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Alberta

Cannabis companies weigh pricing strategies after OCS margin cut

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TORONTO — Canopy Growth Corp. will hold its prices as licensed pot producers weigh whether to pass along to consumers the savings from the Ontario Cannabis Store’s forthcoming margin decrease.

The Smiths Falls, Ont. cannabis company behind the Tweed, Ace Valley and 7Acres brands isn’t budging on what it will charge because the pot market is already “highly competitive,” chief executive David Klein said in a statement to The Canadian Press.

Canopy declined to say more about the pricing decision, which comes after it laid off 800 workers and the company reporting a $266.7 million net loss in its third quarter.

The decision comes after the OCS, the province’s pot distributor, said last week that it would reduce the margins it makes on weed sales this September in a move expected to put $35 million back in the hands of licensed pot companies this fiscal year and $60 million in the 2024 fiscal year. 

Companies aren’t required to pass along the savings to consumers by lowering their prices, so many observers believe licensed producers will adopt a range of pricing strategies when the new margins come into effect.

“It’s reasonable to think that some cannabis producers and retailers may decide to decrease their prices after the OCS announcement just to be more competitive, provided that they have the wiggle room in their market margins,” said Sherry Boodram, chief executive of CannDelta Inc., a Toronto cannabis consulting company.

“But certainly in other cases, some producers and retailers may not want to decrease their prices.”

Making that decision is no easy task when many licensed producers are awaiting details about how deep the cuts will be.

However, two industry sources told The Canadian Press the average mark-up will decline to 25 per cent from 28 per cent, though the amount will vary across product categories. The biggest margin reductions will come in the vapes, edibles and beverage categories with more modest decreases to flower, pre-rolls and concentrates.

The Canadian Press is not identifying the sources because they were not authorized to disclose the information.

“At this point, it’s too early for us to comment on pricing,” said Rick Savone, senior vice-president of global government relations at Aurora Cannabis Inc., which makes the Daily Special, San Rafael ’71, Greybeard and Drift products.

“We are waiting for explicit understanding from the OCS about how the pricing changes will be applied.”

Meanwhile, Moncton, N.B.’s Organigram Holdings Inc. refused to discuss its pricing model, but spokesperson Paolo DeLuca says it will ensure prices are attract to consumers and generate a reasonable margin.

Once companies understand the margin changes, Boodram said businesses will have to factor in production and distribution costs for each item, taxation, market competition, profitability and supply and demand.

“There are some businesses that are facing increased competition that have declining sales and that have excess inventory, so for them reducing prices can be a really effective way for them to attract customers and increase demand for their products,” she said.

But lowering prices can also weigh on profitability and the company’s ability to fund other ventures, and send a false signal to consumers that a product is cheaper because it is of lower quality.

“At the consumer level they’re not aware of this OCS announcement and the reasoning behind the price decrease, so they might wonder what’s going on here?” Boodram said.

Cannabis companies, which have endured rounds of layoffs and facility closures in recent years, are also in a particularly tough spot when making pricing decisions because they have already slashed their own margins several times in recent years.

“Several companies are already actively doing price drops, so price drops are very, very popular,” said Lisa Campbell, chief executive at cannabis marketing company Mercari Agency.

The average price for cannabis was $11.78 per gram at the start of 2019, shortly after legalization, but fell to $7.50 per gram in 2021, a report from Deloitte Canada and cannabis research firms Hifyre and BDSA said. 

The average price for vape cartridges has similarly fallen by 41 per cent from $32.02 per gram around legalization to $19 per gram a year later.

“In some situations, to be competitive with illicit market prices will have to be reduced more, but I don’t think that that’s going to be the case for all products,” Boodram said.

By the OCS’s count, the illicit market made up 43 per cent of Ontario’s cannabis market last March.

While any margin decrease is helpful for licensed producers, Campbell doesn’t see it having a meaningful effect on the industry’s profitability because the cut isn’t big enough and OCS margins have steadily increased since legalization.

Shoppers are also unlikely to bat an eye.

“I don’t think the consumer is thinking too much about it,” she said.

“I don’t think it’s really going to be a significant change.”

This report by The Canadian Press was first published Feb. 22, 2023.

Companies in this story: (TSX:WEED, TSX:ACB, TSX:OGI)

Tara Deschamps, The Canadian Press

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Alberta

Alberta takes big step towards shorter wait times and higher quality health care

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From the Fraser Institute

By Nadeem Esmail

On Monday, the Smith government announced that beginning next year it will change the way it funds surgeries in Alberta. This is a big step towards unlocking the ability of Alberta’s health-care system to provide more, better and faster services for the same or possibly fewer dollars.

To understand the significance of this change, you must understand the consequences of the current (and outdated) approach.

Currently, the Alberta government pays a lump sum of money to hospitals each year. Consequently, hospitals perceive patients as a drain on their budgets. From the hospital’s perspective, there’s little financial incentive to serve more patients, operate more efficiently and provide superior quality services.

Consider what would happen if your local grocery store received a giant bag of money each year to feed people. The number of items would quickly decline to whatever was most convenient for the store to provide. (Have a favourite cereal? Too bad.) Store hours would become less convenient for customers, alongside a general decline in overall service. This type of grocery store, like an Alberta hospital, is actually financially better off (that is, it saves money) if you go elsewhere.

The Smith government plans to flip this entire system on its head, to the benefit of patients and taxpayers. Instead of handing out bags of money each year to providers, the new system—known as “activity-based funding”—will pay health-care providers for each patient they treat, based on the patient’s particular condition and important factors that may add complexity or cost to their care.

This turns patients from a drain on budgets into a source of additional revenue. The result, as has been demonstrated in other universal health-care systems worldwide, is more services delivered using existing health-care infrastructure, lower wait times, improved quality of care, improved access to medical technologies, and less waste.

In other words, Albertans will receive far better value from their health-care system, which is currently among the most expensive in the world. And relief can’t come soon enough—for example, last year in Alberta the median wait time for orthopedic surgeries including hip and knee replacements was 66.8 weeks.

The naysayers argue this approach will undermine the province’s universal system and hurt patients. But by allowing a spectrum of providers to compete for the delivery of quality care, Alberta will follow the lead of other more successful universal health-care systems in countries such as Australia, Germany, the Netherlands and Switzerland and create greater accountability for hospitals and other health-care providers. Taxpayers will get a much better picture of what they’re paying for and how much they pay.

Again, Alberta is not exploring an untested policy. Almost every other developed country with universal health care uses some form of “activity-based funding” for hospital and surgical care. And remember, we already spend more on health care than our counterparts in nearly all of these countries yet endure longer wait times and poorer access to services generally, in part because of how we pay for surgical care.

While the devil is always in the details, and while it’s still possible for the Alberta government to get this wrong, Monday’s announcement is a big step in the right direction. A funding model that puts patients first will get Albertans more of the high-quality health care they already pay for in a timelier fashion. And provide to other provinces an example of bold health-care reform.

Nadeem Esmail

Senior Fellow, Fraser Institute
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Alberta

Alberta’s embrace of activity-based funding is great news for patients

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From the Montreal Economic Institute

Alberta’s move to fund acute care services through activity-based funding follows best practices internationally, points out an MEI researcher following an announcement made by Premier Danielle Smith earlier today.

“For too long, the way hospitals were funded in Alberta incentivized treating fewer patients, contributing to our long wait times,” explains Krystle Wittevrongel, director of research at the MEI. “International experience has shown that, with the proper funding models in place, health systems become more efficient to the benefit of patients.”

Currently, Alberta’s hospitals are financed under a system called “global budgeting.” This involves allocating a pre-set amount of funding to pay for a specific number of services based on previous years’ budgets.

Under the government’s newly proposed funding system, hospitals receive a fixed payment for each treatment delivered.

An Economic Note published by the MEI last year showed that Quebec’s gradual adoption of activity-based funding led to higher productivity and lower costs in the province’s health system.

Notably, the province observed that the per-procedure cost of MRIs fell by four per cent as the number of procedures performed increased by 22 per cent.

In the radiology and oncology sector, it observed productivity increases of 26 per cent while procedure costs decreased by seven per cent.

“Being able to perform more surgeries, at lower costs, and within shorter timelines is exactly what Alberta’s patients need, and Premier Smith understands that,” continued Mrs. Wittevrongel. “Today’s announcement is a good first step, and we look forward to seeing a successful roll-out once appropriate funding levels per procedure are set.”

The governments expects to roll-out this new funding model for select procedures starting in 2026.

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The MEI is an independent public policy think tank with offices in Montreal, Ottawa, and Calgary. Through its publications, media appearances, and advisory services to policymakers, the MEI stimulates public policy debate and reforms based on sound economics and entrepreneurship.

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