Cannabis Risk Manager Calls Out Need for US Reform

Evolving cannabis market has changed risk management

The expert said cannabis operators are reaching further than ever when it comes to business opportunities.

“The way that these companies operate, they are agricultural, they are pharmaceutical, they are consumer discretionary, they are retailers, they are wholesalers — they do everything,” Francis said.

That growth and specialization has made it difficult to pin down a blanket risk management theme for the cannabis industry. As part of its process, CRB Monitor assigns a calculated and long-developed risk measure to each company that it covers using a four-tier grading system.

“We take the risk measure several steps further; we separate the cannabis universe by businesses that are considered pure play vs. non-pure play,” the expert explained.

That's because clients of CRB Monitor want to know about additional risk measures based on calculations using different metrics — for example, a company's overall revenue relative to its cannabis-related revenue.

Francis described the breakdown as the strength of the theme. “We believe it's a very powerful determinant of a company's overall risk and exposure to the cannabis space,” he said. These risk tools can then be used by asset managers to determine if they are interested in a company and its future output.

Challenges continue to plague cannabis industry

While the lack of change at the federal level in the US continues to stump the progress of the market, Francis also pointed to what he described as the unchecked status of illicit players.

“Even in states that have legalized cannabis for adult use … there's still a fairly significant illicit market that ranges from 10 percent of total cannabis sales in a particular state to as high as 50 percent that we've seen of the total market,” Francis explained to INN, saying that this is hurting the sector.

In addition to that, the expert said that given its emerging status, the cannabis market is also still more sensitive to “challenges in the global macroeconomy.”

Poor market conditions dry up cannabis M&A rush

Although a sea of cannabis mergers and acquisitions took place in 2021 and earlier in 2022, Francis said that current company valuations have put this trend on hold.

The expert noted that on aggregate, the cannabis equity market is down nearly 50 percent so far in 2022. “It makes it very difficult for those deals to actually take place,” he told INN.

But there are areas of growth that investors can look toward. “Even though we're not seeing the big blockbuster-style deals because the market has been a little depressing, those companies that have cash on the balance sheet … are (positioned) to grow across several states," he said.