On May 8, 2019, Health Canada announced they were changing the requirements for new cannabis facility licensing applications. This resulted in a lot of speculation on what this meant for the cannabis industry, with implications to those looking to get into the industry as well as those businesses currently in the application queue.
The last five years of cannabis licensing in Canada has been turbulent and unpredictable at times, and this last round of regulation changes may feel much of the same. However, there is a silver lining to be seen with this recent round of updates.
Over the years, there have been many changes to various cannabis regulations, including the Marihuana for Medical Purposes Regulations (MMPR) which were broad and open to interpretation when first released. This was then followed by the more proscriptive Access to Cannabis for Medical Purposes Regulations (ACMPR), which would facilitate industry growth to better serve the needs of medical patients. The Cannabis Act/Regulations, published in 2018, was the latest major overhaul.
Reviewing some of the changes that have taken place over the years will provide some insight as to why the recent changes made by Health Canada are a step in the right direction.
At the time the MMPR was released, Health Canada had a political mandate to licence quickly to establish an initial cannabis supply across the provinces. The relatively fast licensing of these first dozen companies optimism within the industry. It appeared that building a facility and application for a licence would be achieved within a short period. Hundreds of entrepreneurs submitted simple applications and built out their facility at the same time; after all, the first dozen producers succeeded by doing this.
Post-March 2014, the number of new licences approved by Health Canada significantly slowed. This “drought” of licensing created unease in the industry, as many start-ups had pursued licences under the assumption that they were simple and straight forward to procure. While one to two would pass the screening criteria each month, hundreds of applicants were submitted.
At the time, the process of achieving a licence was incredibly challenging for investors and applicants. Many applications were either refused, withdrawn, or waiting indefinitely “in queue”. The slow-down in the licencing process was frustrating for many investors who were basing their forecasting on the faster licensing observed before March 2014. For the fortunate applicants whose file remained in the queue, the timeframe for achieving a licence was unpredictable. Waiting three or more years was very costly, and many applicants simply gave up. After all, there was no longer any predictability as to who would achieve a licence, or when. Achieving a licence was like striking gold.
This was a dark time for the industry. There were many ambitious and well funded applicants who simply ran out of money because the licensing process was unpredictable and slow. If the review process had more structure, it may have worked – but many applicants were left to wait without any communication from Health Canada. As a result, they lost confidence, investment dried up, and applications sat dormant in the queue. In fairness to Health Canada, they were new to licensing cannabis facilities which brought a steep learning curve, coupled with the political will under the Harper government. While not public knowledge at the time, Health Canada had a mandate to ensure there was only adequate supply to meet the demand of the online medical ordering needs of Canadian patients.
With Justin Trudeau’s Liberal government winning the federal election in 2015 with a platform to legalize recreational cannabis and the adoption of a new set of guidelines (ACMPR), we saw licensing wait times decrease. There was a lot of information-seeking by Health Canada between 2017 and 2018, and the optimism in the industry started to grow again. It should also be noted that Health Canada started requesting applicants to keep them up to date on their construction progress, as they started prioritizing applicants who were more operationally ready.
Under the ACMPR, the number of monthly licences increased five-fold from early 2017, and by end of the year the speed increased to 2-3 new licences per week. Even though there was more confidence under the ACMPR and clearer direction to build, Health Canada was already working on new regulations.
The ACMPR would eventually be subsumed under the new Cannabis Act and as the regulations came into force, Health Canada received a record number of applications for cannabis facilities. Health Canada was already burdened by the sheer number of dormant applications that had not proceeded in building out their facility, and it became difficult for them to prioritize applications. Without changing the building requirement in the application process, the administrative burden became very high. Health Canada recently announced that around 70% of the applications in the queue did not have facilities built out. Meanwhile, the other 30% were serious and being grouped in the same review process, causing unnecessary delays for those who were serious and funded.
Health Canada announced the change to licensing on May 8, 2019 that before an application can even be submitted, the facility must be fully built out and meet the regulatory requirements for security. And while these changes were at first viewed negatively by many in the industry, there is a silver lining: the licensing process will be shorter and more predictable for those who are serious and funded.
Every other federally regulated industry in Canada has this requirement (to build the facility before making an application). For example, in the pharmaceutical industry, an application for a Drug Establishment Licence (DEL) is prepared based on the facility that is already fully built out. The inspection of the facility is ultimately the final stage of the review process. Health Canada has aligned standards for Cannabis with the other regulated industries.
This change is great from an investor’s perspective as it provides predictability: build the facility; ensure it meets the regulatory requirements; inspection; and then licence. The length of the whole process is dependant on how long it takes to construct/renovate the facility, whereas before these changes, the entire review process had unpredictable time frames.
With predictability comes confidence, both for investors and for new entrants – and this is where the optimism can be found in the May 8th licence update. By changing the application process, it’s true that this could give some companies pause until they line up their investors. However, investors should interpret these changes as incredibly positive given that licensing will now be achieved in a shorter time frame.
Lastly, it’s important to remember that an applicant doesn’t have to build out a million square foot facility to get a licence. Start small – a few thousand square feet – get it licensed, then file an amendment (and build out more) after the initial licence is awarded. By starting with a smaller Phase 1 build, investors can spread out risk over phases. If done properly, this entire set of announcements should be very welcome news for the investment community.
With Health Canada committing to higher performance standards in review times; they will not achieve targets by letting files sit in the queue for years.
These changes will ultimately be beneficial to the industry overall and should inspire confidence in investors as there is a more clearly defined process. This new process supports a higher possibility of obtaining a licence in a faster time, leading to Licence holders being up and running sooner and with quicker turn around on investment.
Brian Wagner founded NHP Consulting 2004, which was incorporated in 2007. As CEO for NHP Consulting for 13 years, Brian created a unique business model for helping the life sciences industries in Canada achieve regulatory compliance for marketed health products. While at NHP, Brian led the company to offer cannabis consulting services which grew quickly. With a foundation of pharmaceutical GMP standards, security design, financial planning and government engagement, Brian brought the core cannabis team to the forefront by incorporating CCI in April 2017.