Will There Be A $1.3 Billion Marijuana Market In Canada?
Matthew Finston, Matt Finston on Twitter
Value, contrarian, social theorist, perspective
Jan. 5, 2015 1:33 AM ET
Potential size of the Canadian marijuana market may need some revision.
Current daily consumption well below 1 to 1.25 g p/day estimates.
Still potential for a multimillion dollar market.
$1.3 Billion Market?
In 2024, Canada's marijuana market will be worth $1.3 billion, or so we think. This refrain has been repeated so many times, we don't question its veracity.
However, we may have been overestimating the future market.
After reviewing the year-to-date financial performance of three Licensed Producers ("LPs"), evidence suggests that the demand might be lower than we have expected. I'll attempt to review how we came to such high figures and what perhaps may be a more realistic scenario.
Accelerated Growth of MMAP
In 2001, the courts ruled that individuals have a right to possess medical marijuana, if they have a medical need. What came about was called the Marihuana Medical Access Program ("MMAP"), which allowed individuals to obtain marijuana as long as they had an Authorized To Possess ("ATP") license. The number of users with ATP licenses has grown dramatically in the past thirteen years, from 477 in 2002 to 37,844 by the end of 2013.
Source: Delsys Report
When MMAP was small, it was not an issue to regulate. But in the past few years, it has grown exponentially, leading to some unwanted health, safety, and security risks. In its place, Health Canada introduced a privatized system called Marihuana Medical for Purposes Regulations ("MMPR").
While the language of the MMPR law stresses the need to prevent electrical fires and crime, there were only two reported fires and 190 alleged cases marijuana being diverted to illicit markets. So what's the real story? MMAR has become costly and difficult to regulate.
The solution? Let the private sector handle it; let them cover the costs.
So, to become a Licensed Producer, the operator essentially must have a top-notch secure facility so that Health Canada doesn't have to worry about going to the homes of the 28,436 individuals with Personal Production Licenses ("PPL") and/or Designated Grower Licenses ("DGL"). At most, Health Canada would only have to deal with 51 to 61 Licensed Producers.
At the heart of it, Health Canada needed MMPR to sound attractive enough to get private equity involved.
Introducing the Delsys Report
The Delsys Report, also known as the "Cost-Benefit Analysis of Regulatory Changes for Access to Marihuana for Medical Purposes," recounts in tantalizing detail the billion dollar opportunity in store.
The report affirms that Health Canada has a problem. In an unwitting Orwellian homage, the report forewarns of MMAR dystopia. Hundreds of thousands of individuals all growing for personal use, crime rampant, and mold and sickness abounds.
The best solution would be to create a private market. This would be a win-win for the government and for private industry. The private sector could also net $110 million in "surplus gains" by 2024, and $339 million cumulatively.
The report estimated that the number of ATP licenses under MMPR could rise from 250,000 to 650,000 by 2024. For the purposes of the report, the authors estimated that the government should expect between 308,000 to 450,000 ATP licenses issued by 2024.
With these numbers, there's no question there's a lot of money to be made.
Depending on the daily consumption of marijuana per user, the market could be valued anywhere between $900 million to $2 billion. That's of course if people are in fact consuming at least an average of 1.06g to 1.60g p/day.
How Much Do You Toke?
Based on the data from Health Canada, Mettrum, and Bedrocan, it appears that the daily consumption is actually a lot lower than originally projected. According to Health Canada, there were 5,100 patients enrolled in MMPR as of April this year, 8,000 by June and roughly 13,700 patients by Oct. 1st. During that time, an estimated total of 1,400kg have been purchased from licensed producers from Jan. 1st 2014 to Oct. 31st 2014. From this, I get an average consumption of 0.59 grams per day per user or 216 grams a year.
0.59g p/day may even be a slight overestimate as LPs reported selling only 240kg in October, suggesting an average consumption closer to 0.565g p/day. On top of that, the LPs had a surplus of 160kg.
The LPs' inventory surplus should debunk current speculation that weakness in sales comes from the LPs being unable to keep up with demand.
Had patients been consuming between 1.06g p/day to 1.60g p/day, the total YTD consumption should have been between 2,500kg to 3,750kg.
Although Bedrocan (OTC:BNRDF) released a survey that suggests the majority of their patients consume 1-3 grams daily, their sales says otherwise. Bedrocan's sales reveal an average daily consumption of 0.59g p/day.
Bedrocan
Q1 Q2 Q3
February March April May June July August September October Total
Revenues $14,226.15 $80,615 $114,713 $124,635 $130,084 $129,108 $152,976 $164,156 $176,231 $1,086,744
Price 7.5 $7.5 $7.5 $7.5 $7.5 $7.5 $7.5 $7.5 $7.5
Grams Sold 1,897 10,749 15,295 16,618 17,345 17,214 20,397 21,887 23,497 144,899
Est. Patients 533 584 859 903 974 935 1,108 1,189 1,277
Grams p/m 4 18 18 18 18 18 18 18 18 150
grams p/day 0.5936 0.5936 0.5936 0.5936 0.5936 0.5936 0.5936 0.5936 0.5936 0.594
Days 6 31 30 31 30 31 31 31 31 252
In Bedrocan's latest MD&A report, the company disclosed that it had sold 145kg in the last nine months and 66kg within the past quarter. The company has also disclosed that it serves approximately 1,300 Canadian patients as of the beginning of October and 1,100 patients as of the end of August. Based on total sales, grams sold, and adjusting for monthly client pool increase, I get an average consumption of 0.59g p/day.
Similarly, Mettrum's last two financial reports show a similar story. The company disclosed that it had sold nearly 100kg in Q2 and 10kg in Q3. It also disclosed that it stopped accepting new clients at the end of June, capping at 2,100 patients.
Mettrum
Q2
Q3
Revenues
$715,131
$806,412
Grams
100,267
108,285
Patients
1,950.00
2,100
Grams p/m
17.14
17.19
Days
91
93
Grams p/day
0.57
0.55
From this, I estimate that Mettrum sells an average 0.55-0.57g p/day per user.
Goodbye $1.3 Billion Market, Hello $500 million
The original assumptions used by the Delsys report to get a $1.3 billion market assumed that 300,000 Canadians would be consuming 1.6g a day. I believe there's sufficient evidence that this may have been flawed.
This is not to say that Canada's MMPR system can't become a billion dollar market. Even if users consume only .059g a day, it could become a billion dollar market if the number of ATP licenses increase to the 650,000.
Reasonable Explanation
There are some logical explanations for why the daily consumption has fallen below estimates.
The current sample pool may be unrepresentative of the larger market.
One of the grievances waged against the new law points out that the monthly cap of 150g is a violation of constitutional rights. Individuals who fight to continue to grow for personal use have stated that 150g was insufficient to meet their daily needs. Furthermore, the plaintiffs have argued that the cost of purchasing their medicine at a premium from LPs would be unjustly burdensome.
It would be reasonable to assume that the authors of the Delsys report assumed that individuals consuming more than 150g a month would be purchasing from LPs. This would certainly increase demand.
It's also reasonable that individuals who consume more than 150g a month would rather pay the $75 to $375 per month costs to grow for personal use rather than the $1,065 to $1,500 to buy from a LP. Similarly, individuals who consume no more than 0.59g p/m may not find it cost efficient or convenient to grow for personal use and are willing to shell out $130 to $180 a month for their medicine.
The 13,700 patients enrolled into MMPR may also be purchasing medicine through MMAR.
I throw this one out in jest. Although a possibility, this is a theory of pure speculation, assumes the worst in people, and ultimately is not constructive. This type of explanation only serves to put off discussing the tough questions. It assumes that the weakness in demand is not organic and will be resolved following the court's decision on MMAR.
The numbers have always been inflated.
This is a reasonable explanation. A few people may consume as much as they say they do. Others may have exaggerated the numbers to increase their authorized amount.
Looking forward towards a legalized marijuana market, determining the exact demand will be crucial on so many levels.
Making Lemonade
Assuming that the courts decide that everyone licensed under MMAR will be grandfathered in permanently and all new ATP licensees will have to purchase from LPs, the market may only turn out to disappoint.
If MMAR and MMPR exist simultaneously, I still believe we are looking at a multimillion dollar market.
Final Thoughts
This piece was not only interested in reevaluating assumptions that have been made about Canada's medical marijuana market but it was also interested in concretely discussing the challenges and hurdles of the broader marijuana industry. If companies that are currently licensed to sell marijuana face difficulties, what does that say about the companies in the US that simply 'hope' to capitalize on the marijuana industry?
Although investing in marijuana is exciting because it is a brand new industry, we still don't know its true value fully legalized. Part of this article's intent was to paint a sobering picture, one that may not jive with our prior expectations.
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