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Ottawa’s ‘backwards’ limit on pot drinks is having unintended consequences, producers warn

Beverage cans are run through machinery during a tour at a Canopy Growth facility that produces cannabis derivatives in Smiths Falls, Ontario, Canada October 29, 2019.  REUTERS/Blair Gable
(REUTERS/Blair Gable)

Federal government rules limiting sales of cannabis-infused beverages are having unintended consequences, according to industry insiders who say the math behind the current policy favours higher-potency drinks while restricting sales of mellower products.

Drinks, gummies, cookies and other “cannabis 2.0” products are sold under government limits based on how they equate to a gram of dried flower. Retailers are required to cap purchases at 30 grams. Since the rules are based on overall weight, not the amount of active ingredients, consumers can ring-up more high-potency drinks in smaller containers in a single purchase than weaker ones sold in larger cans and bottles.

Canopy Growth (WEED.TO)(CGC) and The Valens Company (VLNS.TO) both produce drinks in 355ml formats with about two milligrams of THC per serving. Under Health Canada’s rules, each container equates to 5.1 grams of dried cannabis, restricting single purchases to five cans in order to stay under the 30 gram legal limit.

Canopy’s strongest drink, with 10 milligrams of THC per serving, comes in a 222ml can. Consumers can buy nine at a time, since each unit equates to 3.2 grams of dried flower. Aurora Cannabis (ACB.TO)(ACB) recently launched a “citrus shot” beverage product, similar in size to a 5-hour ENERGY drink, with up to 10 milligrams of THC per serving. You can buy 42 of those without hitting the 30 gram limit. The numbers skyrocket from there when powdered cannabis beverage additives with almost no product weight are accounted for.

Former Aurora chief product officer Shane Morris congratulates developers of the company's new citrus shot  product. (Twitter)
Former Aurora chief product officer Shane Morris congratulates developers of the company's new citrus shot product. (Twitter)

“Whether you compare it to the rest of the cannabis space or you compare it to alcohol, it’s a flawed concept,” Canopy chief executive officer David Klein told Yahoo Finance Canada in an interview.

A veteran of the beer and wine industry with more than a decade’s experience at New York-based booze giant Constellation Brands (STZ), Klein expects cannabis-infused beverages to hit $1.3 billion in sales, or about five per cent of Canada’s combined booze and sports drinks markets. Citing strong consumer data, he sees pot drinks eclipsing sales of trendy hard seltzer products once Canopy is able to enter the American market through its deal to acquire Acreage Holdings (ACRGF)(ACRG-U.CN).

Canopy claims to have shipped more than half a million cans in Canada since its first drink product hit stores in the spring. The company has appealed to Health Canada for changes that would allow consumers to buy up to 72 cans in a single transaction.

Literally weighing new cannabis drinks against dried flower is antiquated thinking, according to Everett Knight, executive vice president of corporate development and capital markets at Valens. The Kelowna, B.C.-based extraction company produces a line of cannabis drinks through an agreement with A1 Cannabis, an offshoot of a Toronto brewery.

“I think we should do it by dose instead of by weight,” Knight said in an interview, noting Ottawa changed the rules on cannabis excise taxes to focus on THC content rather than weight in the 2019 federal budget.

Canopy’s chief product officer Rade Kovacevic recently told investors that the current purchase restrictions on infused drinks are the product of regulatory oversight, and will be “solved” in the coming months or year. Jordan Sinclair, the company’s vice president of communications, expects progress to resume “post COVID” as health officials remain focused on the pandemic.

Canopy has done most of the talking so far, he said.

“Usually with the regulator you get a lot of listening. Then you get a very polite phone call or email to say thank you and they will get back to you when they’ve made a decision,” Sinclair said. “That’s sort of par for the course.”

According to federal lobbying records, Fluent Beverages and Truss have also engaged with federal agencies in recent months to discuss sales of edible cannabis, which includes drinks. Fluent is a joint venture between beer maker Anheuser-Busch InBev (BUD) and Tilray (TLRY). Truss is a joint venture between Molson Coors Canada (TPX-B.TO) and HEXO (HEXO.TO) (HEXO).

The Cannabis Act, the legislation that ushered in legal recreational cannabis on Oct. 17, 2018, is set to be reviewed in 2021. A report must be tabled in Parliament no later than April 17, 2023.

Peter Cleary is a principal at Santis Health, a Toronto-based government relations firm that deals with the health sector and has lobbied federally. He expects Health Canada will do its own review “in the next few years,” which will result in a batch of changes to be integrated into policy.

“From a government’s perspective, undertaking a regulatory change is oftentimes a labour-intensive task,” he said. “There is rarely a regulatory process on a regulation as significant as cannabis on one change.”

Health Canada spokesperson André Gagnon did not specify what, if any, changes the federal agency is considering.

“The equivalencies across classes of cannabis products draw on lessons learned from the limits established by U.S. jurisdictions that have legalized cannabis,” he wrote in an email. “Health Canada welcomes feedback from stakeholders on the legal framework.”

Canopy and other entrants to the infused beverage category are placing big bets on drinks claiming a spot in Canadian coolers over the summer. Prohibition Partners, a London-based cannabis data provider, recently predicted the global cannabis drinks market will be worth US$1.82 billion by the end of 2020, growing to US$5.8 billion by 2024. They say “all segments of the drinks industry are now embracing cannabis-infused drinks.”

Despite the fact that most of its products can only be purchased up to five cans at a time, Canopy said early feedback from retailers suggests sales are strong, supply is moving quickly and consumers are asking for drinks like Seth Rogen’s Houseplant grapefruit by name.

Klein called the five-can limit on most of Canopy’s drink offerings “a source of irritation for consumers” looking to stock their fridges. He downplays the notion that the absence of 24-packs akin to a case of beer has held back sales. His experience in booze tells him consumers tend to buy a six-pack first when trying new products.

Sinclair said Canopy’s best argument for a quick regulatory change is the fact that the current regulations favour access to strong drinks, apparently flying in the face of the “start low, go slow” mantra adopted by the government.

“The rule has been designed backwards. That has had unintended consequences,” he said. “I don’t think it’s had much of an impact on our bottom line yet. But I would say it has all the makings of something that could hinder growth if it’s not addressed.”

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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