Our Top Trends for the Cannabis Industry in 2020 – Part 2

In Part 1 of our top trends for the cannabis industry in 2020, we outlined much of the growth that we believe will be seen in the US, and the rest of the world, this year.

In part 2, we look at more of the company and commercial trends that we feel investors should look out for in 2020. Bottom line is we see far greater value and opportunity for investors in the US market.

Profit is making a comeback

2019 will long be remembered as the year that the cannabis "bubble" finally popped and the culture of "scale as fast as you possibly can no matter the cost" finally came to an end. The days of burn, burn, burn are now behind us, and companies like MedMen have been hammered by investors for burning ridiculous amounts of money, with no pathway or light at the end of the profit tunnel.

Disclaimer: Past performance is not an indicator of future performance.

Many companies have now put the construction of additional facilities on hold (as Aurora did with Aurora Sun) or have sold off non-core assets and other capital intensive projects in order to conserve cash. In addition, many cannabis companies have effected sale and leaseback arrangements with companies like Innovative Industrial Properties (NYSE:IIPR) in order to free up working capital as the current climate is horrific for raising capital. 

We expect to see companies push hard to deliver on the bottom line in 2020, and those that do will be rewarded with investor confidence. Trulieve is currently the leader of that pack, being one of only a few cannabis companies that are already generating a profit (with Canadian-based MediPharm Labs being another).

Consolidation is the name of the game

There are simply far too many cannabis companies. It is as simple as that. Consider the alcohol industry – how many large producers and manufacturers are there? Three, maybe four, and therein lies the point. There are currently over 250 Licensed Producers in Canada alone. There is simply no way at all that there is enough demand – globally – to make all of them viable business opportunities.

In 2019, we saw consolidation, that could be categorised as "mega-mergers" that created global news. Yet only two of them have actually materialised, and at significantly lower terms (deal price) than was originally announced. We expect much, much more consolidation in 2020, as some of the stronger companies look to augment organic growth through acquisition. 

Although don't expect too many mega-mergers in 2020. Rather, expect to see smaller acquisitions as the market consolidates around a group of key players. This year will most likely see some of the larger MSOs selectively acquiring niche/craft regional market leaders that could bring both customer and product to the mix. 

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But not all will be bought

We expect 2020 to bring the first wave of cannabis insolvencies and bankruptcies. Remember the 280E tax rule we spoke of? Well, the same principle applies to cannabis companies when it comes to bankruptcy insurance. They cannot get any.

Add this to capital crisis pot and you have the perfect recipe for disaster. Cannabis companies are either going to have to become profitable or be acquired by a more profitable company in order to survive. The current capital markets will simply not be an option for companies with weak balance sheets and high cash burns.

If (when) this happens, don't be too alarmed. As most investors know, this is a clear sign of a maturing industry. For a couple of years now we have depicted the industry as being a baseball game currently in the second innings. Perhaps this bankruptcy wave is the signal for the start of the third innings?

Back to the Medical

In the past 18 months, it has been all about Canada becoming the first G7 nation to legalise cannabis and lifting the recreational prohibition of marijuana at the federal level. Analysts and investors alike soon found out, that the gargantuan industry they were expecting, was not so grand after all. As we have mentioned, a lack of retail outlets and the first wave of products (flower and low potency oils only) significantly stifled the market and scared investors…big time.

Tilray's investor presentation points to the fact that currently, 41 out of the 198 countries have legalized cannabis for medicinal use, while only 2 of 198 have legalized for recreational (Uruguay was the other in case you were asking).

However, in the next 24 months, those numbers are set to double. Medicinal cannabis could (should) be legal in over 80 countries, whilst recreational is most probably doubled by the Netherlands and New Zealand at best.

You're going to see a lot of states vote on medical cannabis in the 2020 elections, and you're going to see a lot of great technology on the medical side. — Sam Martin, Chief Strategy Officer, Leafly

The point is the size and potential. Look for investor sentiment and capital to start slowly moving back to the biotechs and pharmaceutical companies looking to leverage the greatest healthcare disrupter of our time. We believe big money will flow into medical this year as investors start to understand just how long it might take for the recreational markets to truly find their footing.

Vape Crisis Cannabis Industry
Source: Alex Castro / The Verge

And now for our most controversial pick – Vaping will end the year on top!

With the current vaping crisis, surely the vape category will be hit hardest? This is the question most investors will ask when reading the above. But it's the silver lining in this crisis that drives our belief in this trend.

Vaping has always been (and continues to be) the fastest-growing segment of the recreational cannabis industry. It is the most desired form factor, and with the correct manufacturing process and safety standards, it could be considered one of the purest way to consume cannabis.

The CDC recently announced that the dominant cause of the illness and deaths related to vaping was as a result of a solvent found only in the illicit market, that is used to volumise the illegal product. It's basic black market logic – get a drug, then cut it by 50% and double your profits. The solvent – found to be Vitamin E Acetate – has not been found to be present in any cartridge bought from a legally licensed dispensary. 

The crisis has really brought into the spotlight the dangers of the illicit black market and the lack of regulation and testing to ensure the highest level of product quality and consumer safety. Simply put, if a consumer buys a rigorously-tested and quality produced vape from a legal dispensary, then they were not at risk of falling victim to the EVALI.

With vapes due to hit the Canadian shelves this month (except for Alberta and Quebec who have temporarily banned them), and many of the Licensed Producers manufacturing vapes that meet the very strict and rigorous Health Canada product safety standards, the logical conclusion is that eventually the bans will be lifted and the billion-dollar illicit vape market in Canada will start to migrate.

We believe that by the end of 2020, vapes will become the top-selling recreational product in Canada. It's a big one, we know, but sometimes you gotta shoot for the stars, rather than the gutter.

Strap yourselves in, as one way or another, the 2020 cannabis ride is going to be a crazy one.

This could be one of the best investing opportunities of 2020

Legislative changes are blowing through the US, and with it, an ever-increasing number of states legalising cannabis for recreational use.

With the success seen in Illinois, which legalised for adult-use on January 1 and saw products moving off the shelf at an unprecedented rate, this company is primed to take advantage of the booming US recreational market.

They have secured partnerships with the biggest cannabis companies in the US, and their portfolio is second to none.

And with the sector-wide pullback of 2019, this company is now at a bargain-basement price.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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