Why Medical Marijuana Could Be the Modern Gold Rush

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Photograph by Tilray.

Once seen as a secretive crop with a shifty reputation, marijuana — At least of the medical variety — has hit the mainstream on Vancouver Island thanks to massive changes in federal regulations. A number of companies, Island-based and international, are setting up here to tap into this multimillion-dollar industry.

As recently as 2013, Jake Ryan was busting marijuana grow-ops as head of the criminal intelligence unit with the Nanaimo RCMP. Less than a year later, Ryan is overseeing the loading of boxes of legally grown marijuana into a Purolator van at the Duke Point Industrial Park. After 18 years in policing, Ryan now heads up security at Tilray, which is among the first licensed medical marijuana producers in Canada. More than 100 other people are now working at the $20 million facility, which opened this spring.

Muscular and tattooed, Ryan admits he looked like a bad guy during his undercover days when he sported shoulder-length hair. When Tilray came to town, his RCMP bosses dispatched him to check it out. “And the reality was I was very impressed with the professionalism of all the people involved with the company,” Ryan says.

The work environment also presents a refreshing change from the chaos of policing, where virtually every call would take him to a miserable scene. “But when you work here, everyone is happy to come to work,” Ryan says. “I’m not used to that.”

Tilray is just one of several companies that are already legally producing marijuana on Vancouver Island or have filed applications with Health Canada to do so under the new Marihuana for Medical Purposes Regulations introduced last year. So far Health Canada has received more than 1,000 applications for production licences, 39 from the Island. At last count countrywide, the agency had approved 22 licences, with 13 active producers listed on the Health Canada website. Aside from Tilray, current and prospective Island producers include Thunderbird Biomedical Inc., Island Harvest Inc., Broken Coast Cannabis Ltd., Wildflower Marijuana Inc., Evergreen Medicinal Supply Inc., and Specialty Medijuana Products Ltd.

Growth Opportunity
This modern gold rush began in June 2013 when the federal government’s new rules came into force. The aim was to replace the Marihuana Medical Access Regulations which had been in place since 2001. That program, which allowed individuals to produce medical marijuana in their homes either for their own use or for a designated patient, “was open to serious abuse,” according to Health Canada. While the government is no longer licensing individuals, those licensed as of March 31 have been grandfathered pending the outcome of a court challenge.

Various court decisions — including a 1997 Ontario Court of Appeal ruling that it was unconstitutional to deny a patient access to medical marijuana — forced the federal government to create a legal framework to enable access. In response to a 2003 ruling, the feds even got into growing medical marijuana, but that proved disastrous when patients complained that the weed lacked potency.

“The way the medical cannabis program works is obviously it’s driven by the court system,” says Eric Nash, a partner with his wife Wendy Little in Island Harvest Inc. “It’s not something that was voluntarily implemented by the government.”

Emerging Market Expectations
Island Harvest had been growing certified organic medical marijuana since 2003 under the old program, which restricted each licensed producer to just two clients and each production facility to four licences. When the new rules came in, Island Harvest shut down its modest production and applied to become a commercial grower.

The company recently received a “ready to build letter,” which a Health Canada official confirms is a significant milestone. So Nash expects to be able to begin growing by the end of 2014. But other than to say the leased facility would be a few thousand square feet and somewhere in the Cowichan Valley, he declines to reveal its location, citing security concerns.

Tilray, meanwhile operates in plain sight on Nanaimo’s Maughan Road. A sign on the chain-link fence around the 60,000 square foot building even bears the motto, “Exceptional Cannabis Products.” Erasing any doubt about what grows inside, the aroma of marijuana wafts from air vents across the parking lot as a visitor arrives for a tour with Philippe Lucas, Tilray’s vice-president of patient services.

Trim, spectacled and professorial sounding, Lucas has explored the medicinal properties of marijuana since the mid-1990s when, in his 20s, he learned he had contracted hepatitis C from a tainted blood transfusion when he was 12. Lucas founded the Vancouver Island Compassion Club, which dispensed medical marijuana to patients in what was and still is a legally grey zone in which authorities typically turned a blind eye but also conducted the occasional raid.

“I come at this from a patient perspective, and from my point of view anything that increases options for patients is something that we can celebrate,” says Lucas, a former Victoria city councillor.

Now Lucas has joined the emerging world of for-profit commercial medical marijuana production. And he is stoked about it.

“There’s really nothing like this facility we’re about to go visit anywhere in North America,” Lucas says. “Not just the level of technology but the level of cleanliness and care being given to the plants.”

Growth Conditions
Seattle-based private equity firm Privateer Holdings has so far invested $20 million in getting Tilray off the ground. Privateer co-founders Christian Groh, Brendan Kennedy, and Michael Blue all left successful careers at Silicon Valley Bank after brain-storming what a post-marijuana-prohibition world would like. They chose Canada as their first venture because commercialized medical marijuana had become legal.

“One of our charters is [that] we don’t violate any local, state or federal law,” says Groh, Privateer’s chief operating officer. “So we don’t touch it in the U.S.”

It took Privateer 18 months to raise an initial $7 million. Since February this year, however, Privateer has raised another $75 million. “We’ll build a second facility and it will be two or three times the size of this one,” Groh says.

The first is big enough. Before entering the facility, a visitor puts on a white lab coat and is issued an I.D. card that must be scanned upon entry and exit of each of the secure rooms in the building. Every scan is recorded in electronic logs that Health Canada inspectors have the power to review. Those inspectors also can and do review recordings from the dozens of video cameras scattered in and around the building.

At the time of this visit in early September, about two-thirds of the building was either in production or production-ready while construction crews worked on renovating the remaining 20,000 square feet. Already, 20,000 plants were in the various stages of their 12-week growth. At full production, those plants will number 40,000, Lucas says.

So what’s that worth? Groh wasn’t ready to share those numbers. However, he did reveal that one room of budding plants would likely yield 80 to 100 pounds of dried product. At a sale price of $8 to $13 a gram — do the math — that adds up to around $400,000. When built out, this facility will have 30 production rooms.

No Room for Error
Health Canada imposes strict requirements on anyone wishing to get into the business. Those requirements include a bank-style vault for storing the pot, rigorous procedures for preventing diversion of the product to the black market, and thorough background checks. The latter also involves the designation of responsible persons in charge, or RPICs, who must be present anywhere marijuana is handled.

Chief scientific officer Josh Eades, one of those RPICs, worked in the technology transfer office at the University of B.C. before joining Tilray. He also worked previously with Lucas at a business called Compassionate Analytics, which provides kits for measuring levels of tetrahydrocannabinol (THC) and cannabidiol (CBD), two of the main medicinal ingredients of marijuana.

On this day, Eades is supervising half a dozen people in white lab coats, hair nets, and blue nitrile gloves who are dipping clone cuttings into rooting hormones before planting the cuttings in coffee-cup size containers of soil. Among them is Andrea White, who worked in landscaping before joining Tilray in July.

“They looked at my experience and also that I was growing it (marijuana) when my grandpa was really sick and in hospital,” White says.

As Tilray’s human resources director, Brenda Fearman, points out, this is a workplace where a pot-growing past looks good on a resume. At a job fair in March, she even pressed candidates on their growing techniques.

“And they’re going, ‘Really?’ and I said, ‘Yes, I need to know this,’” says Fearman, who previously was an HR director for Great Canadian Gaming Corp.

Bureaucracy Blocks Progress
Tilray clearly has a jump on exploiting the lucrative medical marijuana market. That irks Victoria pharmacist Michael Forbes and Sooke businessman Ian Laing, who are partners in Specialty Medijuana Products Ltd., which received zoning approval in September 2014 for a facility in the Sooke Business Park.

Forbes, who owns eight pharmacies including five in the Victoria area, questions why Health Canada approved U.S.-financed Tilray while his Canadian-financed venture has been waiting over a year to receive approval of its 600-page application. On the advice of a lawyer, they are going to send letters to the federal ministers of health and agricultural to seek answers to, “Why are we log-jammed when we’ve met all of the criteria given to us?” and, “Why are the Americans red-carpeted through to the finish line?” Forbes says.
Asked about that, Health Canada responds that it “processes applications in the order in which they are received.”

Forbes says it would have made much more sense for the government to have delegated responsibly for dispensing medical marijuana to the country’s pharmacists. After all, they are already trained in handling controlled medications of all types.

“It seems like they’re going about it in a way more complicated way with building bunkers in the middle of nowhere with mail distribution,” Forbes says.

Nevertheless, Speciality Medijuana is ready to start renovating a 4,500-square-foot steel building in the business park — if and when it receives a “ready to build” letter. Laing estimates it’ll cost about $1 million in upgrades.

They intend to start small — what Laing compares to a craft brewery — with about 10 employees, estimates Forbes, who says he is getting into the medical marijuana business because he is passionate about helping patients.

Overcoming Hurdles
In Victoria, Thunderbird Biomedical Inc. announced on September 30 that it had signed a lease agreement for a second medical marijuana facility of up to 43,500 square feet. It had earlier received a licence from Health Canada for a 3,100 square foot facility in suburban Victoria.

The company is a subsidiary of T-Bird Pharma Inc., which trades on the TSX Venture Exchange. CEO Robert Gagnon didn’t respond to requests for an interview. However, Kyle Boyko, an associate/partner with Hamza Thindal Capital, a venture capital group, said Thunderbird started in March with $60,000 of private capital, followed by a $3-million injection of public money.

Boyko expects production in the original facility, which has five grow rooms, would begin in October. Although he has visited the facility, Boyko couldn’t identify the community where it is situated.

Amid pumpkin patches in Central Saanich, on Lochside Drive near Michell’s Farm Market, a chain-link fence encloses a cinder-block building that is home to Evergreen Medicinal Supply Inc. Company CEO Shawn Galbraith didn’t respond to messages. As of September 30, Evergreen wasn’t listed among Health Canada’s licensed producers. But the Evergreen website proclaims, “Our leading edge, Health Canada approved MMPR facility will be opening soon.”

Cowichan Valley producer Greenleaf Medicinals had its licence suspended only about a month after it got started. The company, since renamed as Broken Coast Cannabis Ltd., voluntarily recalled a batch of Purple Kush.

Production manager John Moeller says he can’t comment on the nature of the recall, but notes, “It’s not going to make anyone sick — let’s put it that way.”

The company, which expects a Health Canada re-inspection in early October, operates out of a 12,000-square-foot facility on the outskirts of Duncan. Moeller asks not to identify the location out of security concerns, although other media have already revealed it.

The recall has set the company back about six months and probably cost it some customers, Moeller concedes. “But we feel confident the market is still healthy and that customers are going to want to come back.”

A Big Step
Wildflower Marijuana Inc.’s proposal for a facility on 50 hectares of farmland near Nanoose Bay has spawned fierce opposition from neighbours in the nearby River’s Edge subdivision, according to local news reports.

“Why wouldn’t I grow on agricultural land? It’s agriculture,” says Wildflower CEO William MacLean, who pledges to address the neighbours’ concerns.

Wildflower is also publicly traded — on the Canadian Securities Exchange, under the symbol SUN. “Our capital investment over the next four to five years is going to be in the ballpark of probably around $40 million to $50 million,” MacLean says.

Initially, the plan is to construct a 14,000 square-foot building on the Nanoose farm. Two subsequent phases, depending on demand, would push annual production to 10,000 kilos (22,000 pounds). The company also plans a smaller operation at Yellow Point. Eventually, Wildflower envisions a combined 150,000 square feet of production space at the two facilities with 50 to 60 workers at each one.

The company only submitted its 600-page-plus application in August 2014. So MacLean is being patient and sounds generally supportive of the new system, even if the process is tedious. “It’s definitely a big step in the right direction from where it was where people were growing it in the garages and in their basements,” MacLean says.

Back at Tilray, ex-cop Jake Ryan would attest to that. “In two years we won’t even be talking about this,” he says. “It will be old news.”

And that’s how it generally goes with gold rushes. The excitement is in the anticipation of those first mother lodes. After that, it’s all about the basics of running a good business.