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Potpreneurs rush to cash in on the new market

It seems that almost everyone these days has a medical marijuana scheme, a press release and some post-industrial site on which to grow their dreams. One B.C. company wants to re-purpose an elementary school, re-placing rows of children's desks with hedges of marijuana. Another plans to refashion an old Imperial Tobacco plant in Aylmer, Ontario. Two hours away, in Lakeshore, Ontario, another company plans to spend at least $20 million building a medical marijuana empire; $3 million of that investment will go to security alone, including a double ring of 12-foot fences topped with razor wire. Near Hamilton, a father-son duo is building its grow-op in what was once an indoor soccer stadium, near a dance studio.

It's a dot-com flashback of sorts, but this surreal version involves a swaggering new class of potpreneurs ready to capitalize on the birth of an industry. The federal Conservatives sparked the green rush last June, when they announced they would privatize the market for medical marijuana, regulate the producers and, of course, tax it. As of midnight on March 31, the 37,000 Canadians who use marijuana to soothe a variety of ills—chronic pain, epilepsy, nausea and loss of appetite due to chemotherapy, the tremors associated with Parkinson's—will have to navigate an entirely new green world.

Under the old rules, Health Canada allowed licensed grow-ops to supply weed to two patients apiece. In other words, they could grow it themselves. Or they could visit a compassion club, which offered them marijuana at a discounted price—especially important to the large group of financially challenged users who don't have the money or resources to cultivate it themselves. Clubs are banned from distributing. Home producers are fighting to keep their right to grow in the federal courts.  For the patients who aren't growing it themselves, they will be required to purchase cannabis from licensed and heavily monitored producers, paying a shipping fee and tax.

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Ottawa has long struggled with how to regulate a drug with scientifically unproven efficacy, so the new system is a no-brainer. Producers will cultivate in strictly regulated conditions; no more worries about the pesticide-created toxins from homegrown pot creeping into the lungs of immunocompromised patients. Police will worry less about baggies going out the back door to organized criminals. There will be fewer complaints about electrical fires caused by amateur growers frying their overloaded outlets.

The industry will be worth somewhere between $120 million and $220 million in the first full year. But Health Canada estimates that within a decade, the marketplace will grow to at least 400,000 registered patients, generating annual sales of some $3.1 billion. A simplified application process will no doubt help: Under the old system, prospective users had to fill out a 12-page form, signed by a specialist, justifying their need for cannabis. Under the new system, the Marihuana for Medical Purposes Regulations, patients plough through roughly half as much paper, depending on their malady. The Conservative government's hints that it might decriminalize possession of small quantities of pot—a major policy reversal—could also boost the market.

So far, just 12 companies (including PPS's CanniMed division) have been licensed to sell marijuana. But at least 450 others have applied—many of them plonking down hundreds of thousands of dollars, if not millions, just to get started—and there's no cap on how many will ultimately enter the market.

"You wouldn't believe the cold calls I get from people who want to get into this business—investor types," says Adam Greenblatt, executive director of the Montreal-based Medical Cannabis Access Society, adding that there are names on the list that would be readily recognized by Globe and Mail readers. He believes many companies are playing the long game—setting up shop and building economies of scale for the moment when cannabis is legalized here in Canada, as it has been in Colorado and Washington. "Just like Seagram did before Prohibition ended," he says.

It's an intoxicating story as feverish as the Klondike gold rush, and as hazy and hubristic as the early days of Silicon Valley—a dose of refreshing, unshakeable entrepreneurial insanity. These are scenes from the green rush.

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THE GRANDDADDY

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Unless you call and ask for directions, you will never find CanniMed Ltd. Google Maps places the company in the middle of the South Saskatchewan River, just east of the Mendel Art Gallery. "We don't want to be found," says John Woodley, the company's chief security officer, who used to work in drug enforcement for the Saskatoon Police Service—a job trajectory that is not all that unusual in this industry. "It makes sense, for security reasons."

Struck in 2003 to give buyers an alternative to home-based operations, PPS's sole-vendor deal with Health Canada prevented the company from talking to the media or engaging in any marketing whatsoever. That contract has now expired, however, leaving the company to compete on an equal footing with everyone else—and giving it free rein to talk publicly.

The first journalist to visit CanniMed's facility, I initially spend an hour with CEO Brent Zettl in his modest office, from which you can hear trains whistle their way into a pink horizon. "I feel like we've been blindfolded and muzzled," says 51-year-old Zettl. Mild-mannered and assertive, Zettl co-founded PPS in 1988, while still an undergrad in the University of Saskatchewan's agricultural school. The operation made its name as a troglodytic cultivator of roses, tomatoes and Saskatoon berries in an abandoned mine shaft in Flin Flon, Manitoba.

Its big break came in 2000, when it beat out 195 other applicants for the right to manufacture medical marijuana for clinical trials. Three years later, the Ontario Superior Court of Justice ruled that the company's pot should be made freely available to patients. "That's when the heartache began," says Zettl. "We couldn't talk to patients, and all of us were somewhat inexperienced in the field. It cost me a lot—two marriages."

But he stuck it out. "I didn't want to go down as the only guy who went broke selling marijuana," he says. And he didn't: In 2003, PPS had $1.6 million in revenue. Last year, it was somewhere in the range of $12 million, with roughly 85% of that from medical marijuana. The company, he says, represents Saskatchewan's twin spirits of innovation and compassion: "This is the province that gave us both canola oil and Tommy Douglas."

But as CanniMed braces for an onslaught of rivals, its reputation is hurting. The criticisms of its original product (it has since completely revamped its pot lineup) were legion: The psychoactive compound tetrahydrocannabinol (THC) in its medical marijuana was too low to be efficacious, meaning patients had to double or triple their doses to get the relief they needed. It was "milled," or ground down, making for an industrial, granular crunch. To get rid of impurities, the cannabis was also irradiated—a cellular zapping process that led one critic to call it the Incredible Hulk of marijuana. So, while CanniMed might have the incumbent's advantage when it comes to production and cash flow, it has a long way to go to persuade patients that its green is worth buying.

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Zettl doesn't sound the slightest bit defensive about the criticism. Yes, the THC levels were low, he says, but that's what Health Canada mandated. When asked about irradiation, he shows me a slide of the stickiest and most potent part of the flower, where bacteria, mould and toxins can collect. "People who are immunocompromised can't tolerate a lot of extra challenges," he says, hence the irradiation. And he argues that milling is an act of compassion for patients with motor-skill issues: Leaving the blends clumpy makes for a more difficult rolling experience.

The only criticism that really gets a rise out of him is the speculation that as much as 30% of the company's product was returned—an erroneous statistic Zettl says he was never allowed to refute publicly. "We haven't had any returns of that kind," he says. "We have about 0.3% returns a year. Some of them arrive after people pass away, or an address has changed. Some people messed up their decimal places."

Eager to show off his state-of-the-art facility, Zettl and I hit the showers—everyone who enters the place needs to scrub down to prevent the introduction of impurities. And so, three stalls down from Zettl, I somewhat absently discuss the footprint of his company, which will widen to 150,000 square feet by next year. He has the advantage of sunk costs and much of the infrastructure his future competitors lack. He's even considering an initial public offering.

After we've towelled off and donned coveralls and hairnets, Zettl leads me through a byzantine sprawl of rooms. The technology here is dazzling and expensive. But no matter where we go, no matter how tightly sealed each room is, there is the thin but discernible sweet waft of marijuana.

The micropropagation lab—a sort of cannabis library—is a spacey little zone of test tubes containing plants that sit in a gelling agent called agar, made from refined red algae. Inside the grow room, harvesting teams of 12, largely composed of local retirees, spend three eight-hour days gathering the buds from a 1,000-plant harvest. There is a milling room, where machines coarsely chop the buds and separate the stems. There's also a quality-control lab, where technicians analyze each strain's concentration of cannabinoids, including THC and cannabidiol. A process called ultra-performance liquid chromatography helps CanniMed identify different strains for different types of users. Some patients, says Zettl, want more cannabidiol, to take the edge off their pain, and less THC, the component that makes users feel stoned. Others might want more THC, which will disinhibit them.

As an example, Zettl starts telling me about a client in his 30s who has a spinal cord injury that has led to a dozen operations and a life of utter discomfort. "He couldn't go to his son's soccer games, couldn't function around the..."

Zettl's last word is muffled, his voice caught. I look up from my notepad. He is weeping. "His wife was in tears," he continues. "Because he got his life back." Zettl pauses, lifts his glasses and dabs his eyes. "That's why I get up in the morning," he says in a croak. "Sorry, I've been under some stress lately." Collecting himself, he continues with greater force: "That's why I get up in the morning."

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THE BRANDING WHIZZES

It's not hard to find Tweed—just ask any officer of the law in the working-class town of Smiths Falls, Ontario, an hour south of Ottawa. The company's headquarters, located in an old Hershey's chocolate plant, is across the street from the local police station and a two-minute drive from an Ontario Provincial Police detachment.

Or you could flag down a local: 700 of them attended the plant's grand reopening this past November to check out what Tweed had done to the factory where many of them used to work. Before Hershey shut the place down, hundreds of Smiths Falls's 9,000 residents had jobs there.

Or just call the mayor. Dennis Staples says he has done more media interviews about the opening of the Tweed plant than he did for the wrenching closure of the old one. He's also favourably disposed to cannabis therapy, his brother having used it to endure the agony of colon cancer. "The pot profoundly improved the quality of his life in the final months," says Staples.

When you arrive at Tweed's headquarters, the place feels roughhewn but ready. Workers lurk in hard hats emblazoned with the Tweed logo, which looks like it belongs to a casual denim company as opposed to one that produces a therapeutic drug for the chronically ill. Awarded a licence in January, the company has already raised $10 million (Tweed refuses to release the names of its investors), which it is using to retrofit part of the factory into a state-of-the-art 160,000-square-foot facility that will suck up around $100,000 a month in electricity bills alone—when it hits full capacity, it will have 50,000 plants under grow lights, up from the current 5,500. Bruce Linton, the company's 47-year-old chairman, says that securing financing wasn't for the faint of heart. "The way people came back to us was, 'You don't have a permit, and you can't get one until you finish your building?'" he recalls. "Capital doesn't miraculously migrate to that kind of model."

Tweed's top management must have helped reel in financiers. Linton himself is a veteran of several tech start-ups, including webHancer, which makes tracking software, and Computerland.ca, a software and hardware reseller that was acquired by Softchoice. CEO Chuck Rifici, 39, has an MBA from Queen's University and almost 20 years of experience in finance-related positions in the tech realm, raising a total of $30 million in funding for various start-ups. The company's vice-president, Mark Zekulin, is a 34-year-old Cambridge-trained lawyer who worked at the OECD and was a senior adviser to Dwight Duncan, Ontario's finance minister under Dalton McGuinty's Liberals. Rifici, too, has Liberal ties: He volunteers as the chief financial officer of the federal party—whose leader, Justin Trudeau, has made pot legalization one of the central tenets of his platform.

Legalization may still be a ways off, but the company's branding has the unmistakable whiff of a recreational future. First there is its punny name. Then there is Ryan Douglas, a 37-year-old native of Maine who oversees Tweed's horticultural development and who holds the title of Master Grower, a moniker often conferred on people in similar positions on the recreational side. (He is not to be confused with Brian Greenleaf, Tweed's 70-year-old operations manager.) The website has an arty, casual design, and even the names of its various strains evoke ads for clothing geared toward preening anglophiles. There is Herringbone (otherwise known in the industry as AK-47), which has a 19:1 ratio of THC to cannabidiol. As the website informs potential users, it is most effective for pain and stress, offers a euphoric feeling and is recommended for late in the day or evening. For those who prefer a higher concentration of cannabidiol, there is Argyle (also called Nordle). It has a 5:5 ratio, is great for morning or afternoon, and leaves users feeling relaxed. The major side effect of both is dry mouth.

Linton, however, insists the company is focusing on marijuana for therapeutic use only. And though the Canadian Medical Association (CMA) insists there is not enough clinical testing to prove that the drug's benefits outweigh its risks, the Tweed team believes doctors will get on board. "It's not appropriate to say that they are pawns," says Linton. "My doctor knows me and my needs more than the CMA."

But the tantalizing prospect of legalization hangs in the air, and industry insiders hint that Rifici has a whisper campaign going with Trudeau. Linton refutes the idea that there is a long game to be played—or, at least, he sort of does. "If you don't focus on medical, you won't be there for the next wave."

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THE PROSPECTORS

Tom Bozek is all about that next wave. He and his father, Mark, have shovelled at least $2 million into their start-up, Cannadiana, based in Ancaster, Ontario, a few minutes' drive from Hamilton. They've ordered hundreds of thousands of dollars' worth of equipment: extra-large hood reflectors that intensify the lighting, an automated perpetual drip to maintain the optimal level of moisture, and a ventilation system that will change the air 15 times an hour to ward off excess heat and humidity. They have designs to turn a 25,000-square-foot indoor soccer stadium into a facility that includes a "mother room" for cloning, two flower rooms, a drying room and a heavily secured storage vault. To help Tom develop various strains, they have retained pot consultant Nick Hice, the chief grower at Denver Relief, a respected purveyor of medical marijuana in Colorado and a winner at last year's U.S. Cannabis Cup, sponsored by High Times magazine. Hice's claim to fame is a strong recreational pot called Bio-diesel. All told, the Bozeks expect to invest $4 million in the venture. Ten months into the arduous application process, they have yet to receive one of Health Canada's coveted licences, let alone plant any clones.

A small, taut 35-year-old who, like his dad, wears tinted eyeglasses, Tom sees Canada going the way of Colorado. In 2001, the Rocky Mountain State kicked off its own medical marijuana experiment; a decade later, it had around 110,000 registered users, or 2% of its population. (The Canadian equivalent would be 706,000 patients.) And that was before weed became available in retail stores Jan. 1. In February, Colorado Governor John Hickenlooper estimated that the state's marijuana industry could reach $1 billion (U.S.) in sales in the next fiscal year, with recreational use comprising around $610 million of that.

Washington has also legalized pot, and Oregon and Alaska will likely follow. In fact, roughly half of American states—even Southern ones—are considering changing their cannabis laws, either granting access to patients or legalizing it outright. Perhaps most important, it's a cash crop for struggling state governments that could use the revenue. ArcView Market Research, a cannabis industry research firm, predicts that by 2018, the U.S. pot industry could grow by 700%, to $10.2 billion.

"I feel legalization is just around the corner," says Tom. Look at Justin Trudeau, he continues—if Trudeau wins the next federal election, Tom believes Cannadiana will be practically printing money.

For now, however, the Bozeks are based out of a barren office adjacent to the stadium, located near a dance studio and a martial arts centre. The space contains a gaggle of crusty chairs and an old desk. When I visited on Feb. 6—Bob Marley Day, as Tom archly reminded me—I was greeted in the lobby by a single telephone, afforded the small dignity of a plastic stand.

Tom got hooked on the medical marijuana business via a licensed 200-plant grow-op in Barrie, Ontario, where he was a design and construction consultant. His father, a 60-year-old Polish émigré whose long, straight hair cascades down the back of his turtleneck and blazer, was initially skeptical of the market's potential. Mark made his money selling wholesale kitchen cabinets; his company, Pure Wood Inc., now generates $10 million a year. Then the Bozeks' cottage neighbour, Greg Herriott, began exploring the possibility of starting a medical marijuana outfit. He and Mark considered going into business together, but the idea fizzled. Herriott struck out on his own and co-founded Mettrum—which, after some run-ins with a NIMBY protest in the Georgian Bay area, has a licence and is up and running near Bowmanville. (Mark says that Herriott, a savvy marketer, will eventually buy some of its pot from Cannadiana and sell it to patients.) "Mark's very competitive, and once he wants something, he has to get it," says Tom.

And so they started Cannadiana. But Mark—whom Tom often refers to as the Dragon, in homage to Dragons' Den—still doesn't foresee a future where pot is legal. The government, he says, simply wants oversight of an industry that had spun out of control. "Canada is a country of regulators," he says.

The father-son duo certainly has a long, dark tunnel of bureaucracy yet to crawl through. There is Health Canada's forbidding "Guidance Document," which goes gastrointestinal deep on Cannadiana's business plan and proposed personnel, all of whom are subject to background checks for criminal activity. Applicants must specify their planned "activities with marihuana," "the maximum quantity of dried marihuana to be produced," proposed site information, building information, ownership and security. Health Canada is covering every base (except explaining why it may be the only entity in any language that spells marijuana with an h).

Mark has also put his son through the grinder, forcing him to check and recheck projected costs and revenues. "I sharpened my pen on the price of marijuana until I wanted to vomit," says Tom, who estimates they will harvest their first crop in November, 2014 (he expects to have a licence in hand by June). Mark says he's prepared to wait a year before they start making money. And that's the Dragon's job, says Tom—to temper his dreams and make tough investor demands. After all, it's his money. "He's putting his ass out on the line every day," says Tom. "That's my motivation."

Mark sees a future where marijuana is a legitimate pharmaceutical like any other: clinically tested, scientifically irrefutable and readily available at a drugstore near you. For now, however, it's all about the gut-sinking risk and sucker-punch surprises that come with running any start-up. He says that what will happen in Cannadiana's first year is anybody's guess. "If it doesn't work, then we move on to something else," Mark says with a dismissive shrug. But who is he kidding? The Dragon isn't going anywhere.

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