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Marijuana Stocks Jump on Friday After Successful Reading of Canada’s Legalization Bill, but Still Down for the Week

Global marijuana stocks got a late week pop from the successful second reading in the Senate of Canada’s retail legalization bill C-45.

The bill only needs to be approved one more time during the third reading on June 7th and Canada will officially be the first country to legalize recreational marijuana use. Even with this good news, stocks were down 4% for the week following the global stock market lower driven by fears of a coming global trade war.

WEEKLY PERFORMANCE OF THE TOP 75 MARIJUANA COMPANIES

New Cannabis Ventures

Canada Releases Restrictive Packaging Guidelines for Retail Marijuana

Grizzle released a report on Friday detailing the government’s retail packaging guidelines.

Bottom line: If you are a producer looking to set your product apart from competitors, good luck.

Producers have very little room on packaging for branding or to explain their product to consumers. We worry that without differentiated branding a rational consumer will buy the lower priced option leading to a race to the bottom for prices.

Legal Producer Tilray Forms First Strategic Partnership With a Major Pharmaceutical Company

Tilray signed a letter of intent with Sandoz Canada, the Canadian subsidiary of Novartis AG, a global healthcare giant.

Tilray will supply the raw materials and rely on the medical manufacturing expertise of Sandoz to create marijuana products such as patches, gels, sprays and tablets for sale to Canadian hospitals and pharmacies.

Sandoz did not make an equity investment into Tilray so the deal will likely be structured as a revenue split on each sale.

What This Means for Canada

The more processing you do to the marijuana flower the higher your margin in 2018. Marijuana edibles can be sold for $20-$50 per gram compared to raw flower at only $8/gram.
As the industry matures, sales will transition away from dried marijuana flower to other means of consumption. In the US a steady increase in demand for edible products, over the raw plant means that edibles now command more than 50% of sales in many states.

Margins are much higher for pills and edibles than flower, but as more companies get into the business of making edibles, pills, creams, patches and sprays margins will fall just like we are seeing with dried flower.

Canadian Producers Continue to Sign Export Agreements

Marathon Global, a private Canada grower and MedReleaf, a publicly traded grower, signed additional export deals to send Canada grown marijuana to Europe. Neither deal mentioned the volumes involved which means they were likely small.

Germany seems to be the big prize for the Canada growers with most export and international expansion deals focusing on servicing this market. Demand in Germany is growing rapidly, but with a majority of the population against legalization compared to widespread support in Canada, recreational marijuana is likely years away in Europe.

Gallup, Ipsos, Forsa, Roy Morgan Research, Australian National University

What This Means for Canada

Without enough demand from Europe or elsewhere, wholesale and retail prices in Canada could fall 50%+ from where they are today.
It is positive to see growers in Canada continue to try and find markets for their supply, however most of the deals being signed are simply short term, small volume export agreements that will neither increase their long term capacity or provide a big enough outlet to absorb excess supply in Canada.

As we mentioned in our Marijuana Export Mirage report, Canada could be oversupplied by 850,000 kg in 3 years which would require demand in Europe to grow twice as fast as demand growth in Canada leading up to legalization.

READ THE MARIJUANA EXPORT MIRAGE FOR AN IN DEPTH REPORT ON THE STATE OF DEMAND FOR MEDICAL MARIJUANA OUTSIDE OF CANADA

About Author

Scott Willis

Scott has over 15 years of institutional investment management experience analyzing both debt and equity securities. He has held senior investment research roles at Credit Suisse, and TD Asset Management. His core areas of investment coverage at Grizzle include marijuana, energy and technology. Scott is a CFA charterholder and has been featured on Bloomberg, CBC, CNBC and Macleans.

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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.