For 11 years, Brent Zettl and Prairie Plant Systems Inc. cornered the market for government-approved medical marijuana in Canada.

Now, after a change this month in Canada's production and distribution laws made it legal for any licensed company to grow and ship medical marijuana to patients, and illegal for patients to grow their own, Mr. Zettl finds himself competing with a dozen new entrants in an industry that could be worth as much as $1.2 billion in a decade. Already, it is drawing investments from hedge funds and private-equity...