Canadian Medical Marijuana Market

Brief on the Canadian Market for

Medical Marijuana (November, 2016)

OBJECTIVE

The objective of this brief is to provide an overview of the medical marijuana market in Canada based on publicly available information. It is not meant to take the place of a comprehensive study of the various factors impacting the market and potential entry of new producers in this business sector. Instead, the purpose of this brief is to provide a starting point for further study by persons interested in this market

OPENING THE MARKET FOR INDEPENDENT PRODUCERS

The legalization of medical marijuana in Canada led to entrepreneurial interest in establishing medical marijuana operations in Canada. Much of the interest was fed by speculation that the Canadian medical marijuana market would reach $1.3 billion by 2024.

This led to a flurry of investment in marijuana operations. Alas, for many would-be medical marijuana producers the long process of licensing and the quick saturation of the Canadian market have led to unexpected challenges and frustration.

LICENSING

As of August 1, 2016[1] there had been 1,561 applications for producing medical marijuana.

• 35 (2.2%) have been approved,
• 253 (16.2%) had been rejected outright,
• 419 (26.8%) were in progress,
• 54 (3.5%) had been withdrawn,
• 801 (51.3%) had been returned for being incomplete.

For those who invested hundreds of thousands of dollars in setting up production facilities, the slow processing of licensing approvals has been devastating.

MARKET SATURATION?

Originally, estimates were that by 2024, the Canadian market for medical marijuana would reach $1.3 billion and would serve 450,000 Canadians: on average each consumer would spend $2,900 per annum for medical marijuana and, assuming a price of $10/gram, would consume 290 grams of marijuana annually.

According to the latest figures[2], as of August 31, 2016, the total number of users was 91,178 and the average daily authorized consumption is 2.6 grams. The average consumption for 2016 varied from 2.5 to 2.9 grams/day – somewhat lower than the 2015 figures of 2.8 to 3.3 grams/day. Assuming a price of $10/gram[3] for medical marijuana, the Canadian market as of

August 31, 2016 was just over $865 million annually, or about two-thirds of the way to reaching the expected peak of $1.3 billion.

This represents just over 86,500 kilos of medical marijuana per year.

Another factor to keep in mind is the amount of product sold versus the amount of product in inventory.

In the month January, 2016, 921 kilos of medical marijuana was sold and 1,129 kilos was produced. In other words, the amount sold represented just over 80% of the amount produced. The amount in inventory was 11,186 kilos. 

In the month of August, 2016, 1,685 kilos of medical marijuana was sold (an 83% jump from January) and the amount produced was 2,025 kilos (an increase of just under 80% from January), the amount sold represented about 83% of the amount produced. Also, inventory increased by 17% to 13,096 kilos. 

In other words, the existing licensed producers are meeting the needs of the market in terms of production. The licensing of new producers may lead to a glut in the market and sharply lower prices. 

The same situation is affecting cannabis oil. In January, 2016, 206 kilos of cannabis oil was produced and 66 kilos were sold (32% of production). Inventory stood at 915 kilos.

In August, 2016, 810 kilos of cannabis oil was sold (an increase of more than 1,200% from January), but at the same production had increased to 1,839 kilos (up by almost 900%) so that the amount sold represented 44% of the amount produced. The inventory had increased 915 kilos in January to 3,380 kilos in August, a 369% increase.

Again, the existing licensed producers were successfully meeting and exceeding the needs of market demand. The introduction of new producers will lead to reduced prices.

CONCLUSION

While the Canadian market continues to grow, it is already exhibiting signs of market saturation. This can be seen in the fact that current producers are already producing more product than the market can consume and, at the same time, inventories for the product continue to grow. This situation may lead to a fall in average prices for medical marijuana without necessarily cutting the cost of production, thus leading to lower rates of profit.

From a consumer point of view, this is excellent news. From the point of view of anyone seeking a license to produce medical marijuana or cannabis oil, this could present a serious barrier to entry.

Enrico Codogno, Customer Foresight

November, 2016

[1] Source: Health Canada

[2] Source: Marijuana for Medical Purposes Regulations (MMPR)

[3] As of March 31, 2014, the government-controlled price was $5/gram. The projected private sector price was $7.60/gram in 2014 and about $8.80/gram upon market maturation. One large producer was charging $9 to $12 per gram. For convenience, the figure of $10/gram was used for this brief.