The Agenda with Steve Paikin (Audio) - Cannabis in Canada: What's Changed Since Legalization?

Episode Date: September 19, 2024

Nearly six years after cannabis was legalized by the federal government, issues remain with how pot is regulated in Canada. The Agenda explores several facets of legalization, including whether consumers have enough information about the harms and benefits of cannabis, gaps that still exist with respect to pardons and why cannabis-related health research has fallen behind. See omnystudio.com/listener for privacy information.

Legalizing pot was supposed to be a boon for businesses and deal a blow to the black market. So how did we go from pot shops on every corner to high-profile bankruptcies? There's a similar story with hoped-for research on medical cannabis that hasn't quite materialized as expected. With us now to consider such realignments six years on. Let's welcome James McKillop. He's a professor at McMaster University and director of the Michael G. DeGroote Center for Medicinal Cannabis Research, which is a partnership between McMaster and St. Joseph's Healthcare in Hamilton.

And Ranjiv Dhillon, he's a partner at the law firm McCarthy Tetro. Good to have both of you guys in those chairs for this discussion. I wanna start with a chart. Let's just give people a sense about how Canadian cannabis sales have sort of tapered off over the years.

And for those listening on podcast, I'll just describe what we're seeing here, which is essentially a bar graph that starts in April of 2023 and fast forwards to March of 2024. And sales kind of hit a peak in the fall and winter of 2023, but since then have dipped. And I guess I want to know, Ranj, for starters, how come?

I think when we had legalization, we had a big conversion of people that were in the black market to the legal market. And so the uptick numbers were absolutely massive. And if you sort of follow that graph along, you would think they would keep going up. But as people have moved in from the illicit to the legal market at Some point there's a natural sort of plateauing and we're probably in around there now

You know the good news is the industry is still big It's a five billion dollar plus industry that that's just a legal side of it. The legal side is five billion a year That's right. Yeah, that's right And the view is hard to know because it's illicit obviously But 30 to 40 percent of all cannabis sales in Canada are still in the black market. So there's still a very substantial black market out there. The legalization of marijuana opened, I guess,

the doors to your organization to start doing some research. Tell us how that happened. That's right. So in around 2016, we started seeing the need for more research on medical cannabis We saw that there had been over the past few years a more than 4,000 percent increase in the number of people who had had who had obtained Authorizations for medical cannabis, but the evidence wasn't the basis for that. It was just greater access So we thought there was a real need to do more clinical trials, so really asked the tough question, does cannabis work?

And that was the creation of the DeGroote Center for medicinal cannabis research. Does cannabis work to do what? That's the $64,000 question. So it is believed to be helpful for a very long list of conditions, and what we wanted to do is to really target the ones that are at the top of the list,

in particular chronic pain, sleep disorders, and mental health conditions. And those have been the top priorities. How much more do you know today than you did six years ago? Well, Steve, I wish I could tell you that we've had a transformative impact, but the reality is it has been extremely challenging to do clinical trials on medical cannabis in Canada.

We thought that the momentum around legalization would really greenlight capacity and infrastructure around doing clinical trials. But the reality is the Cannabis Act regulations make it very, very difficult to do trials. We have successfully launched some pilot trials, which are the precursors to the major trials. But those were labors of incredible love

from investigators because they took so much work. And other projects have simply foundered. And we've even had investigators who've had to give back grant money because they weren't able to get through the regulatory burdens of getting the trials launched. Hmm. OK, Renj, back to you on the business side of things.

Here we are, six years in since legalization. What are the biggest challenges that the business side of this equation feels at the moment? Yeah, I mean, look, we've already touched on the black mark a little bit. I would say the biggest issue is the taxation. The excise taxes are very, very onerous on this. Six years ago, when this came into play,

the view was that things would sell for about ten dollars a gram and so the excise taxes were based on the greater of one dollar and ten percent and so if you're selling at ten dollars fine it's a ten percent tax but those numbers have come down we've had seen price compression so now you're seeing sales at three dollars four dollars so that ten percent tax again it's the greater of $1 or 10%, is now a 25% tax, a 33% tax. Also, they didn't lower the percent?

No, they haven't. Same percent. OK. Exactly. And so the licensed producers have complained about this quite a lot. So far, it's fallen on deaf ears. Is it a huge moneymaker for the province of Ontario?

It's a huge moneymaker for the government as a whole. So I'll talk about it at a federal level and at a provincial level. But excise duties in Canada for beer and wine combined were substantially less than for cannabis. So cannabis was approximately $865 million for fiscal 2022 to 2023. That number was less for beer and wine combined.

For beer, it was $610 million. And it was like in the twos for wine. to 2023, that number was less for beer and wine combined. For beer it was 610 million, and it was like in the twos for wine. But you're just talking taxes here. Just straight taxes. You're not talking profits, revenues, the other kind of thing. Just straight taxes,

straight into the coffers of the government. And so if you're a licensed producer, one of the licensed producers I talked to that went into CCAA, which is essentially installed in CEA. Exactly. We say CCAA to be polite. They estimated between 40 and 45 percent of their top line was going to taxes and to regulatory fees, including land transfer taxes, things like that. So very substantial amount of the top line is going into the government. Do you care about tax rates? Does that have an impact on what you do at all?

I care a lot because one of the big challenges has been access to research funding to do this kind of work. Everybody agrees it's in the public good to get better evidence because so many Canadians are using cannabis for medical purposes and we have these big unanswered questions. And Senator Stan Kutcher has been a really outspoken advocate for the need for more investment into research and in health research in particular because the reality is we have been lagging and so for me with the legalization of cannabis and the associated taxes we were hoping that this would mean that there would be more resourcing of the Canadian Institutes of

Health Research and other research funders in order to basically convert some of those legal tax dollars back into answering the questions that Canadians really need answers to. But you haven't seen that yet. There have been some modest investments. We have seen there have been some grant calls, but if you look in the grand scheme proportionately in terms of the allocation of resources, it's a drop in the bucket. The reality is there have not been large-scale grant funding sources to support research.

We now are launching a national network to support clinical trials on medical cannabis, and that's all for the good. But the associated funding is relatively small at this stage, so in terms of the government putting its money where its mouth is, in terms of the need to study the health effects of cannabis as a medical cannabis research center we haven't really seen that happen.

Gotcha. Ranj I'm gonna make a confession here which I don't normally do on the air. I know nothing about this stuff okay? Sure. Not a thing. So I'm gonna ask you some questions right now that will seem very naive and you're gonna help me as a newbie on all this understand. Tokyo Smoke, what is that? Tokyo Smoke cannabis retailer was one of like the early, early retailers, had a huge presence in, started off in Ontario, huge presence, was their coffee shop.

They recently filed for CCAA insolvency protection for 29 stores. Why did they do that? It's a very tough market, right? We've seen price compression. So there's a number of reasons. One is, like, in, let's talk about Ontario, a lot of clustering of stores, right?

So we have approximately 1,400 stores in Ontario. 200 of them are in Toronto, right? I was talking to one of your colleagues earlier today. They said there's like four, just right outside the door. Very hard to differentiate. Inside the door here? Just in this neighborhood. How do I not know that?

Yeah, you're not looking for them. No, I'm not, all right. Also, there's no real way to differentiate the stores because of the regulations that we have. Again, very heavily regulated industry. So the stores essentially are very similar in a lot of regards. It's not like, let's use alcohol as an example.

It doesn't work in Ontario because of the LCBO, but if you go to New York, you could have four stores that sell alcohol next to each other. One just specializes in very high-end wine. One sells scotch. One's a beer place and a seltzer place. And one place is like, we just sell everything

at a good price. And you can make money at all of those. Here, you're having the same products at the same price, like how do you differentiate? There is no differentiation in the product in the same way as alcohol. Very hard too because of the regulations and promotion and brands,

so there's no level of loyalty that way. Did ever, well listen, again, I don't know, did people think when this stuff got legalized, there's going to be so much market out there, everybody's going to be able to come in and everybody's gonna be able to make a buck. Is that what they thought at the time? I think you have to say that's what people

would have thought otherwise, why would they have started up their companies? I think, look, this is an interesting sort of product because, again, $5 billion industry, we know there's demand for the product, but this demand for product has been around for a very, very long time. People have been using cannabis in Canada, around the world for a long time.

I think part of the problem became is that it's a very heavily regulated industry, right? Some people compare to CPG products, consumer packaged goods, but consumer packaged goods don't have the same level of taxation on them. They don't have the same regulatory burden, right? So there's a big difference in how to make money between these things. And again, I go back to the taxes, but assuming that 40 to 45% number is accurate, you're taking that right off the top line.

You haven't even factored in yet your actual cost to produce this, your margins, right? So if you go to a cannabis store in Ontario, about 50% of the price that you're paying is taxes and government markup. Doesn't leave a lot of margin to make any money, right? Do you represent clients for whom you are trying to lobby government to get the taxes lowered?

We have lots of clients that are lobbying the government in their own way. I would say the government is not generally in the business of cutting taxes and giving money back, although the sad state of affairs is that they're actually choking up the business, right? We have lots of businesses that just would be viable if the taxes were, say, just a flat 10% rather than a dollar or 10%. That margin in and of itself would be enough to take what is now a non-profitable business and turn it into a healthy business.

Can you tell us something that you are working on right now in terms of research? Tell me one thing you want to know the answer to. So it's been super challenging to do clinical trials, but we have had a lot of success in terms of doing observational research, studying the impacts of legalization, studying, for example, the rates of cannabis use disorder among medical patients. What is that? So one of the big questions is, among patients who use cannabis for medical purposes, how many of them develop addiction to cannabis?

Because this is a real issue in the context of the opioid epidemic, because many people who developed opioid addiction started with prescription exposure. So we want to know does that pipeline and that pathway exist for cannabis also? And so in our observational research, we've been able to document the rates of individuals who are using medical cannabis who also meet criteria for cannabis use disorder, the technical definition of cannabis addiction. And we see varying rates from population to population, but it's a non-trivial level. It ranges from a low end of around one in 20

to a high end in, as high as one in two in some populations. So what we see is that there is a similar relationship, and that's one of the risks that people need to be aware of when it comes to medical cannabis. Does your ethnic background factor into whether you're either one in 20 or one in two? That's a great question. We haven't looked at that, and the biggest factor seems to be the kinds of products people are using and why they're using them.

So, oral products that are low addiction liability have very low rates of individuals developing cannabis use disorder. The smoked products and people who are using them for mental health issues tend to be where we see those much higher rates in our research and in other people's research too. So it's really a challenge and to the point raised before around storefronts, we also see a lot of people reporting concerns about the density of storefronts and the fact that there are so many. And other reports outside of our research center

have found that many of the harms associated with legalization are not present in jurisdictions like Quebec where you have provincial monopolies. So what we know from alcohol and other substances is that the denser the number of storefronts and outlets, the higher the risks to the whole population health. And that's why this new kind of cannabis climate,

this very friendly cannabis climate, in terms of the sheer numbers of stores, which no doubt is challenging from a business standpoint, is concerning to consumers and associated with some risks. Ranch, we've got to talk more about the black market here. Sure. Obviously, one of the reasons to legalize cannabis was to put the black market out of business and have it all come under a legal framework.

I gather you've told us that is not happening. How big is the, okay if legal cannabis is a five billion dollar a year business in Canada now, any guess at what the illegal market is still is? The numbers indicate 30 to 40 percent of the overall market is still illegal and like, I don't think the government or anyone rationally would think that you can totally do away with the black market. It's just impossible. There will always be a kid who can't go to a store

because they're not the right age. There will always be people that would want a product that the regulations don't permit. There will always be users that want to have more product because they actually need it. Not for recreational purposes, just for medical purposes. Theoretically, that should be a small number if you legalize, right? If the black market before was 100 percent, surely it ought to be a lot smaller now.

Sure, and look, we're talking about over the course of six years a substantial decrease, right? In what the black market is. Now listen, the black market has the advantages of they're not regulated, right? So pricing, for example, they can do whatever they want on pricing. Potency of products, right, which could potentially be a health issue as well, is also not regulated if you're illegal, right?

And so they have advantages that the legal market does not have and never will have, right? So the question becomes is, how do you minimize that in a way that still protects public policy and protecting youth, the overall public, right? So that's the dichotomy of what we're trying to like, trying to actually govern for. So it is impossible, basically, to stay

about the black market. It's always going to be with us. That's my view. I just don't see it. It's also a product that people feel OK purchasing in the black market, right? And look, perhaps over time it will decrease. But if I said to you, come to my house, Steven,

let's have a get together, and I'm serving moonshine that I bought out of illegally, you would be like, that's crazy. That's insane. But if you went to someone's house, and someone was smoking pot, and it was from the black market, I think people would be like, yeah, that's- Big deal. Yeah, not a big deal, right?

Yeah. Okay. I wanna follow up on this one more time, and that is on the issue of price, because we've seen in the past, the illegal cigarette market occasionally gets bigger and bigger if the taxes on cigarettes get too high. So every now and then the government lowers the taxes on cigarettes and takes a chunk out of the black market.

Could you do the same thing with cannabis? I think if you decrease the excise tax there is a chance that the pricing would come down, right, and still leave enough profitability for licensed producers. But again, that's a hope and a prayer, right? People have been lobbying to decrease the excise taxes for a long time. It's the number one complaint, I would say, from licensed producers.

It hasn't happened. I don't think there is a path forward for that at the moment. Maybe the next government will view it differently. It'll be interesting to see what they do with it. But it is a very challenging sort of market, right? My understanding was at the beginning of this year, there was approximately 200 million dollars owing to the government for excise taxes, outstanding. To the federal government. So that number

may have increased or decreased. And the reason I say it might have increased is if they're not paying it, it just continues to rack up. It might have decreased because a lot of companies are just going into insolvency, CCAA protection, in order to avoid having to pay these taxes altogether. Got it. And I should say that prices can be too low. What we know is that when the minimum pricing laws

are really important, for example, in the context of alcohol, to avoid essentially encouraging heavy drinking. And so even though low prices compete with the black market, I feel like the Canadian legalization experiment has been quite successful in terms of displacing and penetrating the 100% contraband market before legalization. So I think that minimum pricing probably should apply. I would say that I think that pricing that scales

the amount of THC in the products would be important because really a lot of the harms and a lot of the risks are about how much THC is in products. And when I see products that have 85 or 90% THC, they're really, I think, toxic in terms of the risks associated and having a price scaling system that would really minimize or encourage the use in terms of the risks associated. And having a price scaling system that would really minimize or encourage

the use of lower THC products would be beneficial, at least from a health standpoint. James, I'm gonna follow up with you on the issue of what you think it will take to get a successful, significant clinical trial involving humans, obviously, and cannabis up and running in Canada. So I think it'll take several ingredients, some of which are already in place. involving humans, obviously, and cannabis, up and running in Canada? So I think it'll take several ingredients,

some of which are already in place. So the development now of a network of sites across Canada to do large-scale medical cannabis research is already happening. That's critical. There needs to be investment in terms of the research bodies to say, we need answers to the question of cannabis for chronic pain, we need answers to the question

of cannabis for mental health conditions like depression, anxiety, and PTSD. We need answers around cannabis for insomnia. So there has to be resources, there has to be gas in the tank. The third critical ingredient is gonna be working with regulators to really streamline the requirements to execute these trials.

Because we've had a number of chapters of the bureaucratic burden being so high as to effectively bottleneck research and discourage researchers from pursuing this work. Because it was professionally increasingly problematic, because no progress could be made. So building a regulatory regime in which research licenses are available, in which researchers can study

the products that are available in the market now, and in which feedback is received in a timely way is gonna be critical for this to move forward. You and some colleagues recently wrote Health Canada. So, this got so bad that we wrote an open letter to Health Canada with more than 200 signatories nationally saying that the framework currently was essentially preventing clinical trials research.

And since then, there have been some positive changes. There's now a pathway. So, for research, for example, giving participants cannabis to study, for example, driving effects or non-therapeutic effects. There's a different pathway because before you actually needed to register that as a clinical trial. There seems to be a greater interest in thinking differently about what's needed, but the reality is that some of the regulations still are challenging.

And Steve, I'll highlight one aspect. The products that can be studied in a clinical trial have to be what's called GMP certified, or Good Manufacturing Process certified. That's like a drug. But the products that you would buy from a cannabis store are GPP, or good production practices, and that's like a food.

So none of the products that can be bought from either the OCS, the Ontario Cannabis Store, or any of the storefronts would typically be viable for us to study. So I could do a personal experiment on myself to see if cannabis works, but if I wanted to randomize you guys into a clinical trial, none of the products that are widely available would be viable for that. And that's a huge barrier because that means that the companies that exist are not producing products that we as researchers

could study for their health benefits. There's a vanishingly small number of companies that have GMP certified products, and what that means is 99% of the products that are available can't be studied, that are available and that Canadians are using for medical purposes, can't be studied in a systematic way. It's a real disconnect,

and that's that third piece of the puzzle that would be critical to reconcile to do the kinds of world-class research I think Canadian researchers want to do. That small number of product that is GMP is probably making its way outside of the country for export, right, which even decreases the amount that's available to you even further, right?

That's right, so when legalization was happening, we had dozens of licensed producers reach out to us and say, if you're going to be doing research, we want to support this. We'd be happy to supply products. And they actually told us that our GMP pipeline goes to places like Germany where medical cannabis has to be GMP certified.

So even Canadian producers that are making these products are often actually exporting them. So this disconnect between what's viable for people to just buy in the store and consume versus what researchers can study is a huge problem and a major barrier. Just a few minutes left here. Ranj, I wanna ask you again

about the business side of things. How many of the 50 American states, if you know, legalize cannabis right now? The majority have legalized either medical or recreational, and I think it's only a matter of time before they all legalize in one form or another. And generally, the route is legalize medical, get acceptance for that, and then recreational is generally the path. Okay.

That leads to the follow-up question, which is, if eventually all 50 states go that route, what's the impact on Canada? Yeah. I mean, I think if that happens, I think we could potentially see a number of companies that are listed on Canadian stock exchanges shift to the US. I think that will take some time, right? The requirements to be on the US exchanges are different than in Canada. So I think we'll see that happen. I think we could potentially see a focus from external sources.

Organogram just recently closed a tranche with a large British company, tobacco company. That would probably shift to the US instead of being in Canada. So the early mover advantage that we had has been slowly lost over time and will continue to be lost if legalization happens in the States. OK, that's the point I was trying to get to here. It presumably for Canadian businesses that are in this space, it gets worse the more

and more America legalizes. Is that right? Yeah, I think over time, right? I mean, like it's just a bigger market, right? And so that's where your focus is going to be, right? And so people that are investing in Canada or have invested in Canada, if they had their choice would probably rather invest in the US or UK or Germany or larger markets, right?

And unfortunately, a lot of money that was put into the industry early on was wasted on things that actually ended up not being of importance, right? So building giant facilities because there was a thought process that the larger your facility, the more you could produce and there's gonna be a lack of supply There is that that is not is not an issue. There's been more than enough supply, right? So we certainly have lost our advantage in the US legalizing

We'll probably only further damage Canada. You guys gonna go for a doobie after the show's over No comment Just curious. Okay. I want to thank you guys for coming in and helping us out with this. I think we all understand it a lot better right now. Ranjit Dhillon from McCarthy Tetro, James McKillop from the Michael G. DeGroote Center for Medicinal Cannabis Research at McMaster University and St. Joe's in Hamilton. Thank you both very much. Thank you.