The Canadian cannabis industry is projected to reach $1.3 billion in size over the next decade, according to Health Canada, with a patient population growing from 37,359 in 2013 to 300,000 to 450,000 by 2024. While the market may not be quiet as large as the U.S. market, which now includes recreational marijuana, the Canadianfederal government’s approval makes it far less risky for businesses and investors.

The Marihuana for Medical Purposes Regulations (“MMPR”) create a program whereby only licensed commercial producers may grow and distribute medical marijuana to patients. The MMPR replaces the previous regulatory scheme, the Marihuana Medical Access Regulations (“MMAR), which provided patients with access to medical marijuana through non-commercial self-production. The MMPR has faced some early legal hurdles, but industry and legal experts are confident the commercialization of Canadian medical marijuana will survive any such challenge.

Sizing Up the Opportunity

Health Canada expects medical marijuana prices to rise from $5.00 per gram under the MMAR program to between $7.60 and $8.80 per gram under the new system; however, these figures are notoriously hard to predict and could be as low as $3 per gram. The pricing dynamics suggest that size matters when it comes to licensed producers, since economies of scale can help improve overall profit margins.

Supreme Pharmaceuticals Inc. (OTC: SPRWF), an aspiring producer under Canada’s new MMPR program, may offer investors the best value for their money given its massive scale. With a 342,000 square foot facility capable of producing up to 24,000 kilograms of medical marijuana per year, the company has the potential to become the largest producer in Canada, if it’s approved.

Currently, the company operates two projects in South Okanagan and Southern Ontario, which both diversifies its odds of obtaining a license and its geographical reach within Canada. Both projects are rapidly moving forward with the final stages of the MMPR approval process, including the implementation of necessary security measures that management believes will take 90 days to complete.

Low Risk, High Reward

Supreme Pharmaceuticals’ first facility has been in the business of growing medical marijuana indoors through hydroponic processes under Canada’s MMAR program since May of 2013. By transitioning this facility to the MMPR, the facility will be able to greatly increase its output and potential revenue generation.

The second facility is a 342,000 square foot greenhouse – roughly the size of six football fields, which Supreme Pharmaceuticals purchased in May 2014. Currently, the greenhouse is being retrofitted for commercial medical marijuana production. This includes preparation of the growing and processing areas, the installation of a level 9 vault capable of storing up to $150 million worth of dried marijuana, as well as numerous other security measures to ensure the facility meets or exceeds the security requirements proscribed by the MMPR and related regulations.

In January, 2014 the operating company received “pre-approval” from Health Canada to produce and distribute up to 24,000 kg of dried marijuana per year, providing the company with the opportunity to become the biggest, or at least one of the biggest licensees in Canada. Pursuant to the terms of the pre-approval, the second facility’s license will follow an on-site security inspection.

Some of the facilities also represent an option to buy that are contingent on successful regulatory approval, which also serves to de-risk the entire process for investors in Supreme Pharmaceuticals. The first facility is an option to buy for $150,000 in cash and $100,000 in stock subject to regulatory approval, while the second facility was purchased outright providing a guaranteed property.

Comparing Valuations

Health Canada has only approved 13 licensed producers under the MMPR program, as of July 9, 2014, which means that competition is very limited. These trends have led to premiums being assigned to those publicly traded companies that either already have MMPR licensed producer status or are perceived to be in the later stages of the approval process by the investment community.

Publicly traded licensed producers, like Tweed Inc. (OTC: TWMJF), are trading with market capitalizations of greater than $90 million as a result of the limited competition and first-mover advantage. Companies that are in the later stages of MMPR approvals are also generally trading at significant premiums, relative to those companies that may be further away from approval.

By comparison, Supreme Pharmaceuticals’ modest $14 million market capitalization could offer investors more attractive risk-adjusted returns. Management plans on being ready for final inspection in August 2014, patient signing in fall of 2014, the first harvest by the end of 2014, and initial retail sales revenue in Q1 2015, according to a company fact sheet, meaning that its timetable could be shorter than many competitors.

Looking Ahead

The stabilization of Canada’s MMPR program has led to increasing valuations for many publicly traded companies in the larger cannabis space, including those like Cannabis Sativa Inc. (OTC: CBDS) that have seen a significant rise. Supreme Pharmaceuticals differentiates itself with one of the largest facilities in the country that management believes could begin generating revenue by Q1 2015.

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