A Gummy Conundrum for Canada’s Pot Producers

(Bloomberg) -- Call it the gummy conundrum.

Canada released its regulations Friday for new cannabis formats that will become legal this fall, including edibles, beverages and vape cartridges. The government crafted rules aimed at keeping the drug out of the hands of minors, so it wasn’t surprising to see producers will be prohibited from selling products “that can reasonably be considered appealing to a young person.”

But the vagueness of that phrase has led to some head-scratching.

“A cookie is appealing to a kid, so can I make a cookie? Can I make a brownie? What do you mean by appealing to kids?” said cannabis lawyer Trina Fraser, a partner at Brazeau Seller Law in Ottawa.

On a media call Friday, a Health Canada official said it would be possible for a pot company to develop a gummy, chocolate bar or baked good that isn’t considered appealing to kids, depending on its color, shape, flavor and branding.

“I would suggest that it’s not a difficult thing to determine,” the official said. “Think of chocolate bars on the market today: there are chocolate bars that are designed and marketed to adult consumers and there are chocolates and candies that are marketed to kids.”

That means gummy bears are probably out of the question for now, said Fraser.

“Maybe your gummies are going to have to be square and clear, not red and yellow and orange and green and bear-shaped, but they’ll taste the same and you’ll have the same outcome and effect, it just won’t be deemed to be appealing to kids,” she said.

The government has already showed a willingness to ease off on regulations -- for example, it’s toned down some of the scarier health warnings on cannabis packaging -- and is likely to do so again in the future, Fraser said.

“It’s really hard to go back and increase regulation later,” she said. “It’s much easier to start with a high level of regulation and then relax it over time.”

Canopy Earnings

Investors won’t have to wait long to hear more about how the world’s largest cannabis company is preparing for the launch of the new product formats. Canopy Growth Corp. is scheduled to report earnings post-market on Thursday followed by an analyst call Friday morning.

The company is probably the furthest ahead in terms of its preparations for the new product formats, with a 197,000-square-foot bottling plant near its headquarters in Smiths Falls, Ontario set for completion in the fall. Some say its bet on cannabis beverages is a risky one, given that consumer demand for such a product is relatively untested, but Chief Executive Officer Bruce Linton is a fervent believer in pot drinks.

“We’ve done such a good job with the anti-smoking campaign, I think getting people to smoke cannabis is less likely than getting them to drink it,” Linton said on the sidelines of a conference earlier this month.

Canopy can also afford to take more risks than many of its competitors. With a $4 billion investment from alcohol giant Constellation Brands Inc., it has both the cash and the beverage expertise to take a leadership position in the drinkable pot space -- if that’s what consumers want to buy.

Forget the idea of a pot-infused Coors Light though. The new Canadian rules strictly forbid the mixing of the two intoxicants.

Looking ahead to Canopy’s fiscal fourth-quarter results, Bloomberg Intelligence analyst Kenneth Shea expects the company’s revenue to more than triple from a year earlier.

“Gross profit before fair value adjustments may rise at a proportional pace, but we expect operating losses to persist from higher expenses tied to share-based compensation, marketing, R&D and acquisitions,” Shea wrote.

Acreage Vote

Canopy will also find out this week if shareholders support its proposed takeover of Acreage Holdings Inc. Investors in both companies will vote Wednesday on the deal, which is dependent on the U.S. changing its federal pot laws and could take years to close.

Currently, the offer values Acreage at about $3.1 billion, or a little over $26 a share. That’s well above the company’s closing stock price of $18.75 on Friday, implying investors aren’t optimistic the deal will get done. Activist investor Marcato Capital Management has already said it will vote against the transaction because it limits the potential upside of Acreage’s stock.

For the deal to move ahead, at least two-thirds of Acreage shareholders must vote in favor, including a majority of the subordinate and proportionate voting shares. Canopy investors must approve the deal by a simple majority. If they do approve it, Acreage holders will get an immediate sweetener of $2.55 a share.

Upcoming Events This Week

MONDAY 6/17

• The World Cannabis Congress will be held in Saint John, New Brunswick through June 18

WEDNESDAY 6/19

• Shareholders of Canopy Growth Corp. and Acreage Holdings Inc. will vote on Canopy’s takeover offer for New York-based Acreage

THURSDAY 6/20

• Canopy Growth reports earnings post-market followed by an analyst call June 21 at 8:30 a.m. Toronto time

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To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Jacqueline Thorpe, Steven Frank

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