eResearch | On July 24, 2019 the Government of Quebec has drafted new legislation that bans cannabis products “attractive to minors”, which include cannabis alternatives such as THC infused solid and liquid products, such as candy and drinks, that are expected to become legal across Canada federally, in October 2019.
The proposed regulations also include the restriction of additives (flavoring or coloring) that would change the smell or taste of cannabis products, while alternative cannabis products such as oils and butter that do not appeal to children will be permitted. Permitted solid forms of cannabis products are restricted to a maximum of 5mg THC per unit and 10mg THC per package; permitted liquid forms of cannabis products are restricted to a maximum of 5mg of THC per package.
All non-food cannabis products will be restricted to a maximum of 30% in THC, which will severely impede cannabis vaping products (vaporizers, pens and cartridges) from entering the market.
The Government of Quebec believes the Federal government’s legislations for cannabis regulations are insufficient to achieve the province’s goals for health and safety. Lionel Carmant, Quebec Minister Delegate for Health and Social Services stated, “We believe that the first thing we need to do is protect our children who, since the legalization of cannabis, have increased the number of intoxications both at Children’s and at St-Justine [hospitals]”.
To support these claims, the health minister cited alarming Colorado research that showed 10% of all reported intoxications were due to edibles even though edibles only account for 0.3% of total cannabis sales in Colorado. Although cannabis edibles are a small piece of the total market in Colorado, dried cannabis sales dropped to 44% of total cannabis sales in 2018 compared to 67% in 2014, as there is strong growth in demand for cannabis edibles and alternatives, year-over-year.
According to Deloitte’s updated Cannabis Report 2.0, the Canadian market for edibles and alternative cannabis products is estimated to be C$2.7 billion annually. A Deloitte partner commented that Quebec’s ban on cannabis edible and vape products could be a C$300 million hit to the industry.
This is a major setback to Quebec-based cannabis companies such as Hexo Corp. (NYSE: HEXO; TSX: HEXO; DB: 74H), who in August 2018 partnered with Molson Coors (NYSE: TAP), the 7th largest alcohol brewer in the world, to develop cannabis-infused beverages.
Industry leaders such as Canopy Growth Corp. (NYSE: CGC; TSX: WEED; LSE: 0UO9; DB: 11L1) have commented that they are saving dried cannabis to have enough inventory for extraction to capture as much of the alternative cannabis market as possible once it becomes legalized. In May 2019, Health Canada reported 19,268 kg of total cannabis sales compared to 89,611 kg of unfinished products in inventory.
The news from the Government of Quebec regarding additional regulations to the cannabis market is of little surprise, as Quebec’s Legault government has been very critical of the federal government’s cannabis guidelines, and plans to raise the age restriction for cannabis to 21 years of age from the federal guidelines restricting only up to 18 years of age.
Despite Quebec’s strict regulations for cannabis, the province has generated $21.7 million in tax revenue from $71 million in cannabis sales between October 2018 and March 2019. The new legislation is subject to a 45-day consultation period, after which it can take effect, right before cannabis alternatives and extract are federally legalized in October 2019.
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Canopy Growth Corp. (NYSE: CGC; TSX: WEED; LSE: 0UO9; DB:11L1)
- Headquartered in Ontario, Canada, Canopy Growth Corp. is the world’s largest cannabis company, based on market capitalization.
- Canopy was the first company to export cannabis to Germany, the first to make a partnership with a global beverage company, and the first to have an agreement to acquire a U.S.-based cannabis company.
- Canopy is currently trading at US$33.05 per share with a US$11.4 billion market capitalization.
Hexo Corp. (NYSE: HEXO; TSX: HEXO; DB: 74H)
- Headquartered in Quebec, Canada, Hexo Corp is the leading cannabis brand in Quebec.
- Hexo is a low-cost cannabis producer through utilizing hydroponic technology while receiving subsidization on hydro costs from the provincial government.
- On August 2018, Hexo partnered up with Molson Coors to create a new joint venture called Truss.
- Hexo is currently trading at US$3.85 with a US$990 million market capitalization.
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