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There's been little time for sleep – let alone holidays – in Canada's legal cannabis business, which is at the dawn of a transformational year.

The federal government has promised to legalize the recreational use of the drug by the summer in a bid to displace the illicit market. Licensed producers are in a rush to bolster their supply, improve their growing methods with quality and costs in mind and come up with new ways their product can be consumed.

Read also: Federal government targets black – and grey – markets with legal cannabis

The largest companies are also plotting their retail strategy, how they will allocate their inventory across the country and how to brand their products. And they are trying to do it all before the federal laws have been finalized and before the provinces have spelled out the rules for how marijuana will be sold within their borders and at what price.

While no one really knows yet the potential size of the recreational market or how many Canadians will buy their weed the legal way, 2018 is set to bring clarity to many of the industry's unanswered questions. It could also bring a dose of reality to some of the public companies that have seen their shares soar.

"There are still a lot of unknowns," said Neil Closner, the chief executive officer at MedReleaf Corp. of Markham, Ont. "We have to try to anticipate and have a few scenarios, the ones we believe are most likely to take place. And we have to be able to react quickly. A lot of it comes down to execution."

But investors are looking past the uncertainty: They see a boom ahead that could mean big profits.

Trading in marijuana shares has exploded and the buying frenzy has sent prices to the moon. Market caps in the sector have ballooned.

Today, producers sell only to medical patients – operating online stores and shipping orders directly to their clients – but investors appear to be pricing stocks based not on what the companies have sold to their patients, but on how much they may be able to sell in two or even three years. The two biggest publicly traded marijuana companies in Canada – Canopy Growth Corp. and Aurora Cannabis Inc. – saw their market values rise by a combined $8.2-billion in 2017.

"What appears to be the case is that the market is valuing companies on total announced production capacity. Period," Mr. Closner said. "It doesn't take into account that they may not be able to do it. There's no execution risk being factored in."

Mr. Closner's MedReleaf, for example, has recorded $41-million in revenue in the past 12 months, largely serving military veterans. It grows cannabis in a 55,000-square-foot facility in Markham, outside Toronto, and expects to build out its 210,596-square-foot facility in Bradford, Ont., by the summer. Its stock is worth $2.6-billion.

Aurora, on the other hand, has posted sales of $23-million in its last year. The company said on Tuesday that it sold cannabis worth $3.1-million in November, its best month ever. Yet, its stock has a market cap of $5.4-billion.

It operates a 55,200-square-foot building near Calgary and recently received a licence to grow in a 40,000-square-foot facility in Quebec. It's building a massive 800,000-square-foot greenhouse in Edmonton and another 48,000-square-foot facility in Quebec.

Jay Wilgar, CEO at Newstrike Resources Inc., thinks 2018 will be the year investors and analysts focus more on how products are marketed and less on square footage.

"You never hear a beer company brag about how they have 800,000 acres of barley fields," Mr. Wilgar said. "That is not how it works."

Newstrike is on the hunt for an ad agency to help build its Up Cannabis brand, which is backed by the Tragically Hip. It inked a deal to be acquired by CanniMed Therapeutics Inc. in November and is now stuck in the middle of Aurora's hostile takeover of CanniMed.

But being big doesn't hurt either. Just ask Canopy, which is expanding into six provinces and six countries, such as Denmark.

Canopy's goal is to export what it has learned from growing and selling cannabis at scale in Canada, as medical cannabis policy shifts globally. The Smiths Falls, Ont.-based company has been laying the foundation to grow in some of these countries for years.

"If you think Canada is the only thing you want to do, you'll have a nice business that ultimately gets acquired by somebody," said Bruce Linton, Canopy's CEO. "But if you think that because Canada has the best policies in the world that we can actually have the best companies in the world, if you saw that three or four years ago, there's a ton of opportunity."

Mr. Linton said Canopy's achievements in 2017 – such as landing an investment from alcohol giant Constellation Brands Inc. – buoyed stocks across the entire sector. He said this trend will end in 2018, as companies deliver results or don't. "The whole sector didn't sign Constellation. They did one deal and it was with us," he said. "I look forward to seeing trades based on the efforts, delivery and functionality of companies more than, 'Well, Canopy did it so the whole sector must be good.'"

One way companies might look to grow into their market caps is to expand internationally. Several ambitious producers are already looking beyond Canada's borders, moving into new regions that have given the green light to medical marijuana companies. The goal is to export their products and set up shop around the world before competition starts to heat up.

Canadian cannabis companies have already done business in places such as Germany, Israel, Spain, Australia, Chile, Brazil, Jamaica and the United States, where the drug is legal in certain states but illegal under federal law.

"We can't waste time. We have to execute not just well, but fast," said Cam Battley, an executive vice-president at Aurora. "I feel this intense sense of urgency to expand globally. If we were to say let's slow it down a bit, get profitable and evolve like a company would in another industry, we'll be too late."

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Aurora Cannabis Inc
Constellation Brands Inc
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