Pot producers get creative as feds mull reforms

LEASE ON LIFE | Otto Folprecht, CEO of Vodis Pharmaceuticals Inc., rents out a state-of-the-art marijuana-growing facility in Bellingham

Over two dozen licensed producers built business plans upon new legislation governing medical marijuana. All that’s now up in the air

If you want to know what happened to the lofty dreams of B.C.’s medical marijuana hopefuls, look no further than Bellingham. In a white-panelled warehouse across from that city’s airport, Otto Folprecht—CEO of Vodis Pharmaceuticals Inc.—rents out a climate-controlled, 450,000-square-foot grow-op for $3 million a year. It’s one of only three sanctioned grow-ops of its size in Washington State—but as a Canadian citizen, Folprecht can’t actually sell the marijuana in the state’s legal $70-million recreational market.

“We found and retrofitted the building, trained the licensed grower and then handed over the keys,” says the U.K.-born former pharmaceutical salesman, who joined Vodis, then a private marijuana consultancy founded by Ivan Miliovski (the current COO) and the late Pencho Batanov in 2012. The cross-border leasing arrangement is how Folprecht and his team of six are paying the bills as they wait to become a licensed producer in Canada.

Vodis is one of about 1,450 companies that have applied to become licensed producers under the Marijuana for Medical Purposes Regulations (MMPR), introduced in 2014. Under those rules, marijuana production was to be centralized in a few dozen highly secure factories—while the old system allowed patients to grow their own. In late February, a federal court ruling threw the whole legal framework into question—arguing that patients had a right to grow their own medical marijuana and forcing the Trudeau government to come up with a new system.

It’s been a tough two years for the hundreds of producers, like Vodis, who applied for MMPR status in B.C.—as well as for those already producing. Critics say that Health Canada has been inordinately slow in approving producers and opaque in its decision-making process. For those who do have a licence—26 across the country, seven based in B.C.—it’s hardly the promised green rush.

Last June, Nanaimo-based Tilray eliminated 61 of 187 staff, delaying an expansion that was to increase the square footage of its factory sixfold. PharmaCan Capital Corp.­­­—a Toronto-based outfit whose licensed producer, In The Zone Produce Ltd., is located just outside Vernon— has seen its stock fall from $0.82 in 2014 to around $0.20 today. Victoria’s Emerald Health Therapeutics Inc., the only other public MMPR company, reported a $2.9 million loss in the first nine months of 2015. The shifting legal framework—and uncertainty about marijuana legalization promised by the Trudeau government—is making things worse for countless enterprises whose business model was built around the new MMPR rules. And they all now face competition from the illegal output of dispensaries. “The average dispensary sells 500 pounds a month—that they admit to,” says Brayden Sutton, an independent analyst of marijuana stocks. “Few MMPRs are even at that.”

When the MMPR system was introduced in 2013, it kicked off a “dumb money gold rush,” according to Sutton. Novice investors invested heavily in risky over-the-counter (OTC) stocks on the pink sheets—public markets with much less stringent listing requirements than the TSX Venture Exchange. “The sector sucked in so many brand new investors who invested solely because it was marijuana,” says Sutton. The supposed smart money came later: Bay Street brokerages like Dundee Capital Markets, who underwrote Bedrocan Cannabis Corp.’s financing, and GMP Securities LP, who underwrote the $20 million financing of Tweed Inc.—the largest producer by market capitalization. But as MMPR rolled out over the next year, the patient counts didn’t increase—a mere 37,000, according to Health Canada’s latest count—and hence the expected revenue didn’t materialize. By mid-2015, says Sutton, “everyone got really gun shy.”

While the Trudeau government has been tight-lipped as to how reform will happen, the February court ruling could force the government’s hand, says Trina Fraser, an Ottawa-based lawyer at BrazeauSeller LLP who has worked with MMPR applicants. Just as the government was outlining a timeline to decriminalize and legalize marijuana, the ruling forces the Liberals to reconfigure its current system for dispensing medical marijuana first. “It’s just really inconvenient timing,” says Fraser. Then this month the federal Minister of Health, Jane Philpott, announced at the United Nations that a legalization bill was coming in the Spring of 2017.

Meanwhile, Vodis’s state-of-the-art facility just over the border in Delta sits idle as the partners wait for word from the feds. Folprecht says he’s content to sit on the sidelines in Canada and collect rent in Bellingham. “We’re happy we’re not in production. The market is imploding—if you look at balance sheets, companies are burning working capital. There’s an overproduction of marijuana.” 

B.C.’s BIG licensed medical marijuana producers 

THC Biomed Intl Ltd. $ 10.99 million
PharmaCan Capital Corp.  $10.78 million 
Vodis Pharmaceuticals Inc.   $8.70 million
Emerald Health Therapeutics Corp.  $8.09 million

*by market capitalization as of March 23