(Reuters) – A year after Canada legalized use of recreational marijuana cannabis stocks have lost half their market value, and investors betting that the launch of higher-margin pot-infused drinks and other products will quickly lift shares may be in for a bumpy ride.
FILE PHOTO: Cannabis products on display at the Hunny Pot Cannabis Co. retail cannabis store after marijuana retail sales commenced in the province of Ontario, in Toronto, Ontario, Canada April 1, 2019. REUTERS/Moe Doiron
So-called cannabis 2.0 – legalization of marijuana derivatives including edibles, beverages, extracts and vape pens – takes effect on Thursday, with sales seen beginning in mid-December. While that is expected to help sagging share prices, the crucial factor for a turnaround is a significant increase in the number of stores selling the products, investors, companies and analysts said.
Share prices in the Horizons Marijuana Life Sciences Index ETF have slumped as companies’ revenues missed expectations. Cannabis producers, investors and analysts have blamed Canadian regulations that have slowed the opening of new retail outlets, strangled sales and imposed higher costs.
Investment bank and advisory firm Seaport Global figures Canada needs about 1,055 stores to realize the cannabis market’s true potential.
About half that number currently exist, with about 300 of those stores in Alberta, which has looser regulations than the rest of the country, while the most populous provinces of Ontario and Quebec have lagged far behind.
“We would probably give the first year a C minus,” said Seaport Global analyst Brett Hundley, giving the industry performance a barely passing grade. The slow roll-out of stores “creates a real problem for Canadian licensed producers, because they’ve expanded rapidly with cultivation and production facilities and have nowhere to go,” he added. Lackluster results from cannabis producers “will continue and potentially worsen,” Hundley cautioned.
Canada’s biggest cannabis companies including Canopy Growth and Aurora Cannabis reported larger-than-expected losses in the latest quarter and pushed back their timelines to profitability, blaming their woes on the need for more stores to sell their wares.
Regulations for the new marijuana products market, which include restricting each package to 10 milligrams of THC – the psychoactive compound in cannabis – will add to companies’ costs, said Ryan Greer, co-chairman of the Canadian Chamber of Commerce’s National Cannabis Working Group, which is made up of Canadian marijuana companies.
With each province responsible for its own retail rules and taxes, the fragmented approach to regulating the industry will continue to raise costs and create distortions in the market, Greer said.
One such distortion is evident in prices, with consumer paying far higher prices for legal weed, according to industry experts.
“Too high a level of taxation at the inception of a legal consumer system can be a disincentive for consumers to make that move from black market to legal market,” said Aurora Chief Corporate Officer Cam Battley.
Challenges facing the industry and disappointing financial results have spooked investors who had piled into the sector amid initial euphoria in the run-up to legalization of recreational cannabis last Oct. 17.
“Now, this year these companies are coming more under the microscope by investors and people are saying, ‘hey, when are you going to start making money?’” said Andrew Kessner, analyst at William O’Neill & Co.
The current investor attitude reflects the search for clarity on the real long-term value of these companies.
“With any emerging industry/market, you’ll see incredible exuberance around it, and sometimes irrational pricing,” said Emily Paxhia, co-founder of Poseidon Asset Management, which focuses on cannabis investments. “Future capital is going to expect a more prudent approach.”
An investment in excess of $4 billion in Canopy led brewer Constellation Brands to report a quarterly loss this month. But Canopy Chief Executive Mark Zekulin remains optimistic about the long-term prospects for the industry.
“It takes a lot of capital money, a lot of operating money, bringing these large facilities up to scale,” Zekulin told Reuters.
“But at the end of the day,” he said, “the multi-100-billion-dollar cannabis opportunity that existed yesterday still exists today.”
Reporting By Nichola Saminather in Toronto and Shariq Khan in Bengaluru; Editing by Denny Thomas and Bill Berkrot
In some parts of America, adults who want to smoke marijuana or consume some other cannabis product can walk around the corner or drive to a shopping center and buy whatever they’d like. In other parts of America, thousands of people a year are arrested, charged and sometimes jailed for the same activities — buying, selling or possessing cannabis.
It’s a contradiction that’s been intensifying for years as state after state eases prohibitions on marijuana and the federal government sticks to its guns. Already 33 states permit the use of marijuana for medical purposes and 10 have fully legalized all adult use; Illinois will become the 11th next year. But at the federal level, marijuana remains as illegal as ever.
Needless to say, this is an extraordinary test of federalism and the power of states to challenge it. As POLITICO Pro senior cannabis reporter Natalie Fertig writes, the conflict between state and federal law creates bizarre hardships for many participants in this new economy, from the farmer who has to pay his federal taxes in cash to the researcher in California who has to buy marijuana from a federal farm in Mississippi instead of getting it from the dispensary down the street. Fertig tracks how the debate is evolving, including signs that federal lawmakers are beginning to respond to growing pressure from the states.
Even as marijuana advocates and foes square off over legalization, neither has much science on their side. That’s because federal restrictions on marijuana research mean that we still know very little about how cannabis acts in the human body — and the current rash of vaping-related illnesses underscores how dangerous that ignorance is. POLITICO Pro health reporter Sarah Owermohle profiles two Colorado researchers who have had to develop complex workarounds to conduct basic research on marijuana even in a state that has fully legalized, including outfitting vans as mobile labs so they can test research volunteers off campus.
Elsewhere in the issue, Zachary Warmbrodt and Alexander Nieves, who write for POLITICO’S financial services and California statehouse teams, explore how prohibitions on providing financial services to cannabis businesses are having negative knock-on effects on other companies — including the iconic fertilizer company that makes Miracle-Gro; POLITICO Pro agriculture reporter Liz Crampton describes how Congress’ decision last year to legalize hemp has confused the debate over cannabis legalization; and POLITICO Pro tax reporter Bernie Becker looks at why state tax revenues from cannabis haven’t been the windfall many expected.
Our issue also includes two counterintuitive views of legalization: an exclusive interview with Rep. David Joyce, a Republican from Ohio who has, somewhat incongruously, emerged as a leading voice on Capitol Hill in favor of legalization, and an op-ed from documentary filmmaker Jane Wells, who, despite being an avowed progressive, spent 18 months filming a documentary in Colorado and has concluded that legalization might not be such a good idea after all.
And finally, if you’re confused about what’s legal where, and just what all those cannabis terms mean, we have two tools to help: an interactive map of cannabis legalization called The Dis-United States of Cannabis, and Everything you wanted to know about cannabis, POLITICO’S guide to cannabis terminology. We’ll be keeping both updated as this unusual, and fascinating, test of U.S. federalism evolves.
Welcome to The Agenda Special Report: The Great American Cannabis Experiment.
— Maura Reynolds, editor
I’m charmed by goodbrands, you may not know about them yet, but if you live in California it’s pretty simple, I want you to find them and smoke them.
Wandering around the Hall of Flowers this year, I found their vending machine irresistible. How many vending machines take quarters for beautifully packaged pre-rolled joints that are more than just good?
But first, how does a pre-rolled cannabis joint take the imbiber there? Cannabis has many colors, indoor and outdoor grown, soil, hydroponic, and then there is the biodynamic and organic crowd. All are doing their best to get your attention and your hard earned dollars. There is also a huge market out there looking for inexpensive, but still very good stuff and goodbrands has succeeded in this regard. I didn’t know what to expect when I discovered goodbrands. Perhaps it was their marketing with their unique vending machine, or the easy going salesforce who really love their place in life. Whatever the case may be, I like goodbrands because they are better than just good and that is really good for the consumer. Why? Because they don’t cost too much for a really gracious experience. There are many luxury brands in California with some raising the bar even higher by putting their financial goals directly into their print journalism. Expensive weed for sure, but does it mean good? If you are like me, it’s important to spend a bit less and still get the really good. Does that make sense? I hope so. Cheers to goodbrands, they caught my attention for growing good stuff.
Warren Bobrow=WB: Why goodbrands? What is the inspiration behind it?
goodbrands: In 2018, Canndescent became California’s #1-selling brand of luxury flower products. We launched goodbrands the same year in order to vertically integrate and deliver premium-quality, natural cannabis to an even wider demographic of consumers.
goodbrands is the official cannabis of good times and natural living, designed for those who want quality products at a competitive price point. We grow the best varieties under the California sun using sustainable practices, fair wages, pure water, and no pesticides. Simply put, we are good people who provide good weed. Our products are sold at local dispensaries throughout the state of California and we are currently working to expand into new markets.
WB: At Hall of Flowers I saw and utilized your antique vending machine, great job. What was your inspiration behind this piece of working artwork in the booth? (I thought it to be brilliant.)
goodbrands: We wanted to engage people in a fun, interactive way to deliver a user experience that would be memorable. It’s good to hear it did what we intended it to do. Pretty wild to think we made it possible to purchase (high quality) cannabis out of a vending machine.
WB: How did you determine the strains? What is the feeling that you seek?
goodbrands: All goodbrands products are approachable to the novice user but still evoke a feeling of familiarity with the experienced consumer. Our sativa-dominant strain energy & motivation helps you get fired up, feel good and power through your day by naturally bringing out your best. We also offer three different hybrid strains. If you want to amp up interactions by being more upbeat and chatty, we encourage you to try our socializing & intimacy hybrid; the focus & inspiration hybrid will help you hone in on finishing a big project; and the leisure & relaxation hybrid will help you wind down into a more relaxed state after a long day. Finally, our indica-dominant effect rest & relief helps dial down energy to help you sleep better.
WB: What is the price point in the dispensary? Is this competitive in this genre? Is it in competition to your other pre-rolls?
goodbrands: We think of goodbrands as an affordable, high-quality alternative to our more premium positioned Canndescent brand.
goodbrands offers 1/8th oz. whole flower; individual pre-roll joints; full spectrum vape cartridges; and cannabis infused mints in three CBD to THC ratios. goodbrands products are competitively priced and range from $10 pre-rolls to $30 1/8th oz. flower. Comparably, Canndescent pre-rolls and 1/8th flower retail for $20 and $50 respectively.
goodbrands is available in licensed, California dispensaries and via MedMen delivery.
WB: I love the packaging of goodbrands. Also the name. The cannabis is brightly aromatic and packs a serious stone, great job. What is your demographic for goodbrands?
goodbrands: goodbrands is targeted to the millennial-focused demographic and those who embody a “go with the flow” mindset. These consumers want simple choices — they are easy-going and have a carefree attitude.
Thank you! wb