As industries grow and establish their territories and markets, rules and leaders are formed throughout. In 2017, the cannabis industry continued its path of growth into a viable and respectable industry. Leaders of the public industry paved the way for new possibilities in the Canadian market and beyond. The dismissal of cannabis doesn’t cut it anymore when looking for successful markets.
Legitimacy is a concept often tossed around when discussing emerging market and the possibilities in it. The notion that these markets haven’t fully established themselves in the opinion of trusted arbiters can slow down or prevent and industry to flourish faster.
Over the course of 2017, the world of cannabis took decisive steps in seeking legitimacy –at least in Canada– and fully launching its name into the eyes of more and more investors.
With that in mind, here the Investing News Network (INN), brings investors old and new to the cannabis space a look back at the year and some of its biggest trends and how it could frame 2018.
Legislation news caused a spike
Investors of cannabis stocks have eagerly awaited the arrival of full legalization in Canada. Positive news within the sector has a tendency of reflecting optimism in the market.
In March of this year, companies in this sector enjoyed a boost from a development from the federal government to introduce the cannabis legalization bill in April. Neil Maruoka, a cannabis analyst with Canaccord Genuity, wrote a report saying legislation “should be the tide to lift all stocks,” according to the Financial Times.
Later in the year the bill was tabled and has now officially moved into the Canadian Senate, where it is expected to pass without any delay, effectively completing the promise by the Liberal government to bring recreational cannabis sales to the market in July 1, 2018.
Blockbuster deals brought a new type of establishment to cannabis stocks
Criticism of cannabis as a successful business often leads to the concept that people have a negative opinion on the drug. While that may be true with some segments of the population, a majority of Canadians favor complete legalization of cannabis and expect to see the rewards of its business through the taxation to follow.
The biggest deal of this kind in 2017 was Constellation Brands (NYSE:STZ) an alcohol producer whose most notable product is Corona. As reported by INN in early November, the company acquired a 9.9 percent equity in Canopy Growth (TSX:WEED) for $245 million.
Alan Brochstein, a cannabis analyst with 420 Investor told INN this deal was the biggest news of the year and said it “reinforced the leadership position of the country with respect to global leadership.
The deal not only sees a major player in the alcohol industry interact directly with a cannabis Licensed Producer (LP), it also plants the potential for cannabis-infused beverages. According to the two companies, they will begin working on the possibilities of this new product.
That said, cannabis-infused beverages aren’t a new phenomenon, but the idea of bringing it to the forefront through this deal could spark a new wave of products as the diversification of cannabis continues.
Instead of investment deals, partnerships deals between cannabis producers and pharmacies have also made their own splash in 2017. Aphria (TSX:APH; OTC:APHQF) announced its supply deal with Shoppers Drug Mart in December of 2017.
The LP won’t be the exclusive supplier of medical cannabis to the Canadian pharmacy if the law allows it in the future, but it has gotten ahead of everybody and hinted a preference role with Shoppers. The deal will allow the pharmacy’s online shop to offer medical cannabis products from Aphria’s catalog if the law permits it in the future.
During 2017 CanniMed Therapeutics (TSX:CMED), Cannabis Wheaton Income (TSXV:CBW) and Maricann Group (CSE:MARI) inked similar deals with pharmacies in Canada. Getting in early with these medical establishments may provide these producers a leg up if the law permits for pharmacies to carry medical cannabis products.
Public and private investment opportunities for cannabis companies
The growth of investment into cannabis also can’t be ignored. Investment firms in Canada have embraced all types of cannabis companies, while opportunities in the international market have faced roadblocks in getting investment from banks.
While these opportunities continue to appear for companies in the space, it’s still important to note that no banks have approached even the biggest LPs for a piece of the pie.
Famously this year, the cannabis model in Uruguay was halted after US banks threatened to close the accounts of the pharmacies involved in the sale of recreational cannabis. The South American country eventually went ahead and established a new retail system for the sale of cannabis in the country.
A market report from research firm EY said one of the two highest barriers to enter the cannabis industry is access to capital. “[B]anks are not currently issuing traditional financial instruments to cannabis companies” the report stated. This study obtained its findings by surveying executives across Canadian LPs.
With a new industry, it’s always important for investors to remember legislation and regulation challenges. In the case of cannabis, it doesn’t only refer to the issue of legalization.
The TMX guidelines on trading and conducting operations in the US
This year the TMX Group, the parent company and exchange operator of the Toronto Stock Exchange (TSX) and the TSX Ventures Exchange, offered an obtuse back and forth on its intentions regarding cannabis stocks trading in its exchanges whilst holding assets or interests in the US market.
At one point experts feared the Canadian Depository for Securities Ltd. could potentially stop the clearance of trades of these contested stocks. One company that would directly be impacted by an unfavorable ruling is Aphria, since it holds interests in the US through partnerships.
Rita Trichur, financial services editor at The Globe and Mail wrote a report on the potential impact these regulations would have on Namaste Technologies (TSXV:N), an online retailer of cannabis vaporizers.
Trichur wrote the TMX had done a “lousy job” of explaining exactly which companies could be caught in the midst of their new review process.
“[C]ritics say it’s unprecedented for an exchange to retroactively change the rules on publicly traded companies,” the report said. “[I]f TMX is allowed to pull the rug from under the cannabis sector, what will stop it from doing the same to companies in other industries?”
Investors should expect this situation to continue into 2018 as the TMX Group hasn’t officially revealed any new regulations it would set up. Vic Neufeld, CEO of Aphria has repeatedly said conversations and discussions are ongoing with the TMX.
Brochstein recognized the potential impact of this development, telling INN it provided a “curveball” on the development of cannabis businesses.
Cannabis updates in the US
While not as fast forward as the public cannabis space in Canada, the situation in the US is rapidly moving into exciting new directions. This year saw the opening of one of the biggest cannabis markets available–Nevada.
The situation in the desert state was covered by local many producers due to the influx of tourists into the city of Las Vegas. Friday Night Inc. (CSE:TGIF; OTC:TGIFF) was one of the Canadian cannabis stocks that got an early start in the Las Vegas market. Through various deals, this company has strengthened its position in the highly coveted market.
MPX Bioceutical Corporation (CSE:MPX; OTC:MPXEF) provides an interesting case in the entire US versus Canada cannabis market scenario. MPX decided to enter the US market since its license application in Canada was taking too long.
“With 40 odd million people moving into the Las Vegas area every year, to have a wide open cannabis-use market we think we are going to see explosive growth in the market,” Scott Boyes CEO of the then Canadian Bioceutical Corporation told INN. Reports indicate projections see a revenue increase of $120 million in the state of Nevada in the next two years.
Brayden Sutton, CEO Friday Night Inc told INN the most challenging aspect of the cannabis market in the US is the comments from Attorney General Jeff Sessions, who has repeatedly shown his distaste for cannabis.
The Rohrabacher-Farr amendment, an integral piece of the legislation, prevented Sessions from targeting cannabis businesses in the states that it is legal. That regulation may soon be dismissed as the Senate races towards a vote on the federal budget.
“[The Rohrabacher-Farr amendment] bars the Department of Justice from spending even a single dollar to go after marijuana users—but because it is an amendment to a budget bill, Congress has to vote on it every year,” a Newsweek report explained.
Sessions has expressed his skepticism of cannabis businesses and legislation models in states thriving in this industry.
The business of cannabis continued on a path of growth in 2017. The industry moved from its infancy stages before and sought legitimacy this year. The dismissal of cannabis as a viable business isn’t enough anymore to go against this industry.
Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Friday Night Inc. is a client of the Investing News Network. This article is not paid-for content.