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Medical marijuana stocks take off as investors key in on first-mover advantage

Published: 15:16 10 Mar 2014 EDT

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The legal cultivation of medical and adult use marijuana is a field set to bring prosperity to a great many people due to changes at the regulatory level combined with a groundswell of acceptance for the idea of use itself.

In the U.S., 17 states have legalized medical marijuana, two states have legalized adult use marijuana, and many more states have ballot measures in place for the November 2014 elections, while on this side of the 49th parallel, the newly established Marijuana for Medical Purposes Regulations (MMPR) have both cut down on the red tape and plethora of forms that characterized prescriptions for medical marijuana heretofore and opened up the market to commercial–scale production. 

According to some estimates, the current market of 40,000 patients in Canada could grow at the rate of 35 per cent or more per year, such that the industry's value, at $1.5 billion today, is projected to outstrip the North American wine industry, which stands at $35 billion.

“So it’s going to see growth of several thousands of percent over the next decade or more,” says president ofEnertopia Corp. (CSE:TOP) (OTCBB:ENRT), Robert McAllister.

The Vancouver-based company is bracing for a surge in demand, of which it aims to snag a national market share of 5 to 10 per cent.

McAllister, who cites numbers in the order of 25 to 35 per cent profitability, sees the market expanding markedly in years to come. “I believe we are in a new industry being transformed with the legalization in multiple states in the U.S., and federal government support for the new system here in Canada.”

McAllister's expectations for the next two to three years involve a rapid increase in political acceptance: “Already, the approval for medical use of marijuana is running from 70-85 per cent and even on the adult use side, it's at a 45 to 60 per cent approval rating. 

“Thirty years ago, the approval was under 10 per cent, so we've seen acceptance by the general public and once something is accepted by the general public, politicians will always fall in line.”

While the old system provided for the cultivation of enough plants for four patients, the new system points towards scaling up to commercial quantities, a change likely to have major repercussions for growers.

Crucially, under the old system, capital costs for the average grower ran from $10,000 to $50,000; while the new system demands more of growers --- security systems, qualified scientists, shipping and labeling departments --- all of which have added greatly to the cost. McAllister estimates start-up costs under the new system to range from $250,000 to $500,000 at the entry level.

Thus, chief among the changes the new regulations are set to bring about in Canada is a move from “up to 24,000 people licensed to grow on their own” to a system where “only several dozen new producers are likely” to qualify under the new, more stringent guidelines, says McAllister.

The question, as McAllister puts it, is “how many of those growers are astute business people as well?”

Enertopia's near term focus is on taking significant positions in producers that produced under the old system, with an eye towards “helping them get approved under the new system.”

“Our platform is to help producers get licenced under the new system. We have a direct equity ownership interest in their company, so as they build up their production facilities and grow, the revenue will increase over time as well and that will benefit Enertopia and our shareholders.”

To that end, the company looks for existing growers which had operations “larger than 15-25 plants in someone's garage,” those who were, for example, growing for co-ops, and thus had more licenses and could raise more plants.

“We'll support them on the capital side, using Enertopia to raise funds and invest those funds immediately into those operations to build them up and get to Canada Health standards.”

Enertopia's plan is to look towards locations that have municipal support for production facilities and at existing facilities that can be upgraded and retrofitted, as opposed to building new structures.

From there, McAllister plans to expand Enertopia's hold on the market by finding patient groups through the network that it’s building, which includes doctor's networks. “At the end of the day, we’re going to need patients.”

Enertopia's stock has had quite a wild ride this year, driven McAllister thinks, by investors’ realization of a new industry being created, which they are willing to dip their toes into with the knowledge that some companies are set to emerge as billion dollar entities.

For now, investors tend to be “small guys”. However, “as more and more barriers are removed, more capital will come into the sector at higher levels,” he says. “People are really excited about what's going on and how it's transitioning.” Enertopia traded most recently at 56 Canadian cents, up more than 830% so far this year.

Mike Withrow, president CEO and director of Abattis Bioceuticals Corporation (CSE:ATT) (OTC:ATTBF) too sees a world of opportunity opening up, but the company takes a different, more diversified, approach.

With an eye on capitalizing on the move toward marijuana legalization south of the border and towards wider-spread medicinal use in Canada and internationally, the Vancouver-based specialty biotechnology company has plans for the development, manufacturing, licensing and marketing of natural health and wellness solutions addressing chronic illnesses. It recently negotiated a deal with two top researchers to set up an analytics lab in Washington State.

“We have the ability to manufacture and market the most scientifically advanced natural therapeutic formulas based on proprietary technologies through multiple distribution channels,” Withrow says.

The company licenses and markets proprietary ingredients, bio-similar compounds, and patented equipment. It also provides consulting services to North America's medicinal and adult marijuana markets via its wholly owned subsidiaries and seeks to utilize its Grow, Dry, Extract, Refine, and Sell model (known as GDERS) to produce pharmaceutical-grade phyto compounds with its ultimate goal of taking the lead in the emergent botanical drug market.

Its strategy involves growing cannabis with its proprietary indoor mass farming systems, drying it with unique low temperature drying systems to enhance quality, extracting the active ingredients, refining the product, and selling it around the world. The company has two Marijuana for Medical Purposes Regulations (MMPR) applications in, and is looking to becoming one of the few licensed producers of cannabis in Canada that is publicly traded. 

Meanwhile, in the U.S., the company’s subsidiary, Biocube Systems, provide growers with an energy- and space-efficient cultivation system that generates high yields, enabling them to produce low-cost pharmaceutical-grade product. The subsidiary has just closed on acquiring the proprietary formulas from Green Gro Garden Supplies Ltd. and will build its customer base by marketing.  

But Abattis sees beyond the emergent medical and adult use marijuana industry, with Withrow noting that the company is looking to parlay its existing expertise into plants beyond marijuana. 

"Ultimately, we will be looking to what other medicinal plants we can fit into the model,” Withrow says.

But for now, marijuana cultivation provides a ripe opportunity, and one Withrow sees as the highest growth opportunity out of any sector in North America.

“The referendum in Colorado [which passed Amendment 64 legalizing personal use of marijuana for those over 21] changed everything. 

"Marijuana was already being accepted for medical purposes more and more, then when Colorado changed the law for recreational use --- that woke everyone up.”

The law kicked in January 1st of this year, and in the days that followed, Abattis' phone "started ringing like crazy".  On March 7th Washington issued its first licenses for cultivating marijuana for recreational purposes.

“We're positioned perfectly to capitalize on this rare opportunity. We've assembled everything needed to be at the forefront of the industry.”

Indeed, among Abattis' impressive roster of assets are 15 proprietary formulas, proprietary Flash Freeze Extraction equipment, two patent applications and one provisional application, as well as a five-year contract with a Canadian distributor, and exclusive worldwide rights to Mass Growing Systems used to construct controlled indoor pharma grade growing environments. 

It also has a lease on a $13 million dollar Botanical Drug Facility in Quebec, fully equipped to cut costs by using the only LED made in the US that it is currently testing with the manufacturer.

Abattis has been a volume leader on the Canadian Securities Exchange on several of the past recent days, with the stock last week hitting an all-time high of 95 Canadian cents, currently sitting at about 78 cents. 

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