Could 2019 be the biggest year to date for the Cannabis Industry? We think so.
2018 was a monumental year for cannabis. Canada legalised marijuana for adult recreational use. Michigan became the 10th U.S. state to legalise recreational marijuana, while Missouri and Utah joined the growing club of states that allow medical marijuana.
And in November 2018, the midterm elections resulted in more representatives in the U.S. Congress who support changes to federal laws regarding cannabis.
In addition, 2018 saw the first cannabis-based drug become FDA approved, and The Farm Bill of 2018 signed into law by President Trump just last week. Provisions in the Bill would legalise hemp for industrial cultivation and production and remove it from the Schedule 1 list (where it currently sits alongside Heroin and Cocaine).
So what does 2019 hold in store for the cannabis industry? While no one can know for sure, below are our predictions for the key moments in 2019, and how they may impact the cannabis industry on its eventual path to full global legalisation!
Big Revenue Growth from the LP's
Let's start with Canada. In 2018, Canada legalised cannabis for adult recreational use but launched in a very limited way. On day one there were very few recreational dispensaries open and only flower and low-potency oils were available to be sold. This severely impacted the initial recreational sales, with most of the Canadian Licensed Producers (LP's) delivering average results during the recent November Earnings' Season.
But this will change in 2019, as the Provinces license more recreational dispensaries, coupled with greater levels of inventory and supply. Look out for hyperbolic growth in both top line Revenue and EBITDA from the Canadian LP's.
Although the valuations are still very high for most of the big producers, look for them to grow into their valuations in 2019, as they ramp up sales and effectively deliver on Canada's recreational potential. And what a market it will be, with Arcview Research predicting the Canadian market to be worth around CAD$4.5 billion by 2021.
This growth will be driven by significant increases in production in 2019. Most of the LP's have spent the past 2 years burning cash as they build out cultivation capacity. A lot of this capacity will come online in 2019, with the 3 largest producers having the capacity to produce nearly 1.5 million kilograms per annum.
To put this into perspective, it is estimated that Canada's total demand for cannabis will be around 900,000 kilograms per annum. As the supply-chain issues abide, production increases and more retail outlets become available, we predict very big revenue numbers from the Canadian LP's in 2019.
Real Legalisation in Canada
As discussed in Part I, Canada legalised and sanctioned flower and low-potency oils only. The really big market will only open up in October 2019, when Canada is set to legalise extracts and edibles.
For some perspective, in California, Vape Pens make up nearly 30% of the legal market. And in Canada alone, it is estimated that the black market for Vape Pens is worth north of a billion dollars.
"Grinding it up. Getting out a cone and stuffing it, or rolling it, is a ritual. But many people would prefer not to have crumbs of weed all over their coffee tables. They will go for the vape pen. It's quick and easy, and as such, vape pens are going to be everywhere."
– Craig Wiggins, TheCannalysts
We predict a huge increase in the number of first-time consumers once edibles and extracts are legalised, and a significant uplift in Licensed Producer Revenue. Look for US-based brands (such as MPX extracts and Bhang chocolate) to grab market share.
Beverages is a form of edible, and we predict this to be a massive market as well. It is predicted that this could become the largest part of the market as consumers change their drink of choice – when out – to a zero calorie, THC infused beverage, that will give them a standardised dosage and buzz, every time.
Molson Coors' entry into the market in 2018, combined with Heineken and Constellation Brands, mean that cannabis beverages are going to have a big role to play moving forward.
A growing US market
If 2018 could be considered Canada's year, then 2019 could well be the USA's year. This is by far and away the largest cannabis market in the world. Already, 10 States have legalised for recreational use, with 33 states now legalised for medicinal use.
With US support for the legalisation of cannabis at an all-time high, and Republican support above 50% for the past two years running, the winds of change are blowing quickly through the US.
To put into perspective just how big the market is, consider Arcview Research and BDS Analytics's research, wherein they predict that Canada will only make up 12% of global cannabis sales in 2019, with the US (in its current form) accounting for nearly 80% of those sales.
New States that could legalise for recreational use in 2019 include both New York and New Jersey. New York, in particular, is planning to legalise before June 2019, with the changes being driven by current NY Governor, Andrew Cuomo.
"It's time to legalise cannabis once and for all"
– Andrew Cuomo, Govenor of New York
The announcement is a turnaround for the Governor, who last year said that marijuana was a "gateway drug". However, faced with a $40 billion bill for fixing New York City's crippled subway system, the governor has had to rethink, claiming in recent months that the "facts have changed".
The State of Colorado reported tax revenues of $267 million in 2018, and if legalised, New York could be looking to generate over $670 million in State Taxes, annually. A very compelling reason to legalise indeed.
A de-scheduling of Cannabis?
The biggest question for 2019, will be whether Cannabis will be de-scheduled down from its current Schedule 1 status (currently this means it is deemed to offer zero medicinal benefits) down to a lower Schedule 2 or 3 status. This would then allow for cannabis to be studied, approved, regulated and prescribed like any normal pharmaceutical drug.
U.S. Senator Cory Gardner who struck a deal with Trump in April 2018, introduced the STATES Act in late 2018. If passed, it would effectively turn the Cole Memo into an Act, providing ironclad protection, from Federal intervention, for States that have legalised cannabis for medicinal and/or recreational use.
And The Marijuana Justice Act picked up support in the U.S. House and Senate. Introduced by U.S. Sen. Cory Booker last year, the Marijuana Justice Act frames federal legalisation as a criminal justice issue.
With a new year coming into focus, politicians, seeing growth in the many fragmented cannabis markets and eyeing significant election campaigns ahead of 2020, will no doubt engage the industry with more forward-thinking policy statements than before.
We are not predicting there will be Federal decriminalisation or legalisation in 2019 but we would suggest there could well be a de-scheduling of cannabis, which could be driven by the signing of the Farm Bill of 2018, which would remove Hemp from its Schedule 1 status.
The CBD Boom
The passing of the Farm Bill of 2018 has lifted the prohibition on Hemp, and in doing so, has opened up an industry that Brightfield Research predicts could be worth as much as USD$22 billion by 2025.
The current US market value for Hemp derived CBD products are USD$418 million, and this is expected to grow to over USD$1.6 billion by 2021. That's a phenomenal year on year compounded growth.
And it is CBD that is driving this growth. Now found in all areas of the market including beauty, pet care, skin care, and wellness, its popularity is growing exponentially.
"We predict we will start to see that hockey stick of growth in CBD as it explodes into the mainstream."
– Bethany Gomez, Director of Research at Brightfield Group.
Indeed, it is our prediction that via hemp and CBD, the big Canadian Licensed Producers will enter the US. There were multiple acquisitions of Hemp companies by the LP's in 2018, and this would be the perfect way to operate in the US under a Federally-regulated environment.
They could introduce their brands and genetic strains to the US market, and this would lay the perfect foundation for the eventual move into recreational products when cannabis is finally legalised at the Federal Level.
Our final prediction for 2019, is that there will be more consolidation of cannabis companies, this time in the US industry. 2018 saw the nascent, cottage style industry really start to come together, with huge M&A activity by the large Canadian LP's.
Aurora's purchase of Medreleaf, Canopy Growth's purchase of Hiku Brands, and MedMen's acquisition of PharmaCann, stand out as the big three in 2018.
MedMen's acquisition of PharmaCann is the most important, as it marked the largest acquisition in the US to date. The transaction also created the largest US player, with MedMen now operating in 12 states.
Late in the year we also saw the proposed merger of iAnthus and MPX Bioceuticals. This is, in our opinion, a great match.
MPX has significant revenue, and valuable, well-known brands in the market, but have a slightly sub-par management team. On the other hand, iAnthus has a superb management team, but very little revenue and no strong brand presence. This consolidation of smaller players to create synergistically larger and more meaningful companies is a trend we see continuing in 2019.
Not only do we see consolidation, but also the entry of bigger external players into the market. Already it is well known that Coca-Cola and Diegeo are looking to enter the market, and we feel strongly that there will be a Big Pharma entrant in 2019. Look to Organigram, CannTrust and GW Pharmaceuticals as prime candidates for a pharmaceutical acquisition into the cannabis market.
The Bottom Line
We are extremely bullish for 2019. Although the markets have been hit hard in the latter part of 2018, if we are honest with ourselves, the market needed a slight correction. We believe now to be one of the best times to take a position in the market.
Even though cannabis stocks have suffered a short-term setback, this is exactly how we look at it – short-term.
In the longer term, we see significant revenues and positive EBITDA's from the big Canadian LP's, a more open and profitable Canadian recreational market, and the continuation of the fast-moving march towards the eventual lifting of cannabis prohibition in the US.
In addition, we expect to see many more US Multi-State Operators (MSO's) coming to the market and listing on the CSE.
There has been a recent flurry of MSO listings on the CSE with MedMen, GTI, Acreage and Cresco Labs to namedrop a few. The US is the next big frontier and we predict huge growth in this market in 2019.
Make no mistake, it will be volatile, but we believe markets will be higher in December 2019, than they currently are in December 2018. Strap yourselves in people, as you are smack bang in the middle of the Green Rush.
And they told you money doesn't grow on trees.
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