On Friday, June 14th, 2019, Health Canada announced its finalized regulations for the production and sale of edible cannabis, cannabis extracts, and cannabis topicals. If it is any hint as to their impact on Canadian licensed cannabis producers and processors, Compass Point Research & Trading analyst Rommel Dionisio has already cut his price target on shares of Tilray Inc. (NASDAQ:TLRY) (FRA:2HQ) to reflect the new regs.
These new amendments to Canada‘s Cannabis Regulations are well-intentioned, as protecting the health and safety of Canadians is a top priority for the Government of Canada. This is exactly why the Canadian government is implementing such a strict legal framework to regulate and restrict access to marijuana, thus keeping products out of the hands of adolescents, and preventing profits from flowing into the pockets of criminals and organized crime syndicates.
The problem for Health Canada license holders is that new, unforeseen delays will now push Canadian edibles and topicals revenues back until at least mid-December 2019, if not Q1 2020 at the earliest.
What Happened to October 17th?
As required by Canada’s Cannabis Act, the amended regulations setting out the rules governing the legal production and sale of edible cannabis, cannabis extracts, and cannabis topicals will come into force on October 17, 2019.
That being said, it will take additional time beyond the anticipated October 17th kick-off date before new cannabis products become available for purchase.
While the Canadian government is working to provide consumers with a broader diversity of cannabis products, which will help displace the illegal market, it is important that Health Canada upholds its mandate to reduce the potential health risks associated with these new marijuana products.
According to Health Canada’s recent announcement, “Federal licence holders will need to provide 60-days notice to Health Canada of their intent to sell new products, as they are currently required to do.” The problem is, these 60-day notices will not be accepted until October 17th.
“It is expected that a limited selection of products will appear gradually in physical or online stores, and no earlier than mid-December 2019,” which will give federally licensed processors time to familiarize themselves with the new rules and to produce new products. Also, provincially or territorially authorized distributors and retailers will need time to purchase and obtain the new products to make them available for sale.
Many companies, however, have already been preparing for months.
With Edibles Revenues Delayed, CapEx Burns Cash
With the Canadian edibles and topicals markets estimated to be worth $2.7 billion CAD per year, equivalent to approximately $2,012,526,000 USD at current exchange rates, it comes as no surprise that many operators have been rapidly deploying capital to ready themselves for the expected kick-off later this year.
As far back as June 2018, The Green Organic Dutchman Holdings Ltd. (TSX:TGOD) (OTC:TGODF) (FRA:O1GA) decided to add a new purpose-built facility on its Valleyfield property dedicated to the production of cannabis-infused edibles and drinkables. Then, in November 2018, Aphria Inc. (TSX:APHA) (NYSE:APHA) (FRA:10E) and Perennial Inc. formed a joint venture devoted to developing consumer-driven edibles and beverages for the Canadian market.
Even more recently, Namaste Technologies Inc. (TSXV:N) (OTC:NXTTF) (FRA:M5BQ) entered into a share purchase agreement to acquire 49% of the issued and outstanding shares of a Calgary, Alberta-based chocolate company for $1.5 million CAD in cash consideration.
In what was perhaps the least capital-intensive entrance into the Canadian edibles space, The Flowr Corporation (TSXV:FLWR) (OTC:FLWPF) recently hired a past winner of Iron Chef and Chopped, Chef Ryan Reed, to develop signature edible cannabis products for the Flowr brand.
Meanwhile, in the topicals side of things, Canopy Growth Corporation (TSX:WEED) (NYSE:CGC) (FRA:11L1) just recently finalized a deal to acquire a U.K.-based skincare company for nearly $74 million CAD in consideration.
The good thing for the companies that have invested in becoming early entrants to the cannabis edibles and topicals is that they should actually get their new products onto shelves before their competition does. The downside is that the capital expenditures associated with edibles and topicals R&D won’t begin to really pay off until early 2020.
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