For Canada's "Big Pot" industry, it's a shocking year-end fall from grace.
It's tarnished an otherwise dazzling 2016 for Canada's industrialized medical cannabis growers.
And what exquisitely cruel timing with two image-bruising developments in the last two business days of 2016.
For many shareholders in particular, it was analogous to a much-anticipated bottle of high-end champagne turning out to be flat on New Year's Eve.
Here's what happened: it recently came to light that two federal government-approved 'licensed producers (LPs) of medical marijuana have been caught by authorities selling tainted cannabis to medical patients.
It undermines the argument that Canada's many small medical pot dispensaries should be legislated out of business.
This is a big deal.
Admittedly, nobody is suggesting that some nefarious corporate malfeasance has just been exposed. Hopefully, it just turns out to be instances of human error in both cases.
Nonetheless, it hurts the credibility of an industry that insists that it grows and sells the cleanest, safest, best-quality medicinal marijuana in the whole world.
It also undermines the argument that Canada's many small medical pot dispensaries should be legislated out of business -- all because their products aren't grown under the watchful eye of Health Canada or even with its approval.
In fact, some LPs have even lobbied to have their main rivals shut down for selling cannabis that isn't grown to pharmaceutical-grade standards.
Poster boys caught with their pants down
Canada's well-financed medical marijuana LPs boast that they're pioneering the very best industry standards in the world. Now this claim to fame has been besmirched.
The first scandal to blow up last week came with a Globe and Mail exposé on southern Ontario-based Mettrum Health Corp.
It revealed that a controversial pesticide that's banned in Canada had been found on an unspecified amount of Mettrum's products.
The chemical in question is myclobutanil, which is known to emit hydrogen cyanide when smoked or heated in other ways. This comes on the heels of recent recall involving another banned pesticide, pyrethrin, which was found in some of Mettrum's cannabis.
The other scandal involves Organigram Holdings.
That's problematic. After all, who buys cannabis for daily use to help manage a chronic health condition but doesn't use it for at least five months?
In reality, many of the tainted products have surely been consumed already. And medical patients must now be left wondering if they've unwittingly ingested a health-compromising toxin.
Organigram isn't saying what the offending chemical is. But it is reassuring its customers and shareholders that the contaminant "is not likely to cause any adverse health consequences."
So it seems like Organigram's customers might have less to worry about than medical patients who bought hydrogen-cyanide-laced cannabis from Mettrum.
Now that it has lost the PR high ground, it needs to try to win it back.
Hypocrisy of Big Pot?
In recent years, the federal government has favoured big, well-financed corporations to manage the legal roll-out of Canada's medical marijuana industry. The catch is that they're very tightly regulated.
Big Pot now consists of three dozen or so industrial-scale growers all across Canada. And they each benefit from many millions of dollars of private equity backing or big-dollar financing from the capital markets.
So, why exactly does Health Canada endorse Big Pot? It's because the industry has committed to spending tens of millions of dollars on a science-driven approach to growing contamination-free cannabis to pharmaceutical-grade standards.
Big Pot's sales pitch to win over medical patients at the expense of medical dispensaries goes something like the following:
You'd be crazy to buy your medical marijuana from dispensaries. Who knows where these little guys are getting their strains from? Well, actually, it's probably mostly from organized crime. And it's likely laced with excessive pesticide residues, which can even include illegal ones.
This isn't the best way to manage your cancer pain. Instead, you need pharmaceutical-grade marijuana, which is what our industry specializes in. And that's why we have the support of the federal government, unlike those dispensaries.
Now that seems like a very compelling argument -- assuming it's true. But such criticisms don't really apply to many reputable dispensaries.
So Big Pot's moral grandstanding just went up in smoke. Now that it has lost the PR high ground, it needs to try to win it back.
In the rush to scale-up in a hurry for a looming recreational market, licensed producers must remember not to sacrifice quality in favour of quantity. In other words, there should be no shortcuts, especially ones that
involve the illicit use of banned pesticides.
There should also be enough technological screening and scrutinizing to ensure that other contaminants don't also tarnish the end products. After all, isn't that what pharmaceutical-grade really means?
What now?
But this scandal isn't likely to unravel the deal. Certainly, it won't impact the reasons that made this acquisition strategically smart for Canopy.
And Organigram should bounce back soon enough. The company's modus operandi remains fundamentally intact; organic cannabis seems to be the best option for medical patients with compromised immune systems.
However, Organigram now needs to pay much more attention to quality control if it's to preserve its reputation and build its brand.
It also needs to overhaul its PR campaign -- which has been dismal in the immediate aftermath of a scandal that strikes at the very heart of its much-hyped business model.
The whole industry now will be under heightened scrutiny. But it will benefit from this. After all, if Canada wants to be the standard-bearer for the world's best-quality, contaminant-free, pharmaceutical-grade cannabis, it needs to set the highest standards.
Now's the time to walk the talk.
In fact, Organigram, Mettrum and their competitors should take note that the whole world is watching.
Over the next decade, Canada will serve as a template for other progressive-minded nations that want to decriminalize medicinal cannabis.
So LPs need to get it right. And not just most of the time. But all of the time.
Organigram and Mettrum in particular.
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