Wednesday, July 8, 2015

The MMPR in Light of Allard

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The Canadian Press reported a free market for medical cannabis. All the major media outlets followed suit. If a company can trade on the TSX, then ipso facto: a free market. That in and of itself illustrates part of the ignorance of mainstream media coverage of cannabis. If they had further investigated the Marihuana for Medical Purposes Regulations (MMPR) they would have discovered that the cheap credit from the banks (courtesy of our beloved central bank) leads to what business schools call “irrational exuberance”. The licensed producer (LP) financial boom is like the dot com boom of the late ‘90s: artificial and temporary.

Tweed is perhaps the best example of this. In June 2014, the LP broke a $100 million dollar market cap, before leveling out at $80 million. This multimillion-dollar valuation isn't unique to Tweed. All of the publicly traded LPs have decent market valuations for new companies. Mettrum is at $59 million, while Bedrocan comes in at $49.11 million. The thing is, Tweed doesn't have the sales to match its valuation. Their 2014 sales were $1.15 million. Compared to their $80 million market cap, investors have to be betting on future revenue.

Health Canada's requirements are onerous, costing some applicants up to $20,000-a-month. As long as the patients are there, right? Of course, the big problem and elephant in the room is Allard. The fact that the MMAR patients are not legally required to transition over to the MMPR and that the LPs have to compete with dispensaries and compassion clubs supplied by the BC farmer.

If LPs and their investors are banking on the MMAR patients moving over to the MMPR, then they may have lost out big time on their investment. There are an estimated 2,972,774 cannabis plants licensed under the MMAR. Behind every plant there is a patient and a farmer. These people have no intention of buying from an LP. Farmers don't want to work for a big industrial LP; they’re small business owners who have mastered the craft through trial and error, and after years of experience and hard work. The Crown accused Allard plaintiffs of having a value judgment against the MMPR, and for a lot of farmers this is true. They're not about to give up their small farms to go work for someone else in an industrial greenhouse only to get fired down the road.

The federal government requires LPs provide excessive paperwork and security measures that drive up costs. Assuming the LP makes it past this process, the company is then subject to a managed market where the only way investors can see a return on their original investment is if their chosen LP eventually controls a significant portion of the medical market. Not all LPs can be winners; in the model Health Canada has established, there will be losers. It's like the lottery: invest in an LP and hope they're one of the few that make it. Not all of them can reach these $1 billion market valuation projections. With Tweed acquiring Bedrocan and transitioning to a multi-brand holding company, it looks like the Chuck Rifici brand is paying off.

But so long as the farmers and patients are growing, the LPs will fail to see the consumer base predicated by Health Canada. LP valuations are not reflective of their sales, but of cheap credit in a system that treats the stock market like a casino. Absent a change in policy that permits sales to the recreational market, an investment into LP is simply and obviously not worth the risk. And even then, a recreational market with the right to grow on one's own property might make commercial sellers less attractive.

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