Canada Gets Green Light on Legalizing Pot With Retail Sales

(Bloomberg) -- Canada got a green light to sell recreational marijuana through a range of retail outlets from an expert panel, whose report boosts the nascent cannabis industry as the country moves toward legalizing the drug.

The Task Force on Cannabis Legalization and Regulation issued a report that recommends the Canadian government regulate the production of marijuana while the provinces control distribution and retail sales, including through dedicated storefronts with well-trained staff and access with a direct to consumer mail-order system. The market should “encourage a diverse, competitive market that also includes small producers” and set tax rates that balance public health damages from drug use with the need to reduce criminal production of weed.

Prime Minister Justin Trudeau’s government commissioned the report as it prepares to legalize and regulate recreational use of the drug, which would be a first among Group of Seven nations, with legislation promised by early next year. The plan has fueled a surge in Canada’s marijuana stocks in anticipation of billions of dollars of legitimate revenue.

“I think it’s a very sound proposal and I think it will get quite a bit of support,” Bloomberg Intelligence analyst Kenneth Shea said in a telephone interview. “This gave good clarity. I didn’t see any big surprises and I think it gives a good balance and a good responsible way to proceed.”

Shares Rally

Shares of Canadian marijuana stocks surged Tuesday. Canopy Growth Corp. rose 7.9 percent to close at C$10.79 in Toronto, the biggest gain in nearly three weeks. Aurora Cannabis Inc. rose as much as 8.3 percent and OrganiGram Holdings Inc. saw its share price surge 8.9 percent.

The report provides clarity to companies and struck a balance between protecting from potential abuse -- such as mixing with alcohol and its use by minors -- and allowing people to access the drug, Shea said.

Maintaining Canada’s current mail-order medical cannabis delivery system and also giving access to recreational consumers will ensure equality across the country and have zero impact on communities, said Cam Battley, executive vice-president at Aurora Cannabis. The move would be a big step in chipping away at the country’s illegal market and is something that can be done very rapidly, he added.

“I think there’s a lot of good stuff in here and it’s broadly positive,” Battley said by phone.

The government is trying to make sure all sales go through a proper channel and pharmacies will probably be another potential retail outlet, Canopy Chief Executive Officer Bruce Linton said in an interview on Bloomberg TV Canada.

Competitive Market

The panel recommended the government work toward building a competitive market with a “diversity of producers.” It also recommended that provinces and municipalities sort out how retailers would be able to sell marijuana.

There could be about 3.8 million legal recreational users of marijuana across Canada by 2021 and the potential for C$6 billion of sales, Canaccord Genuity analysts Matt Bottomley and Neil Maruoka said in a Nov. 28 note.

“We recognized that there will be much discussion around the implications of our recommendations,” Anne McLellan, chair of the task force, said in the report. “However, like scraping ice from the car windows on a cold winter morning, we believe that we can now see enough to move forward.”

While the focus on public education and health is key, the task force probably went too far with marketing restrictions that will limit branding, said Brendan Kennedy, CEO of Seattle-based Privateer Holdings Inc., which invests in cannabis companies including closely-held British Columbia producer Tilray.

“My fundamental belief is brands are crucial to eliminating the black market,” Kennedy said.

Here are some highlights from the report:

  • Canada should restrict marijuana advertising, set rules on drug potency and create a public education campaign about the dangers of drug impairment.
  • Retail outlets shouldn’t mix marijuana and alcohol, and there should also be a direct-mail system of delivery.
  • Individuals should be allowed to grow up to four plants at home and possess 30 grams of dried cannabis. Less serious offenses should be taken out of criminal law, while tougher penalties should remain in place for trafficking and sales to youth.
  • Government should restrict marijuana advertising, set rules on drug potency and create a public education campaign about the dangers of drug impairment.