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Marijuana stocks lose ground as new federal government legislation remains hazy on details

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The federal government’s marijuana legalization bill, announced Thursday, opens the country to a new billion dollar market the likes of which haven’t been seen since the end of prohibition in the 20s, but many details on what the marketplace will look like are still hazy.

Shares in Canada’s publicly-traded marijuana companies were down as details of the legislation began to roll out, even though what’s been announced is largely in line with the recommendations of national legalization task force report released in November, to which the market reacted positively.

Canopy Growth Corp., the country’s largest marijuana company by market cap, was down just over two per cent, Aurora Cannabis Inc. was down just under four per cent, Cronos Group fell 2.75 per cent, Aphria Inc. slid 4.58 per cent and Wildflower Marijuana Inc. shed 11.11 per cent of its value.

Public Safety Minister Ralph Goodale said the transition to a legal market must be orderly and the government will not tolerate a “free-for-all” approach in Canada, the second country in the world to legalize recreational marijuana at a federal level.

The federal government will continue to regulate and licence producers of legal marijuana but left retail sales question up to the provinces, much like how they oversee the sale of alcohol.

The government has set an ambitious goal of implementing the new laws by July 2018 especially given that exact regulations, Senate approval and provincial regulations still need to be worked out.

However, government officials said that if provinces fail to set up distribution models by that time, consumers will be able to receive marijuana through the mail, in line with the current model for medical marijuana patients.

Meanwhile, the legislation will also restrict advertising especially as it appeals to youth, but will allow for some branding and information on packaging. Those details will also be determined in regulations yet to be written.

Importing marijuana into Canada or exporting it around the world will remain illegal unless authorized by the government, as some of Canada’s current licensed producers have been.

The size of the new marijuana market is largely unknown but several predictions have been made.

Deloitte has estimated the market could be worth some $8.7 billion, while Canaccord Genuity has estimated the market reach some 3.8 million customers and be worth $6 billion annually by 2021, while the Parliamentary Budget Office has estimated there could be 4.6 million users in 2018. Health Canada has projected a tamer estimate around $1.3 billion.

Rigorous government standards and requirements have resulted in high barriers to entry — Health Canada has only approved two per cent of applicants for a licence — securing first-mover advantage for the 40 existing licensed producers.

Canada’s publicly-traded marijuana stocks have been on fire since the government announced it was going to introduce the legislation a year ago with Canopy Growth Corp — the first marijuana company to reach a $1 billion valuation — and shares rising 300 per cent and Aurora shares up 500 per cent.

However, the market has been hamstrung by red tape, quality control issues and the resistance of the medical community.

Several licensed producers sent a letter last month to Trudeau and cabinet asking them to rethink the task force’s position on advertising and packaging, arguing that a lack of brand awareness and advertising will undercut their efforts to differentiate themselves from the black market.

A task force report on legalization has recommended the government allow storefront locations in addition to the current mail-order system and acknowledged a majority of people who participated in the consultation process prefer a distribution system that includes dispensaries.

Yet it remains unclear whether new government legislation will allow a place for the 400 or so dispensaries already operating.

The shops, most of which maintain at least an ostensible medical purpose, argue that they fill a gap for consumers by providing in-person advice, fostering competition and keeping prices low.

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