Cannabis Market Update: Q1 2022 in Review

Cannabis market update: US legalization chatter heats up

US-based cannabis operators are reaching significant growth levels due to the expansion of individual state markets and better availability across the nation.

This financial success continues to be led by state decisions to open the doors to cannabis programs, as the industry has yet to see support at the federal level.

With these companies making positive inroads and support for cannabis coming from both sides of the political spectrum in the US, why is the country stumbling when it comes to uniform legalization measures?

The answer goes back to the convoluted political process that cannabis reform is facing.

So far in 2022, there has been a renewed attempt to legalize cannabis in the US by way of the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act — an all-encompassing piece of legislation that cleared the House of Representatives in April. But it's not expected to make it through the Senate.

“We believe that the MORE Act is dead on arrival when it gets to the Senate,” Nawan Butt, portfolio manager with Purpose Investments, told INN soon after the much-anticipated House vote.

Kacey Morrissey, senior director of industry analytics with New Frontier Data, told INN cannabis reform will eventually see the light of day, but how the industry gets there is less of a certainty. “Now I think we (are) just kind of splitting hairs, deciding who's actually going to benefit the most from this and how,” she said.

In addition to US legalization chatter, the sector has welcomed the official opening of the New Jersey recreational market. This opening has been one of the most anticipated events in the US cannabis industry.

Analysts anticipate that there will be a domino effect on neighboring states in the northeast now that the Garden State has given the green light to adult-use cannabis.

“I think (New Jersey opening is) going to just create a lot of additional pressure,” Morrissey told INN, referring to state markets like New York and Pennsylvania.

The state granted 13 dispensaries special licenses to sell adult-use items, meaning the market is still restricted. These dispensaries are connected to the following publicly traded operators:

• Ascend Wellness Holdings (CSE:AAWH.U,OTCQX:AAWH)
• Columbia Care (NEO:CCHW,CSE:CCHW,OTCQX:CCHWF)
• Acreage Holdings (CSE:ACRG.A.U,OTCQX:ACRHF)
• Green Thumb Industries (CSE:GTII,OTCQX:GTBIF)
• Curaleaf Holdings (CSE:CURA,OTCQX:CURLF)
• Terrascend (CSE:TER,OTCQX:TRSSF)
• Verano Holdings (CSE:VRNO,OTCQX:VRNOF)

Cannabis market update: Partnerships and M&A continue

One of the biggest deals in the cannabis marketplace took place early in the year, when Cresco Labs (CSE:CL,OTCQX:CRLBF) confirmed its plan to purchase competing multi-state operator (MSO) Columbia Care.

The deal is worth US$2 billion and is expected to close in the Q4 period of this year.

“With Columbia Care’s strategic national footprint in the most attractive markets and Cresco Labs’ success in execution and incredibly popular brands, we will together create the most important — and the most investable — company in cannabis," Nicholas Vita, CEO of Columbia Care, said.

Charles Taerk, president and CEO of Faircourt Asset Management, told INN he still thinks MSOs are undervalued, despite the clear growth seen from state markets in the US.

“MSOs (are) very undervalued, and they have very strong fundamentals,” he said.

The financial executive — alongside other stock experts — has expressed bullish support for the growth of MSOs, saying that investors shouldn’t be deterred by the challenges ahead for federal reform efforts in the US.

“The longer the MSOs are allowed to continue to build their businesses, they are effectively strengthening their moat around the businesses,” Taerk said. "To the point when legalization happens, there's going to be acquisitions at much higher prices. And this is why investors want to be investing now.”

Cannabis market update: Canadian licensed producer business update

Up north in Canada, cannabis producer HEXO (NASDAQ:HEXO,TSX:HEXO) has signed a deal with competitor Tilray (NASDAQ:TLRY,TSX:TLRY), putting the two in alignment.

Tilray bought US$211 million worth of HEXO's senior secured convertible notes, which will give it a chance to convert its notes into a 37 percent stake in its competitor. However, Tilray Chairman and CEO Irwin Simon said the company doesn’t plan to immediately act on this event.

“This strategic alliance will help lower our costs, preserves our stand-alone optionality and we look forward to reaching a definitive agreement shortly,” said Scott Cooper, president and CEO of HEXO.

Taerk told INN that leading publicly traded Canadian producers across the board are struggling with shrinking market share despite the general growth of the domestic market.

“We're very concerned that ultimately, some of these names can disappear. There might be bankruptcies,” he said.

The market watcher was critical of both HEXO and Tilray as the two producers attempt to continue operating and look to capture leading positions in key product categories in Canada.

“To us, these transactions that Tilray keeps announcing, these M&A deals, are more to distract investors from wanting them to see the operations — of what hasn't transpired in a positive way,” he commented to INN. “That's kind of our tone on the Canadian marketplace.”

The domestic market in Canada continues to grow at a steady level, but is a tricky landscape where trends come and go, a recent market research report from the Brightfield Group indicates.

These struggles for Canadian companies come hand-in-hand with the fact that they still have no clear path into the US market when cannabis reform does eventually happen.

Cannabis market update: Investor takeaway

Cannabis investors saw volatility extend in Q1 along with doubts about the present health of the stock market. However, experts are bullish about the sector's long-term overall health.

While many questions remain about market conditions in the US and Canada, signs of the emergent growth within both countries are present and understood.