The future of commercial cannabis production in Canada An...

• The future of commercial cannabis production in Canada

An interview with David Hyde on the future of commercial cannabis production in Canada, from craft producers to the Wal Marts of weed
March 9, 2017



As the government of Canada works towards creating a functional adult use cannabis market, coming up with a source for the cannabis Canadians will be able to buy is one of many issues to find solutions for. Before it can be sold in stores, it has to originate from somewhere, and as far as the government is concerned that supply needs to be as tightly regulated as other controlled substances.

To supply this future adult use cannabis market, the Canadian government has repeatedly said they favour relying on a regulated supply chain similar to an expanded version of the commercial medical cannabis program and the licensed producers under that regime. The task force recommendations highlighted this last December, and the head of the Task Force repeated this again last week at a meeting in Toronto.

As we’ve covered in the past, however, to supply the future non-medical ‘adult use’ recreational market, the amount of producers and approved production space will need to increase significantly. Some medical producers currently have trouble even satisfying their medical clients, much less a new non medical market, meaning both the number and type of producers will have to grow, both in scale as well as experience.

In discussions with newly approved producers in the past, there has been a consistent theme of an increase in responsiveness from the regulator, and many of the approvals in the past several months have been applicants who have been waiting in the queue for, at times, years. Applications that once were sitting still, for whatever reason, now appear to be moving forward, which would certainly make sense in light of this need for a significant increase in production space.

To get an inside perspective on this process, we reached out to David Hyde at David Hyde and Associates. Hyde is a security and risk management specialist who has been working extensively in the cannabis industry in Canada and abroad, helping producers design appropriate security systems for their respective jurisdictions.

As the owner and principal consultant at David Hyde and Associates, Hyde estimates he has worked as a consultant in some capacity on nearly 200 applications under Canada’s MMPR/ACMPR, out of approximately 400 active applications currently in the queue. Twenty of those, says Hyde, are PLIs (pre license inspection, the last stage before getting a license to cultivate), and he has advised on security compliance for 16 of the current 39 licensed producers. As such, Hyde has a unique and broad perspective on the industry and evolving changes in the regulatory regime.

We spoke with Hyde about his take on what he calls a ‘surge’ in recent inspection activity, as well as his prediction of hundreds of licensed producers in the coming years to satisfy boutique and niche markets domestically, large scale export markets and points in between, and his belief in a need to streamline the regulations to allow for this diversity of producers.

50 LPs by the end of 2017
In response to projected number of applicants at end of 2017: “We’ve sensed in recent times, certainly an uptick, more staffing in Health Canada, in the review and active review phases. We’ve seen, after a little bit of a slowdown around when the ACMPR individual licensing came out, things slowed down a little bit then to allow them to catch up with that, but now that they seem to have got their heads a little bit more around that, I’m seeing really at all stages of licensing, an uptick in activity.”

“I can just see the trajectory of the activity, particularly in the late stage applicants. I have come to the conclusion, based on four years experience watching this roll out, and seeing the baseline in licensing, I really have seen a bit of a surge.

“We just saw 39 (Del Shen) the other day. I know that there’s been at least seven or eight more PLIs for applicants who are just waiting now to get the feedback. So we’re almost at 50 with the PLIs they’ve already had, and I know there’s a lot more PLI’s coming. So I think 50 is even a conservative estimate. I wouldn’t be surprised if it was a little bit more than that.”

“These new applicants are very savvy. They’ve been watching. They’ve been taking notes. And they’re being advised by people like me and other consultants out there who have been through the ringer, have got the bruises to prove it, and have learned all the way through the process and are still learning, frankly, on every application, and are able to give them guidance to help them come at this in novel ways, in new ways, to keep the cost down, so they can enter the market with a better chance at succeeding at a lower cost and have a value proposition that’s very unique.”

Momentum balanced by ‘circumspection’ around recalls
In response to projected number of applicants at end of 2017:“The only reason why I would hesitate at saying it would speed up a lot more than that is because of Health Canada’s circumspection in and around the recall activity. I am seeing that manifested in some of the questions that are being asked of pre PLI applicants and late stage applicants, they’re taking a closer look at certain aspects of their GPP and QA preparations that would tie in to making sure that we don’t have contamination or infiltration of products that shouldn’t be in a facility. I’m seeing that manifest into new questions from Health Canada, and a little bit more time taken.”

“I think that has a potential to kind of be a bit of a counterweight against what I suspected would be a picked up pace. Fifty was really, frankly a low number for me. Fifty was the minimum and I was thinking it could even be 60, but now what I’m seeing with this and since the recalls happened and I’m seeing a bit of the impact of that, I think 50 is probably a good number when you weigh everything out.”

“I definitely can see in the hundreds of producers. I’m not talking about six, seven, eight hundred. But could I say a few hundred producers in a variety of shapes and sizes across this country, whether you’ve got the smaller ones who are very artisanal or craft and have got a certain angle or play, whether there’s a whole raft of them who are wholesaling, who are white labeling and really are experts at the sale side or the distribution side.”

Hundreds of ‘diverse’ producers
“I think that there are going to be many very discerning users across the spectrum who are going to appreciate a wide variety of aspects, whether it be first nations groups getting involved, whether it be organic, whether it be certain types of grow, whether it be certain types of products.

“I definitely can see in the hundreds of producers. I’m not talking about six, seven, eight hundred. But could I see a few hundred producers in a variety of shapes and sizes across this country, whether you’ve got the smaller ones who are very artisanal or craft and have got a certain angle or play, whether there’s a whole raft of them who are wholesaling, who are white labeling and really are experts at the sale side or the distribution side.”

“I really do see that we need a very, very broad and a deep and diverse range of producers. So I’m very optimistic that we’re going to be up in the many hundreds of producers; that will move forward in the next ten years.”

Export
“The big one that I think stands Canada in the best stead is the export. We will be the only country that has a broad-based supply into a recreational type market, that has the kind of quality control standards…. I mean there’s not really any comparison, with all due respect to our Uruguay friends, there’s really not much comparison in terms of the regulatory levels here and what our product here is going to be meeting in terms of quality, etc. So I think there’s an opportunity for a significant export market.”

“I’ll tell you one trend I’m seeing right now: Quebec’s coming alive, big time. I’ve got a swath of new applicants from Quebec that are viewing this from a Quebecois lens. Seeing this as a real opportunity to set in motion something that very much has a Quebec flavour to it and will be playing to the very large—and potentially in the future growing—Quebec market, for recreational, particularly. “

Streamlining the regulations
“I think ultimately we’re headed towards a slight loosening. When I say that, I don’t mean across the board in every way, but obviously there are some things that we know that Health Canada is very sensitive to, the government is very sensitive to and it would undermine the whole regulatory scheme if there were to be multiple recalls or multiple issues within the sector.

“I do think we’re always going to see a quite a high bar with respect to Good Production Practices, with respect to some of the quality components here. I do suspect there will come a time, based on maybe in 5-10 years of empirical data, Health Canada may find some ways to work with the industry.”

“I would expect there to be what I would call a smart regulation or a what I term as a ‘right touch’ regulation (a fairly new regulatory theory out of the UK primarily), where you might start off a little bit heavier at the beginning, because you’re in a nascent industry and there’s a lot of feeling out to do. But as the regulator gets to know the regulated, and as the industry starts to become more mature and learn from its mistakes and the regulator knows where it really needs to look very closely and where it can perhaps be a little more relaxed. I think as we move on down that road, in maybe five, six years time from now, roughly, I think we can get to the stage where we can look at a slightly more streamlined regulation.”

“And that’s on the quality side. I feel strongly, and have for a long time that the security regulations are over the top. And that’s said as a security consultant who of course is in business and doing well based on the crazy level of security that’s required in these facilities.”

“The smart people in this industry right now are watching all the errors and mistakes that have happened out there, and they’re learning from those and they’re coming in very hungry, very lean, and very smart, because they’ve seen the pitfalls that are out there, and they designed their facility, they’ve really insulated themselves against some of those pitfalls that others have faced.”

“I think inevitably, as the task force found when they did their report and the feedback they got, I think that there’s an ability to take a sober second look at just the mountainous security regulations that are asked. And I think there’s a smarter way of doing this.

“Certainly it’s maximum security, but it’s also maximum spend. Even if you’re a small producer with a small facility, we’re looking at a six figure sum to put your security systems in, and for a big one it’s a million dollar touch. It starts to get a little bit out there in terms of being able to make that viable economically.

“Obviously a facility that has a couple of grow rooms, a very small operation, cultivating and processing a small amount of artisanal cannabis is very different than someone that is a wholesaler that’s receiving massive truckloads of cannabis in a variety of forms from different LP’s from across the country to a small but very full multi million dollar vault type building that at any given time would have just an astronomical amount of stock on hand.

“So I think there needs to be a more nuanced approach based on risk. It’s only fair to the people that are in the industry currently and are being held to a standard that I believe is probably higher than the risks dictate.”

“As the regulator gets to know the regulated, and as the industry starts to become more mature and learn from its mistakes and the regulator knows where it really needs to look very closely and where it can perhaps be a little more relaxed.”

Later applicants learning from mistakes of early-approved
“I suspect we’re going to see accelerated licensing, to a degree. I am seeing a number of new applicants that are coming in with very innovative business plans, doing things different than the current LPs, that are taking different approaches. They’re not weighted down by what the LPs have gone through. They’re able to apply and keep the month over month costs very low. They’re not hiring big staff a year out and then having to cut that staff down. All the things that the current swath of LP’s have had to do—not all, but many of them.

“These new applicants are very savvy. They’ve been watching. They’ve been taking notes. And they’re being advised by people like me and other consultants out there who have been through the ringer, have got the bruises to prove it, and have learned all the way through the process and are still learning, frankly, on every application, and are able to give them guidance to help them come at this in novel ways, in new ways, to keep the cost down, so they can enter the market with a better chance at succeeding at a lower cost and have a value proposition that’s very unique.”

“As we move away from mail order as the sole means [of distribution], this is going to become more of a regionalized market, in many respects.”

Outdoor
“I think we’re going to see it. Obviously it’s a geographical thing in a very large but very diverse country in terms of weather and environment, but I think we’re going to see it. I think it’s been done in Australia with poppies and been done quite successfully because there’s security you can put around it…. I think we’re going to see it, but I think it’s going to be specialized and focussed in certain directions.

“I don’t think you’re going to see it become a broad based portion of the supply chain going into the medical market, for example. I think you’re going to see it as something that would come in very slowly, [there] might even be some testing required to show that Health Canada is confident in it. But I think there’s enough pressure out there for outdoor grow, that I believe that we will eventually see it come into play. Again, Health Canada is very circumspect with anything new, anything novel and anything that might have a little risk attached. So I don’t think it’s going to be soon. But could I see in the next 5-10 years that forming a part of the future of cannabis production in Canada? I think so.”

Geography will be more important as the over-the-counter market evolves. Keep an eye on Quebec
“As we move away from mail order as the sole means [of distribution], this is going to become more of a regionalized market, in many respects.”

“I’ll tell you one trend I’m seeing right now: Quebec’s coming alive, big time. I’ve got a swath of new applicants from Quebec that are viewing this from a Quebecois lense. Seeing this as a real opportunity to set in motion something that very much has a Quebec flavour to it and will be playing to the very large—and potentially in the future growing—Quebec market, for recreational, particularly. “

Advice for new applicants and smaller producers
“Be patient, be unique. Carve out a niche for yourself. Get a good location and team and be ready for the long run.

“There are a number of massive producers out there, and that’s growing and I think that’s not going to go away. But I think there’s going to be a huge followership and a loyal client base for people who do it a little different, for people who have a unique value proposition and for people who aren’t the Wal Marts in the space.

“The smart people in this industry right now are watching all the errors and mistakes that have happened out there, and they’re learning from those and they’re coming in very hungry, very lean, and very smart, because they’ve seen the pitfalls that are out there, and they designed their facility, they’ve really insulated themselves against some of those pitfalls that others have faced.”

“I feel very positive about where the market is going. There’s a lot of excitement out there. I think we’ll see the inevitable export market that I believe is going to flow out from this thing. I think that is where the rubber is really going to hit the road in terms of ramping up to the multi hundreds of LPs, and I think that’s where we’re headed, and I’m very keen to see the trajectory of the new legislation for rec. I want see some kind of ‘right touch,’ some smart regulation where Health Canada really is partnering with the industry, and in the next 3-5 years is looking for ways to lessen slightly the regulatory burden overall, across this.”