The COVID-19 lockdown of the past two years has caused delays in almost every legalisation movement around the globe as well as causing disruption to many existing cannabis supply chains. In addition, the development of various regulatory schemes has been delayed as governments focused resources on responding to the virus. However, many developments are now proceeding as governments around the world are lifting restrictions and reallocating pandemic-related resources. For example; in Switzerland, the upper house of Parliament was due to approve trial adult-use regulations in March 2020 but this was postponed until September that year due to COVID and now the first trials are expected to be implemented during 2022.
The French trial of medical cannabis was approved in October 2019 and only begun in March 2021 due to successive pandemic-related delays but they are now delivering promising early results. Demonstrating that the issues being faced were common on many continents, Q1 2020 saw delays in the decriminalisation of cannabis in South Africa, as well as the rollout of the medical cannabis scheme in New Zealand. In the US, state and federal legalisation efforts were delayed; for example in September 2020 where the Democrats postponed a vote on the Marijuana Opportunity Reinvestment and Expungement (MORE) Act which would federally decriminalise cannabis until a COVID relief package was passed. Since then of course, the MORE Act has made progress in the new legislative term, and has been joined by other bills such as Sen. Chuck Schumer’s comprehensive CAO act.
The globalisation of the cannabis supply chain has also been slowed, as regulatory agencies were reluctant to send inspectors to production and manufacturing sites abroad during lockdown, meaning many companies could not get the necessary certifications to export to new regions. There are now signs that this bottleneck has been overcome, as in H1 of 2021, Germany received imports from 17 nations including novel sources such as Lesotho, New Zealand and Jamaica.
Cannabis represents one of the most exciting and potentially lucrative growing markets in the world, but it has also experienced growing pains over recent years. Since the beginning of broadscale legalisation of medical and adult-use cannabis over the past two decades, more and more of the roughly 150 million cannabis users have been shifting to purchasing their products legally. This process has massive implications for justice and public health, and also financially. The prospect of the conversion of over $100 billion in black market cannabis sales into legal channels has prompted huge excitement both from the business community and governmental bodies whose tax base could stand to benefit. However, the rise of the new cannabis industry has not been as smooth as some had hoped for as a result of a variety of factors.
The industry has struggled with factors such as overly aggressive expansion plans and a resilient black market which has contributed to a loss of investor confidence; all of which were exacerbated by the effects of the COVID-19 lockdown. Below, we consider the trends in stock market value of cannabis firms compared to the general stock market. Cannabis stock prices are proxied by the Alternative Harvest Fund which holds over US$1.61 billion in a wide range of cannabis stocks from various segments. Vanguard Total Stock Index is used as a comparison, as it holds stocks intended to represent the entire market.
Cannabis stocks vs the general market
Stock markets recovered from dips late in 2018 which were caused by high federal loan rates, a cooling global economy and the Trump-era trade war with China. Markets recover early in 2019 due to reduced Federal loan rates and an initial trade deal between the US and China.
The H2 of 2019 saw a six month bust-cycle for cannabis stocks. Investors withdrew funding for many large startup companies including cannabis firms but also Lyft, WeWork and Slack who had high revenues but were struggling to sketch out a path to profitability. Fundamentals become increasingly important for cannabis businesses, global expansion plans begin to slow. This has caused a massive shift of priority for large cannabis firms from global to local operations. The COVID-19 pandemic caused the steepest decline in general stock market prices in history with cannabis stocks also heavily affected. As discussed on page 38, cannabis legalisation is delayed in several regions and the development of regulatory schemes are stalled. The economic recovery which began in March 2020 was supported by massive government stimulus packages as well as the rapid development of vaccines. Cannabis stocks made a partial recovery.
In December 2020, the UN reschedules cannabis to acknowledge its medical potential. Cannabis stocks received a massive boost during the democratic victories in the US and the legalisation of recreational cannabis in several states. The securing of both the Senate and the House prompted hopes that Federal legislation could be achieved over the coming years. In February 2021, the phenomenon of group action by retail investors organising on Reddit temporarily pushed some cannabis stock prices to 2019 levels. Stock prices are down from the surge seen early in 2021. Interest from retail investor groups wane and, in the US, democratic action on cannabis reform is developing slowly. While it is clear that the cannabis market has not reached anywhere near its full potential value, investors are currently shying away from pouring resources into firms until it becomes clearer who the winners might be.
While there has been a decline in cannabis share prices, capital raises have experienced a massive rebound in 2021, almost reaching heights previously seen in 2019. The majority of capital raised is now going to US cannabis firms, with Canadian capital raises now shrinking compared to their 2019 levels. Cru-The year, 2021, has also been a record one for Mergers and Acquisitions in the cannabis industry, especially with US companies making use of healthy cash positions to establish themselves in the US and international markets.
The average transaction size is increasing, reflecting the increasing number of especially, the amount of capital being raised in the form of debt is increasing much faster than is equity. This is probably due to the declining share price of cannabis firms, the related uncertainty around the date of federal US legislation as well as increasingly attractive terms being offered on debt financing. acquisitions and mergers of large firms such as the mega acquisition of Harvest Health and Recreation by Trulieve in October 2021 for US$2.2 billion.
An increasing amount of M&A activity and capital raises can be seen in the cannabis sectors other than cultivation and retail. The massive influx of capital and M&A activity highlights the increasing importance of ancillary services such as technology, professional services, extraction, distribution, packaging and construction. For example, in December 2020, Weedmaps which offers cannabis technology services and an online marketplace signed a deal to go public for US$579 million and at the time of writing has a market capitalisation of over US$1.6 billion. The online cannabis marketplace Dutchie raised US$350 million in October 2021 to bring their valuation to US$3.75 billion. It is a sign of a maturing industry that ancillary services like these are experiencing such rapid growth.
Impacts of COVID on increasing Consumption
Cannabis, both medical and adult-use was consumed in record quantities over the past two years, exceeding what would be expected from linear projections based on increasing legalisation and normalisation globally.
Combined medical and adult-use sales data from Oregon, Alaska, Colorado and Washington all showed large spikes in sales occurring in the wake of ‘stay at home orders’ in each state. Data from Headset has shown that the increase in demand for adult-use cannabis caused a spike in prices for smokable forms of cannabis in several states, by as much as 15% across California, Oregon, Washington and Nevada. Similar results from regions such as Colombia and Australia indicate that the trend of increased cannabis use during the pandemic was a global phenomenon.
It is likely that these effects were temporary, as sales e.g. in Colorado have since returned to their pre-pandemic trajectories. However, the effects of normalisation of cannabis consumption, both in terms of medical and adult-use will probably benefit the industry moving forward.