Submission by Privateer Holdings to the House of Commons Standing Committee on Health’S Review of C-45, the Cannabis Act

SUBMISSION BY PRIVATEER HOLDINGS TO THE HOUSE OF COMMONS STANDING COMMITTEE ON HEALTH’S REVIEW OF C-45, THE CANNABIS ACT

August 2017

For further information, please contact: Cameron Bishop Director of Government Affairs Privateer Holdings Email: [email protected] Privateer Holdings is a private equity firm shaping the future of the legal cannabis industry globally. Founded in Seattle in 2010, we have raised more than $150 million (USD) from investors worldwide (including Canada) seeking to end the harms caused by cannabis prohibition through a legal and regulated market.

Privateer Holdings played a meaningful role during consultations undertaken by the federal Task Force on Cannabis Legalization and Regulation and as the federal government drafted Bill C-45, An Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts (The Cannabis Act). We believe that a successful regulatory framework must allow professional companies to fairly compete with and, ideally, eliminate the black market through brand differentiation, meaningful scale, reasonable taxation levels, distribution controls, product diversification and innovation, and access to capital and consolidation.

Our company currently operates in Canada through our Nanaimo-based subsidiary, Tilray, which in 2014 was among the first companies to be federally licensed by Health Canada to produce and distribute medical cannabis under the Access to Marijuana for Medical Purposes Regulations (ACMPR). Tilray has led the industry in standards for safety, security, ethics and quality. The company is also actively advancing scientific understanding of the safety and efficacy of medical cannabis globally through clinical research partnerships with world-renowned universities and hospitals in Australia, Canada and Europe. A number of elected officials and senior public servants have had the opportunity to tour Tilray’s state-of-the-art, $30 million, 60,000-square foot research and cultivation facility and experience firsthand the standard we set for medical cannabis production and distribution.

In addition to Tilray, Privateer Holdings is investing in a portfolio of brands dedicated to professionalizing the cannabis industry, including Leafly, a cannabis website and information resource, and Marley Natural, a premium product line of responsibly sourced and integrity-driven cannabis and lifestyle products. Our team is comprised of over 350 professionals on the ground in seven countries, seven U.S. states and five Canadian provinces. Our team includes PhD scientists, executives from world-leading brands, and former federal law enforcement officers. In an industry stigmatized by negative perceptions and substandard business practices, we are known for our methodical approach and culture of continuous compliance.

Our experience evaluating investment opportunities and regulatory climates in countries on four continents has shown us how policy choices can affect the success of medical and recreational cannabis programs. Canada’s federal government will determine the success of its framework by whether it protects children by restricting access, keeps profits out of the hands of criminals, and mitigates harms to public health.

The following submission expands on these principles in the context of achieving three different public policy goals: Safe and secure production; Consumer access to safe product; and, Responsible use.

SAFE AND SECURE PRODUCTION

Cannabis Production

The overarching aim of federal, provincial, and territorial regulation must be to ensure licensed producers are permitted to cultivate at scale to undercut the black market. While the Cannabis Act will determine much of Canada’s recreational cannabis production framework, production, distribution and retail cannot be siloed if the program is to achieve its goals. Private sector production with appropriate government licensing and oversight is the best way to allow for safe and secure production while also providing adequate choice for consumers.

Licensed producers have the capacity to quickly meet market demand and scale up even further to supply the new market if needed. These companies must be able to achieve meaningful scale (i.e. at least 500,000 sq. ft. of cultivation

2 | © 2017 PRIVATEER HOLDINGS, INC., CONFIDENTIAL space, stable capital) in order to serve the Canadian market, which is currently estimated by Deloitte at $5B-$8B, and which could rise as high as $22.6B depending on the parameters of the market1. Economies of scale offset the considerable compliance costs licensed producers will incur as a result of operating in a highly-regulated environment.

FPT governments should draw upon the experience of licensed producers already accustomed to operating in a highly-regulated environment. In the United States, the states of Colorado and Oregon both leveraged existing medical cannabis programs when rolling out their recreational programs; the state of Washington started from scratch. The rollouts in Colorado and Oregon were much smoother than Washington’s by measures including adequate supply, pricing competitive with the black market, and licensing and regulation2. We were pleased to see the federal government take this approach in the Cannabis Act and to hear the federal Minister of Finance support a stop-gap program for provinces and territories that do not have a framework in place by July 20183.

We believe there is room for smaller producers in the marketplace as well. The existence of large producers does not preclude the existence of smaller, more specialized cultivators (the same way small-batch craft brewers exist alongside large commercial breweries). This has been proven in U.S. states where large and small producers co-exist.

Good Production Practices Licensed producers are accustomed to a high regulatory threshold and Privateer Holdings supports basic regulatory requirements for producers, particularly when it comes to enforcing Good Production Practices4. Canada has some of the most stringent quality standards for medical cannabis production in the world. These comprehensive production practices are one of the country’s most important assets as it embarks on implementing a new system for regulating adult-use cannabis. We expect federal, provincial, and territorial governments will continue to put the health of Canadians first by holdingany new licensed producers, large, medium or small, to these same standards. All cannabis products should be subject to analytical testing for contamination (mold, mildew, fungus, pesticides, heavy metals, chemicals) and potency (THC and CBD) prior to being released for sale to the public. There should be strict rules regulating the storage of cannabis products to ensure they are kept in sanitary and secure conditions, as well as prevent diversion. Our experience has demonstrated that a high degree of expertise and commitment to security are necessary to produce quality cannabis products safe for consumption.

Licensing and Fees Licensing and fees are an important tool to block out non-professional actors and ensure a professional, responsible industry. All applicants should be required to submit a well-developed business plan, provide proof of sufficient capital, and be subject to vigorous criminal background checks. We would encourage the provincial government to tie the issue of licenses to market growth to keep pace with supply. These licenses should allow for vertical integration so that producers have the option to distribute their product through private retailers, stores located at a licensed cannabis facility, or direct-to-consumer mail order.

1 Deloitte, 2016, “Recreational Marijuana: Insights and opportunities”, p. 5. https://www2.deloitte.com/content/dam/Deloitte/ca/Documents/Analytics/ca-en-analytics-DELOITTE%20Recreational%20 Marijuana%20POV%20-%20ENGLISH%20FINAL_AODA.pdf 2 Associated Press story: http://www.foxnews.com/us/2015/01/16/washington-state-growers-struggling-to-sell-legal-marijuana.html 3 Canadian Press story: http://www.winnipegfreepress.com/local/if-province-cant-get-marijuana-laws-in-place-by- deadline-feds-prepared-to-offer-mail-order-pot-429516863.html 4 Government of Canada, 2017, Access to Cannabis for Medical Purposes Regulations, Subdivision D “Good Production Practices”. As published by the Minister of Justice. http://laws.justice.gc.ca/PDF/SOR-2016-230.pdf

3 | © 2017 PRIVATEER HOLDINGS, INC., CONFIDENTIAL The current situation in the Washington state market illustrates why this is important. As of June 2017, only 392 of the 1158 active licenses issued for production are operational and their average monthly revenue of $15,000 is not enough to offset expenses. In terms of processor licenses, only 645 of 1177 issued are operational, with average monthly revenues of $65,0005. The failure of the state to allow vertical integration has resulted in a high failure rate among professional companies operating in the industry, which would be mitigated by allowing producers and processors to sell directly. A lack of retail licenses is also an issue in the state.

Excess supply, a dearth of retail licenses, a failure to allow for vertical integration, and a lack of capital could create a situation in Canada where legal product continues to be diverted into the illicit market. Oregon’s licensing model corrected for this problem by creating a trial period where only existing licensed medical producers could serve the recreational market to determine whether there would be an imbalance between supply and demand6. Oregon will issue additional licenses when projected demand is forecasted to outpace projected supply7. If the federal government chooses a similar approach, it is important to ensure that the application, approval and inspection processes are not overly burdensome and that the government is adequately resourced to prevent the significant delays and backlogs Tilray has sometimes experienced when seeking approvals for additional cultivation space. We support the implementation of licensing fees in conjunction with service standards (i.e. for processing of applications and amendments), which provide accountability and predictability for businesses.

Packaging, Labeling and Storage The production, packaging, storage and distribution requirements mandated by the ACMPR are some of the most comprehensive of any jurisdiction in the world and should be a point of pride that guides the direction of the recreational framework. While we consider certain packaging requirements to be necessary (i.e. mandating child- proof packaging, requiring product-specific THC and CBD content validated by a lab to be printed on the label, and mandating health warning messages), we strongly believe brand prohibition is incompatible with a legal system capable of competing with a dominant illegal market. To that end, Privateer Holdings through Tilray, has joined with 15 other of Canada’s Licensed Cannabis Producers, representing approximately 90% of the current legal medical cannabis market, the Canadian Medical Cannabis Council, Cannabis Canada Association and Advertising Standards Canada (ASC) to develop guidelines on the branding and promotion of cannabis. ASC, the national, independent, not-for-profit self-regulatory body will contribute its expertise in creating self-regulatory advertising guidelines.

The agreement to develop guidelines builds on the advocacy efforts of participating Licensed Producers, and their respective Associations, urging the government to ensure that cannabis regulations include allowances for responsible branding and promotion as tools required to combat the illegal market. All licensed producers agree on the need for a moderate degree of branding – that does not appeal to children – such as coloured lettering and logos for cannabis products. That way, there is a delineation between combustible and noncombustible forms (i.e. oils, edibles, topical lotions) of cannabis, the latter of which is rapidly becoming the preferred method of use by cannabis users. The development of branding and promotional guidelines is underpinned by the principle that legal, licensed, cannabis companies – whether they be small, medium or large producers - must be allowed to explain to consumers why the products they develop are better and safer, than those offered by the illegal market.

5 Washington State Liquor and Cannabis Board, 2017, “Marijuana Sales Activity by License Number”. http://lcb.wa.gov/records/frequently-requested-lists 6 Wall Street Journal Story: http://www.foxnews.com/politics/2016/10/01/oregon-begins-recreational-marijuana- sales-on-saturday.html 7 Oregon Live story: http://www.oregonlive.com/marijuana/index.ssf/2017/01/oregon_reaches_another_pot_mil.html

4 | © 2017 PRIVATEER HOLDINGS, INC., CONFIDENTIAL Taxation Privateer Holdings recommends a graduated tax structure, where taxes slowly increase over a period of 5-10 years to allow the legal market to gain its footing against the black market by initially undercutting black market prices and incentivizing consumers to move away from the illicit market. Reasonable levels of taxation combined with market forces should determine the price of the products – not price controls. Price controls hamper the ability of the legal market to compete with the black market. New York’s medical cannabis program – widely regarded as the least successful in the United States – provides a useful case study in how price controls restrict the ability of companies to compete with the black market8.

CONSUMER ACCESS TO SAFE PRODUCT

Advertising and Marketing

It is important to develop appropriate advertising and marketing rules to ensure that cannabis products are not marketed to youth; it is also critical to allow professional companies to differentiate themselves from black market producers through branding and responsible marketing practices. If customers are unable to differentiate products through branding and marketing, quality will suffer because customers will have difficulty discerning responsible brands from lower quality alternatives. The result will be a market characterized by adverse selection where unprofessional companies thrive while responsible companies struggle to communicate the value of their brand proposition. To that end, it is critical Licensed Producers be empowered to push back against Canada’s thriving illegal market through branding and education. Advertising and promotion restrictions adopted by Colorado (R.1102-1115) and Washington (WAC 314-55-155) provide reasonable levels of protection while still allowing for moderate brand differentiation.

Product Formulations Reasonable product restrictions will deter overconsumption, requiring certain products to be individually packaged in defined doses. We support the prohibition of products that would appeal to young people (i.e. infused gummy bear candies). We also urge the federal government to move expeditiously on developing guidelines to allow edibles, concentrates and vape carts – without these allowances at the time of legalization, the black market will fill the void left by a lack of legal permits to produce these products by Canada’s licensed producers.

We do not support limiting potency or restricting product formats or innovation (especially the development of products that would allow customers alternate methods of consumption other than smoking). Restrictions on product type and potency will drive Canadians to the black market. Limiting THC, prohibiting high-potency products, and restricting product formats will give the black market a monopoly on these products.

The growth of various types of adult-use cannabis products in Colorado and Washington provides some useful data for Canada to consider. While dried flower remains the dominant product in these states, growth is ebbing as individuals transition to other means of use – in both states, dried flower is the fastest declining category of preferred product, losing approximately 5% market share per year. In Washington, concentrates and vape carts are the fastest growing categories; In Colorado, vape carts, concentrates and edibles are the fastest growing categories9.

8 ABC News story: http://news10.com/2016/03/23/medical-marijuana-too-expensive-for-some-patients/ 9 Headset & BDS Analytics.

5 | © 2017 PRIVATEER HOLDINGS, INC., CONFIDENTIAL Access to Medical Cannabis Tilray’s experience has reinforced our view that Canadians, in consultation with their physicians, must have reasonable access to legal cannabis products for medical purposes. Reasonable access to medical cannabis – including the ability of patients to access medical cannabis through pharmacies – requires carve-outs for patients below the legal age but with legitimate medical needs and patients who require high potency products.

Limited home cultivation should be an option for medical patients and recreational consumers, but personal cultivation alone is not sufficient to provide ACMPR patients with continued access to the selection of product strains and formats that meet their medical needs.

We urge the government to consider insurance coverage for medical cannabis on federal drug formularies, zero-rating medical cannabis and investments in clinical research. Tilray is a global leader in medical cannabis research and has engaged in research partnerships on cannabis applications for post-traumatic stress disorders, epilepsy, chronic lung disease and chemotherapy-induced nausea and vomiting10. Such research is critical to securing access for patients and educating physicians and other public health professionals about cannabis. The new framework can further improve medical access by distinguishing medical and recreational supply and accommodating differing taxation approaches.

RESPONSIBLE ADULT USE Privateer Holdings endorses a reasonable age limit (minimum 18 years) for purchasing and possessing cannabis. However, we believe that consistency across the provinces and territories is preferable to a patchwork of age limits, a disparity that would create a complex compliance burden on businesses and could encourage cannabis tourism across provinces and territories, creating further enforcement and public safety issues. That said, it is important to continue to permit children and youth who derive therapeutic benefits from medical cannabis to be permitted to access cannabis products under the supervision of a physician.

Impaired Driving Privateer Holdings supports ongoing research to determine how to equip law enforcement to deal with impaired driving. Tilray has been selected to supply study drugs for a research at the University of Sydney examining the effects of vaporized cannabis consumption on driving ability. We look forward to sharing the progress and results of this study with Parliament.

Public education campaigns should emphasize the risks associated with drug-impaired driving and a portion of tax revenues generated from legal cannabis sales must be applied for this purpose on an ongoing basis.

CONCLUSION A successful legal market will have the following four key pillars: an allowance for limited branding and in-store promotion; a minimum age of use; a competitive tax regime; and, moderate flexibility in terms of the types of recreational cannabis products that can be produced and sold. Without these elements underpinning the legalization effort, Canada will fail in its attempt to bring regulation and order to an out-of-control illegal market.

10 Tilray Research Portfolio: https://www.tilray.com/research/