Strategic Management Case Study Analysis: The Canadian Regulated Cannabis Market

The Canadian Regulated Cannabis Market

Strategic Management case study analysis.

 Medical marijuana was legalized and regulated at the federal level by Health Canada, starting in 2001, when the Canadian government enacted the Marihuana Medical Access Regulations (MMAR), thereby allowing patients (or a designated individual) to either grow their own cannabis plants or buy dried cannabis from Health Canada. In April 2014, the Harper government replaced the MMAR with the Marihuana for Medical Purposes Regulations (MMPR), which allowed only licensed producers (LPs) to produce, distribute, and sell medical cannabis to patients. The intent was to create tighter controls on the medical cannabis supply. Patients were no longer permitted to grow their own plants, and LPs became the only legal suppliers of medical cannabis. Two years later, the Access to Cannabis for Medical Purposes Regulations (ACMPR) once again allowed patients to grow their own plants because a Canadian federal court case (Allard v. Canada) concluded that the requirement for individuals to obtain their cannabis only from LPs “violated liberty and security rights protected by section 7 of the Canadian Charter of Rights and Freedoms.

The ACMPR had a possession limit for patients of 150 grams or a 30-day supply, (whichever was less) regardless of whether the patient grew or bought it. Anyone growing plants (either for themselves or for someone else) was required to register with Health Canada. Patients who purchased their cannabis from an LP could be registered with only one LP per prescription at a time. The regulations did not permit companies to sell cannabis derivatives such as edibles (i.e., cannabis-infused food products) or cannabis resins. Only fresh or dried cannabis plants and cannabis oils were permitted. The oils could not be sold “in any dosage form other than a capsule or similar dosage form.

 The amount of legal cannabis (both dried cannabis and cannabis oil) sold by LPs had been growing consistently each quarter. Cannabis oils were first offered in the third quarter of 2015 and quickly became popular . In addition to being one of Canada’s first LPs under the MMPR, Canopy Growth was the first company to be awarded a licence to both produce and sell cannabis oils, which required specialized machinery to extract the active ingredients (i.e., tetrahydrocannabinol, or THC, and cannabidiol, or CBD).

Critics raised concerns about preventing children from accessing cannabis and the efficacy of medical cannabis. Nevertheless, the total number of clients, industry-wide, was growing from quarter to quarter. For the quarter ending March 31, 2017, 167,754 clients were registered, and the average amount of dried cannabis authorized per client was 2.4 grams per day (see Exhibit 3).

The Canadian Legal Medical Marijuana Market

In the same announcement, Health Canada disclosed that the average number of registered clients had been growing by 10 per cent a month, sales of dried cannabis had been growing by 6 per cent a month, and sales of cannabis oils had been growing by 16 per cent a month. The processing of licence applications would be streamlined by allocating more resources to the intake, screening, and review stages. In May 2017, 187 applications were at the review stage. As of August 21, 2017, Canada had 54 authorized LPs, seven of which were owned by Canopy .

Linton emphasized that one of the differences between the legal and illegal cannabis markets was that the legal product complied with quality control regulations. At the end of 2016 and during first of half of 2017, media accounts surfaced of unauthorized pesticides being found in cannabis, which led to Health.

Canada instituting mandatory pesticide testing requirements in May 2017. While it was a temporary setback for the companies that sold cannabis, the stories highlighted the importance of testing cannabis for impurities, especially the medical cannabis intended for patients. Cannabis obtained from the black market was not regulated or monitored in the same way that legal cannabis was.

As players in a relatively new industry, companies needed to learn how to construct and operate large growing operations while keeping costs down. Some of the larger licensed producers managed to lower their cannabis production costs to less than $2 per gram, which they attributed to economies of scale. Canopy’s production costs were $1.28 per gram (preshipping and fulfilment). Because the plants were grown indoors, the product achieved higher consistency as a result of the accurate control of lighting, soil, and other inputs. It also meant that electricity costs could be high, depending on the provincially legislated electricity costs where the LP was located.

One of the challenges that the industry as a whole faced was a shortage of medical cannabis in Canada. With the legalization of recreational cannabis on the horizon, Canada could potentially face a larger shortage of supply if the LPs did not develop and expand their grow spaces quickly enough for the rollout in 2018.¹⁴ Simultaneously, some of Canada’s medical cannabis companies, including Canopy, were looking at opportunities for international expansion. Making the decision to expand internationally created an additional layer of complexity because the cannabis laws of many countries were changing. Was it worth the effort at this point in time to engage in more international expansion activities, or was it time to concentrate on Canada’s rollout of recreational cannabis in July 2018?

 Cannabis was believed to be a “weed” and therefore easy to grow anywhere. The ACMPR allowed patients to grow their own plants or to have a designated person grow the plants. If people could grow their own plants, why would they spend so much money to buy cannabis from the LPs? THC Biomed, another LP, was already selling clones (starter plants) to medical marijuana patients within Canada, and had bought Clone Shipper, a specially designed container for shipping plants through the mail. Aurora Cannabis Inc., Canna Farms, Delta 9 Bio-Tech, Maricann Group Inc., Peace Naturals Project, WeedMD, and Whistler Medical Marijuana Corporation also had licences to sell plants. CannTrust and Tweed were also licensed to sell cannabis seeds.

Even if patients and future recreational cannabis clients were allowed to grow their own plants, doing so would take a lot of effort. People could grow fruits and vegetables or make their own wine at home, but most people did not. Companies that could achieve economies of scale could produce cannabis for a lower per unit cost than most home growers, mainly due to the electricity costs required for controlling the indoor lighting and temperature conditions. Also, growing the plants required space, and quality control issues needed to be considered. Pests and mould could lead to a bad crop. Cannabis plants also produced a strong smell, which could be a deterrent to growers in densely populated areas. According to Linton.

Having a cannabis plant grow is not all that hard. . . . The problem is that it gets stressed by . . . light, water, heat or mildews on it or moulds. I would suggest that we view people who wish to grow out of their home, I would love if they bought the seeds and/or any nutrients or components that we could develop Because I will give them a coupon for 15 per cent off their purchase of product in the event that when they grow themselves, isn’t quite as good as we do, and we’d be delighted to help them out. I think probably about 90 per cent of the time, they’ll be coming back to us.