Health Canada makes all the regulatory decisions in the medical marijuana market. In order to procure and maintain a licence to cultivate and/or sell cannabis, marijuana producers must provide a considerable amount of information about their operation and practices, only a fraction of which is released to the public at irregular times. Since many of the licensed producers are publicly listed in stock exchanges, policymakers should be taking a closer look at Health Canada’s responsibility to disclose more information to the public out of fairness, as well as the department’s duty to address the potential for insider trading.

Insider trading

Insider stock trading occurs when someone has information not readily available to the public and seeks to exploit this through buying or selling of stocks. For obvious reasons, it’s illegal and security commissions do their very best to ensure that there is a level playing field. Currently, Canadian licensed marijuana companies are required by Health Canada to provide information that potentially could be used for insider trading. My research into the Canadian marijuana industry shows no evidence that such trading has occurred, but the opportunity certainly does exist and needs to be addressed.

The only data about individual companies that are available to the public are the names and locations of licensed producers and whether they are licensed for both cultivation and selling. But Health Canada retains far more market information about its licensed producers under the new Access to Cannabis for Medical Purposes regulations.

By the fifteenth of every month, licensed producers must report to Health Canada how much cannabis is produced and received during the month-long reporting period, and how much is sold or transferred during the period to registered clients, licensed producers and dealers. This is only a selection of the information Health Canada requires.

These data requirements touch the entire industry, both publicly and privately held companies. I know of no other market where such a situation exists. Having access to such data and using it to trade in marijuana stocks would constitute a distinct advantage over regular market participants. For example, anyone with access to this data would know which firms are growing their business through new clients, or producing larger volumes for existing clients.

Because of the sensitivity of this information, and the potential impacts on the companies involved, Health Canada must ensure that the specific data collected from the licensed producers are secure and that all those who have access are prohibited from investing in marijuana stocks.

Licensed practitioners

Other valuable information collected by Health Canada includes the names of medical professionals (physicians and nurse practitioners) that are prescribing medical marijuana and the quantity sold in grams (both dried and cannabis oil). But oddly enough there is no verification by Health Canada that these individuals have valid medical licences in jurisdictions where they are doing the prescribing.

Health Canada should verify whether health care practitioners prescribing medical marijuana are licensed to practice and whether they have valid licences in the province or territory where they are prescribing. At present, we have no way of ensuring that all producers are playing by the rules.

Transparency around producer licences

By law, publicly traded companies are required to post financial reports following generally accepted accounting principles (GAAP) in Canada. At a minimum, these reports must include an income statement and a balance sheet that accurately reflect the financial position and results of a firm’s operations. These firms must obey the rules of the security commission in the province in which they operate.

Marijuana firms currently report dollar sales (revenues), expenses, debt refinancing and so on, so potential investors can construct various measures of profits, cash flows and profit margins over time. But information about the amounts that companies are licensed by Health Canada to produce over a given period of time is not disclosed. When recreational marijuana is legalized, investors will want to know how much firms are licensed to produce.

Health Canada should release the licensed amounts in kilograms of dried marijuana and cannabis oil for medical use by licensed producers (which includes cultivators and cultivator/sellers).

There’s also a lack of transparency when it comes to when licences are issued.

Imagine a situation where two public companies have stock prices trending upwards at comparable rates as we approach the date for legalization. Upon legalization, one of the firms continues to increase sales substantially and the other does not. The reason for this could be one firm has room left before they reach their licence limit, whereas the other firm is bouncing up against it. The constrained firm could apply for an expanded licence and after an unknown amount of time this may or may not be granted. However, there is no way for an investor to keep track of this information, although Health Canada would know.

Health Canada should adopt an orderly timing to announce new licences, say at the first day of each month and should indicate for how long a period the licence is granted. Most government information is released to the market in a predictable way (for example, real GDP growth, consumer prices). In this way, market participants can be ready and prepare appropriate strategies to respond to new circumstances.

Finally, there is the issue around how to release information about the licensing progress of marijuana producers through the multi-stages of approval. For other drugs that require Health Canada approval, testing is done quietly, but the public is informed of results at different stages in the process. In some cases, the results are disastrous and the firm’s stock price falls precipitously. In other cases, the drug passes one level of testing and moves along to the next.

But the context around marijuana licensing is fundamentally different from that of pharmaceuticals. Health Canada licenses producers who satisfy a set of known criteria, and at present there does not seem to be any policy limiting the number of potential licences that are awarded. Also, firms aren’t told when they’ll find out whether they’ve met the criteria for a licence (applicants are licensed only 3 percent of the time). Meanwhile, only the information around approved licences gets transmitted to the public. Health Canada should make public the names of companies applying for licences and information about what stage they are at in the application process.

Furthermore, Health Canada should publicly disclose whether it has a total supply goal for marijuana, so that firms will know whether there’s any point in putting together a licence application and making the financial investment.

Health Canada has met most of the challenges of managing the medical marijuana market. The problems raised here on its data collection and transmission procedures are not ones this department has likely encountered before, but they do require a quick and careful response from Health Canada. The importance of a fair and orderly market for medical marijuana will only increase as we near legalization of recreational use. If Health Canada is going to continue to control the licensing of production and sales for this much bigger market, it should ensure it has the right procedures in place to ensure fairness and transparency.

Photo: Shutterstock/Seastock

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Allan W. Gregory
Allan W. Gregory is a professor of economics at Queen’s University. His main research interests have been in applied time series issues primarily in finance, international, and forecasting. He is also active in health economics.  

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