Sunday, September 19

Marijuana: The Pitfalls of Legal Cannabis in Canada | Business

A worker at a cannabis plantation in Ontario this past January.
A worker at a cannabis plantation in Ontario this past January.Annie Sakkab / Bloomberg

In October 2018, the Justin Trudeau government legalized recreational marijuana in Canada, the second country, after Uruguay, to adopt this measure (the medicinal use has been authorized since 2001). After two and a half years of this national framework in place, sales have increased considerably, although the cannabis industry with permits to operate still faces a number of challenges.

The country’s statistical service published in December that 54% of consumers buy the product through legal channels (it was 37% a year earlier). Legal marijuana sales in 2020 were about 2.6 billion Canadian dollars (1.76 billion euros); with an increase of 120% since 2019. Two factors are behind. Mental Health Research Canada speaks of an increase in consumption of 29%. The anxiety and stress caused by COVID-19 have been fertile ground. However, the legal market has gained presence due to a greater number of authorized stores, fewer supply problems, increased quality and more competitive prices. Likewise, in December 2019, edibles, resins and other cannabis derivatives arrived on legal shelves.

Authorized sales have increased, but not at the same rate across Canada. Germain Belzile, a researcher at the Montreal Economic Institute, speaks of the fact that “Quebec and the maritime provinces [como Nueva Escocia y Nuevo Brunswick] they created state sales monopolies, unlike the rest of the country. The supply is carried out by private firms, but state stores are the only customer in those provinces. In addition, the operating costs are high and the branches were few at the beginning. Long months went by before they stopped suffering losses ”. Between 2019 and 2020, legal sales in Ontario increased 168%; in Manitoba, 108%. In the same period, they grew 66% in Quebec and 23% in Nova Scotia. It should be noted that one of the mandates of state cannabis sales companies is to invest all their profits in prevention and research.

Legal marijuana contributed some 5,800 million Canadian dollars (about 3,900 million euros) to the country’s GDP in January 2020. A year later, the figure reached 11,032 million (7,400 million euros). In 2017, when only the medicinal use was authorized, Ottawa had issued 55 production licenses. Currently, the figure is 499. The federal government paid 12 million euros in taxes in the first year of the legalization and estimates that there will be 148 million in 2023. The provinces enter 75% of the sales taxes and the federal treasury the 25% remaining.

Despite consumers increasingly turning to legal stores, licensed producers continue to face turbulent scenarios. Canopy Growth, the most important firm in the industry, announced in February that it expects to be profitable in the second half of 2022. Cronos and OrganiGram could achieve this in 2023. Sabrina Williams, executive director of the Quebec Association of the cannabis industry, says she is in disagreement with several points of legalization. “Marketing and packaging restrictions make it difficult to stand out from the competition. Special taxes and different permits affect our accounts. Exemptions should have been foreseen in the first years. It is difficult to access financing. We have problems with the banking system, especially when you have been operating for a short time. Not all companies looked for money on the stock market. There are considerable barriers and the black market benefits, ”he says.

Williams adds: “There is a lot of illegal marijuana circulating on the internet. There are also people with medical cultivation licenses, but who sell large quantities to third parties. There has not been a major effort to attack these problems that damage the legal market ”. Belzile believes that the ban does not work, but thinks that the market needs to be more competitive. “We should simplify regulations that add costs, think about a more open legal market.”

A lower-than-expected demand in the first two years and investments in infrastructure are other factors that have made a dent in the books of legal producers. As a consequence, they have had to lay off a good part of their employees (around 3,500 between January and June 2020). The Canadian Ministry of Health reported in October that producers had 1,100 tons of cannabis in storage.

The performance of companies on the stock market has also disappointed. Weeks before the entry into force of the legalization, the shares of several companies soared; the frenzy in those moments was doing its thing. However, the titles were losing value. In the second week of February, Canopy Growth’s stock hit its best record in 18 months, but is trading at C $ 40, a far cry from its 2019 peak of 67. Other companies – such as Aurora and Tilray – are also much higher. far from their highs of that year, although they are now experiencing a certain rebound.

Small investors

For Rishi Malkani, Deloitte analyst on the Canadian cannabis market, these small increases had to do with the names of some of these companies appearing on the WallStreetbets forum on Reddit, an issue that encouraged small investors, as happened with Gamestop. On the other hand, John Zamparo, an analyst at CIBC World Markets, pointed out in a report that the movement has to do with the fact that “the Joe Biden Administration is expected to legalize cannabis at the federal level.” It is now decriminalized in 15 states. The most widespread opinion is that adaptation times are still expected in the sector accompanied by stock market volatility. The long-awaited US legalization will hardly be a reality in the short term, although some companies are already making a move on opportunities abroad. Not only in the neighboring country; also in Europe.

In December, Tilray and Aphria announced their merger. Joint annual sales are estimated to be around 560 million euros. “Aphria needed to grow outside of Canada, and the merger with Tilray is the best answer because it has operations in the United States and great international exposure,” said Irwin Simon, president of the new company. In addition to the United States, managers highlighted the growth opportunities in the medicinal herb market in Germany and the fact that Tilray has a license to operate in Portugal.

On February 16, Hexo announced the purchase of Zenabis Global; a settlement for about 159 million. “Hexo’s growth strategy includes expanding our global presence, and this acquisition is an important step in that direction,” said Sébastien St-Louis, its CEO. Hexo already has a subsidiary in the United States, but seeks to build on the Zenabis Global alliances in Europe. From the association of companies in the industry, Sabrina Williams believes that sooner or later the opening in the United States and Europe will come: “Canadian producers, given our experience, should be better prepared. But the obstacles we face are preventing it ”.

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