Marijuana Stocks Have a Rough Week, Down 6%

Global marijuana stocks are now down 6% since the second reading of the marijuana bill in the Canadian Senate compared to the TSX and S&P (both up 1% and 2% respectively).

Marijuana stocks have been in the doldrums since their January highs and recent capacity announcements and positive momentum on the Canada legalization bill have not pushed the stocks into a new uptrend.

As we have been saying here at Grizzle we think retail prices will only hold up through the end of the year at most, so if the stocks can’t outperform while legal pricing is getting better we see risks to stock prices once producer capacity really ramps up in 2019 and prices fall.


New Cannabis Ventures

A Quick Analysis of Selling Prices

We were curious to see what has been happening to the selling price of a dry gram of marijuana in the last year. According to government data, dry marijuana prices in the legal and black market fell 8% in 2017.

We wanted to see if this same trend applies to the legal market only, so we pulled the last 12 months of retail prices for the top 8 producers. Results were all over the place:

  • Aurora increased selling prices significantly as they worked out the kinks from selling on an industrial scale.
  • Canntrust and Canopy Growth were able to increase prices due to a shortage of medical supply among patients and significant patient growth.
  • MedReleaf and Hydropothecary sell premium strains and were forced to introduce lower priced products or decrease the selling price on legacy brands to compete as more producers entered the market.
  • Aphria increased wholesale volumes in the last 12 months which pushed down their average revenue per gram.

Bottom Line: Legal prices are still stable as volumes are not currently enough to supply the coming legal demand. This trend could continue into the first few months of legalization. When legal output ramps up in 2019, it’s likely retail prices will start to fall at least 8% a year, possibly more, based on our forecasts of supply exceeding demand.

Note: This chart doesn’t include oil sales, only dry flower.

Change in the Selling Price of Dry Marijuana in the Last 12 Months

Company Filings

The Future of the Legal Market is in Extracts

Industry wide, oils and other extract-based products are 50% of sales and increasing.

Industry wide, oils and other extract-based products are 50% of sales and increasing. Many consumers want a smokeless option to consume marijuana and are willing to pay more to get it.

From the producers’ point of view the more marijuana flower is processed the higher the retail price, so producers have every incentive to shift from selling raw marijuana to more complex products.

Revenue per gram for different marijuana products:

Raw Flower: $8.00/gram

Raw Oil: $25.00/gram

Edibles: $45.00/gram

Spray: $55.00/gram

As revenue per gram for dried flower falls, growing extract sales will help stem the slide in producers’ revenue per gram. Longer term every producer will offer a full range of extracts and medicinal products causing prices for even these products to fall as competition increases.

The chart below shows the revenue weighting to oil sales for the seven largest producers. Higher is better.

% of Sales from Oils

Grizzle Estimates

Germany Scraps Plan to Award Cultivation Licenses — Will Start Tender Process All Over Again

The Federal Institute for Drugs and Medical Devices (BfArM) was banned by the courts from awarding cultivation licenses for now. The government had planned to allow winning applicants to grow 6,600 kg by 2022 but will now have to restart the tender process which could push the licensing out by 6-12 months.

What This Means for Canada

No cultivation licenses in Germany means Canada will still be the major provider of marijuana to German citizens.
German medical marijuana demand far exceeds the amount that was going to be awarded in the tender so this ruling is only incrementally positive for Canadian exports (an extra 6,600 kg of demand).

We worry that the licensing delay shows regulatory change will be slower than the market expects. It’s still time consuming and difficult for a German patient to be approved for medical marijuana. Without easier access to medical marijuana, demand will not grow as quickly in Germany as it has in Canada.


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