CannTrust Scandal Unpackaged

By now,  you’ve probably heard about the very hot water that CannTrust has recently found itself in after Health Canada learned that the company had been operating in violation of Canada’s Cannabis Regulations

Let’s break it down a bit. On July 8th news broke that CannTrust, one of Canada’s largest producers of medical cannabis, had been growing thousands of kilograms of cannabis in unlicensed rooms. This immediately resulted in Health Canada halting the sale of all cannabis that was believed to have been sourced from the illicit rooms—about 5,200 kg worth. Further, in a presumed move to demonstrate their commitment to work with Health Canada, CannTrust opted to voluntarily place an additional 7,500 kg of legal product produced in its Vaughan, Ontario facility on hold until the investigation is completed. 

This is, of course, a serious issue (and to be frank, a PR nightmare) that CannTrust is going to have to face head-on. While the company is being cooperative with Health Canada’s investigation, it appears that this is not CannTrusts’ first breach, which leaves a few big questions. 

What will Health Canada do?

The future for CannTrust is anything but certain. It’s fate? Well, that lies entirely in the hands of Health Canada. With several previous (less egregious) violations already under their belt, and questions looming over whether employees and management knowingly tried to deceive inspectors, it will be up to Health Canada to decide whether CannTrust will be able to continue to thrive, or wither up and die. A bigger question, can Health Canada even afford to go easy on them?

This is the first high-profile violation since the national legalization of cannabis. As a government bent on touting public safety over industry interests, one option (and the one that some industry-watchers are calling for) is that Health Canada stick to tough-love, making an example of CannTrust by revoking their license. The alternative (and perhaps more likely option) is that Health Canada demands that the company destroy the stock in question and imposes a hefty fine (up to $1 million). However, even if the company manages to retain its license, Health Canada may impose a wide array of other punishments—none of which will bode well for CannTrust’s future in the Canadian cannabis market.  

What impact will this have on the market?

As one of the top five producers of cannabis in Canada, the halt of sales from CannTrust is only going to exacerbate what can only be described as an already chronic shortage of product and high prices that is plaguing Canada’s legal pot market. 

Statistics Canada has since reported that the price gap between legal and illicit pot is growing—hitting the widest gap since the legalization of recreational cannabis. Not surprisingly, the number of those who report purchasing their pot from black market sources is also on the rise, citing the cost of legal pot as the deciding factor. While local governments and police forces do what they can to stifle the ever-burgeoning illegal market, it has long been known that to do so will require a much improved price-point and consumer experience—none of which the CannTrust situation is currently helping. 

But the fallout hasn’t been limited to supply. The CannTrust scandal has actually damaged the rest of the pot sector with several other major cannabis companies seeing significant drops to their market valuation and stock prices over the past couple of weeks. 

Cann-Trust ever be restored?

Medical cannabis

Since beginning this article, further allegations have come tumbling out of the wood works. On July 23, the Globe and Mail broke a story that both the “chairman and the chief executive officer of CannTrust Holdings Inc. were informed that the company was growing cannabis in unlicensed rooms about seven months before Health Canada uncovered the regulatory breach. As this new broke, CannTrust shares plummeted even further and were trading at $2.75 on the Toronto Stock Exchange.

At this point in time, public trust has withered and it is difficult to imagine how CannTrust can come back from this scandal. If CannTrust retains their license (which seems unlikely at this stage) it is presumed that future consumers of CannTrust products may think twice about the safety and quality of products coming from a company that has shown to cut-corners. But generally speaking it seems doubtful that this will leave a permanent distaste in the mouths and minds of the casual cannabis user. Investors—well that may be a different story.

With class actions filed in both Canada and the US, the bigger question yet to be answered is can CannTrust regain the trust of investors in a way that will enable them to remain competitive in the booming North American market. Either way, even if they do manage to squeak-by with a comparatively minor slap-on-the-wrist and escape a full license revocation, they can almost be certain that they will find themselves subject to incredible scrutiny, from both public and industry, moving forward. 

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