(Adds details on market estimates, U.S. context, analyst quote)
By Leah Schnurr and David Ljunggren
OTTAWA, Dec 13 (Reuters) - The Canadian government should regulate the production of cannabis when it is legalized for recreational use and require plain packaging for such products, an official panel recommended on Tuesday, a potential setback to growers who hoped to build brands.
How cannabis is sold should be left up to the provinces and should include both retail storefronts and a mail order system, the report recommended. Authorities have been battling a surge in illegal dispensaries over the past year, particularly in Ontario and British Columbia.
With medical marijuana already legal in Canada, Prime Minister Justin Trudeau’s Liberal government made legalizing it for recreational use a part of its successful election campaign last year and will introduce legislation in the spring of 2017.
Deloitte has estimated that annual sales could be as high as C$8.7 billion ($6.63 billion).
Canada is following in the footsteps of some U.S. states that have already legalized recreational use, including Colorado and Washington. While Tuesday’s recommendations are not binding, the government said it will take them under consideration.
The recommendations were generally positive for the 36 companies that currently produce and sell medical marijuana, analysts said, with a lower-than-expected age limit of 18 for recreational users and the allowance of some forms of edibles, which have been popular in places such as Colorado.
Still, the panel recommended that plain packaging be required, while restrictions to advertising should be put in place similar to those currently on tobacco products.
“That’s where the downside is for some of these licensed producers that had been hoping to advertise and really develop brands,” said Jason Zandberg, an analyst at PI Financial.
Canopy Growth, which has a C$1.2 billion ($914.98 million)market capitalization on the main TSX exchange, was up 6.6 percent at C$10.66, while producer and seller Aphria Inc was up 5.3 percent at C$5.34.
The panel recommended Canada maintain a separate system for medical marijuana.
The government should use licensing and production controls to foster a competitive recreational market that includes small producers, the panel recommended, suggesting the door was open for new producers to get into the burgeoning sector.
Nonetheless, analysts did not expect the firms that want to transition to recreational will find themselves shut out.
“We’re talking about a massive market,” said Noel Atkinson, analyst at Clarus Securities. “There’s lots of room for everyone to play.” ($1 = 1.3115 Canadian dollars) (Additional reporting by Alastair Sharp in Toronto; Editing by Alan Crosby)