10 Predictions for 2020 in Cannabis

A couple weeks ago, I shared the results of my 2019 predictions for the cannabis industry. While I didn’t make these public last year, I’m ready to share this year’s predictions. And why not? The way I see it, there’s a lot to look forward to in cannabis this year, from new products and changing regulations to an overall maturing of the market. So here are my ten predictions for the cannabis industry in 2020.

 

1. Five new US multi-state operators (MSO) will exceed US$1B in market cap

Throughout 2019, Canadian cannabis cultivators represented some of the largest companies in the sector. Canopy Growth remained the highest value company, closing out the year with a market cap in the US$7B range, while Aurora and Aphria, among others, eclipsed US$1B in market cap. However, only three US MSOs saw market caps climb north of US$1B during 2019: Curaleaf, Green Thumb Industries, and Trulieve.

With state after state legalizing medical and adult-use cannabis, there are still growth opportunities in the US. Illinois legalized as the calendar turned over, New Jersey has a ballot referendum scheduled for 2020, and an increasing number of state governments have recognized the need to modernize their cannabis policies. As the number of legalized states adds up, I think an increasing number of US MSOs will add revenue and watch their valuations climb.

2. Germany will grow quickly and make strides to fully legalize cannabis, following a framework similar to Canada

I’m predicting that the German medical cannabis market will double in size this year, with a bold bonus prediction that we could see the legalization of the adult-use market in Germany as early as 2023.

Market makers and armchair pundits have shared lofty expectations for the European cannabis market in 2020. While I remain optimistic about Europe’s market development, I think Germany is ahead of its European counterparts in almost every respect, from the steady growth of medical cannabis users to its robust regulatory scheme governing domestic cultivation and import. And, with the first domestically cultivated cannabis expected to hit the market in 2020, I think Germany will grow its patient base and lay the groundwork for a similar legalization approach to what we saw in Canada.

3. Three of the “big six” tobacco companies will launch cannabis vape products starting in Canada

Last year I correctly predicted that big tobacco would foray into cannabis with a billion dollar deal. And I will go further to say that I think we’ll see more from them in this space. I expect the cannabis vape market to be one of the largest selling categories in Canada in 2020. It’s likely that we’ll see tobacco players launching their own vape products to compete with those already on the market.

4. 2020 will have the fewest cannabis go-public transactions since 2017

The cannabis capital markets have been nothing short of volatile in the past year. The Horizons Marijuana Life Sciences Index ETF reached an annual high at C$23.65 per share on March 19, 2019 only to drop 63% to C$8.75 by December 31, 2019. The ability for cannabis companies to access capital through the public markets has decreased significantly. Missed earnings and governance issues have led to a loss of confidence in the markets, leaving many companies cash-strapped and unable to raise funds. In 2020, I expect that cannabis companies will aim to stay private longer, giving them the runway to build out a solid path to profitability before considering going public.

5. Vaping rollout delays will alleviate and cannabis vapes will end the year as a top selling consumer product

At this point, illicit cannabis vaping products have been the driving force behind vape-related illnesses. We haven’t seen definitive clinical evidence linking legal cannabis-based vaping to the recent surge of illnesses. Nevertheless, there’s a need to mitigate the risk and impact vaping has on youth. Banning flavoured products is a good first step, but I think the ultimate course correction will come from displacing the black market supply of low quality and untested products. With many licensed producers manufacturing vapes that meet rigorous Health Canada product safety standards, I see no reason why bans and strict regulations will not be lifted. Once this happens, I think vapes will be a top selling consumer product in Canada by the end of 2020.

6. Mexico will adopt legislation that legalizes recreational cannabis in the first half of 2020

What many thought would happen in November 2019 may not happen until the first half of this year. Mexican lawmakers have until April 30, 2020 to approve groundbreaking legislation that would have Mexico become the world’s largest legal recreational cannabis market based on population. At this point, it seems likely to pass. After all, medical cannabis has been legal in Mexico since 2017, and the country’s highest court has ruled five times that banning both cannabis possession and recreational use is unconstitutional. While the details are still murky and amendments are likely, I think the opportunity to empower low income communities, build local businesses, and push out the black market will be too alluring to pass up. By this time next year, I predict the US will be flanked by two legal adult-use markets.

7. The US FDA will release rules and regulations surrounding the ingredients, packaging, and marketing of hemp-derived CBD products

To date, the US FDA has not approved a marketing application for the treatment of any disease or condition using cannabis. It has, however, approved one cannabis-derived and three cannabis-related drug products. And right now, there are approximately 800 cannabis and hemp clinical trials taking place. As the market for CBD products grows, I expect that the US FDA will finally flex their power to introduce rules and regulations around the ingredients, packaging, and marketing of hemp-derived CBD products.

I think this would be positive for the industry. In the foreseeable future, cannabis and hemp derived-products are expected to be part of a regulated market. I think regulations will decrease some of the operating risk (specifically in the US), while adding credibility to the cannabis market as a whole.

8. Big tech will make an acquisition in the cannabis space

There’s no question that big tech is eyeing the cannabis space. Our team even recently wrote about it. Shopify has expanded its cannabis e-commerce platform into the US CBD market, Square is launching a payment processing program for CBD sellers, and various cannabis tech companies are using NetSuite’s ERP software for their day-to-day operations. With more and more US states legalizing medical and adult-use cannabis, I expect that a big tech company will acquire a cannabis ancillary tech company in 2020.

9. A major CPG player will acquire a CBD beverage company

In line with my previous prediction, our discussions with major CPG brands show that they are also evaluating cannabis acquisition opportunities. Led by CBD products, the cannabis beverage space saw many new entrants in 2019. According to Cowen, the bottled water category accounted for 65% of 2019 CBD sales, energy drinks held 20%, and beer accounted for 15%. US CBD brands such as Sweet Reason, Recess and Vybes have all carved out their own value proposition and built brand loyalty. New brands are emerging, especially in Canada, and as regulations around marketing CBD products evolve, I expect that a mainstream CPG company will take the plunge into cannabis via a CBD beverage acquisition.

10. Political gridlock in an election year will keep the status of cannabis precarious on the US federal level in 2020

We’re still playing the waiting game when it comes to US federal legalization. While many polls show that the majority of Americans support cannabis legalization, I don’t think the legislative branch will federally legalize cannabis in 2020. However, I do think the Republican-controlled Senate and Democratic-controlled House could collaborate to liberalize federal laws adjacent to legalization to support and legitimize businesses operating in states where cannabis is legal. This could mean that a California-based MSO could sign-on with a national bank or list on the NASDAQ or NYSE, but it still wouldn’t be able to do business in states that deem cannabis illegal. While this may seem like a bandage solution, I believe it would be a step in the right direction that would open up a lot of value for cannabis companies currently operating out of the US.

That’s a wrap on my 2020 cannabis predictions. If you have some of your own, feel free to share in the comments, or send them to us on Twitter or LinkedIn. I’ll check back on these in December 2020 to see how I fared.

This is not an offer to sell or a recommendation to trade in any securities. This information is provided as of the date hereof. This document contains data obtained from third parties that Canopy Rivers has not independently verified. This document also contains forward-looking information within the meaning of Canadian securities law, which is based on certain assumptions. While management believes these assumptions are reasonable based on information available as of the current date, they may prove to be incorrect. Many assumptions are based on factors outside of Canopy Rivers’ control and actual results may differ materially from current expectations. Forward-looking information involves risks, including, but not limited to, the risk factors set out in Canopy Rivers’ most recent Management’s Discussion and Analysis and Annual Information Form. You should not place undue reliance on forward-looking information. Except as required by applicable law, Canopy Rivers assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances.