There was no way we could have envisioned what 2020 had in store for us when we made these predictions last year. The pandemic touched every industry, and although cannabis fared well, our predictions did not. Our hope for splashy acquisitions was quelled by a significant market downturn, and our expectations for a global green wave appear to have been optimistic. These predictions could be defined as bold, but we don’t think it’s unrealistic to think that many of these will come true over the next two years. As the stigma is erased and major markets like the U.S. continue to legalize, we think we’ll be able to look back on predictions like these and say “hey, maybe we were just a year or two too early.”
Despite a strong year for the U.S. cannabis sector, this prediction didn’t quite materialize. The top five MSOs saw their market caps increase alongside optimism surrounding eventual federal legalizations, and they were joined by a trio of new companies. TerrAscend, a Canopy Rivers portfolio company, saw its market eclipse $1 billion at the start of December after seeing its share price climb from $2.64 on January 1 to $12.38 at market close on December 11. Planet 13 and Columbia Care also eclipsed $1 billion, while smaller MSOs Ayr Strategies, Jushi, and 4Front Ventures increased their public market caps significantly as well.
Result: Half points
Taken as a whole, the cannabis industry didn’t suffer too many blows in 2020. But one punch was landed by Germany when its federal parliament rejected the legalization of a highly regulated recreational cannabis market. Chancellor Angela Merkel’s party opposes legalization, so any passage would require agreement among the coalition parties that make up a majority. These parties mostly favour legalization, but not on any of the specifics. With this level of disagreement in the current parliament, we’ll likely have to wait until the next federal election for any meaningful plans for Canadian-style recreational legalization in Germany.
Despite the waves made by some early tobacco-cannabis deals, linkages between the two sectors came to a halt in 2020. Even as vapes continued to scoop up market share among cannabis 2.0 products, these products were from cannabis brands. It remains unclear whether big tobacco companies see any value in Canada’s still-growing cannabis industry, or whether they’re holding out for eventual U.S. legalization. Of course, there’s also the possibility the two sectors remain separate in the long run and the early deals we saw were more red herrings than a sign of things to come.
Cannabis financing was already slowing down before an economically tumultuous 2020. Data from Pitchbook indicates that there were 48 cannabis go-public transactions in 2018 and a further 38 in 2019. In 2020, that number dropped to 33. This is the lowest number since 13 in 2017, a year before cannabis gained legal status in Canada. Even as economies recover, we expect that cannabis go-public transactions will remain low. In many ways, early cannabis entrants mirrored early tech companies, and we believe that, like tech, many will opt to stay private longer following the initial rush to go public.
To say we were bullish on vapes going into 2020 is an understatement. And we’re not the only ones. Data from Headset indicates dried flower remains the dominant category across all North American recreational markets. Vapes, however, are the best selling cannabis 2.0 product in many legal jurisdictions.
Safety concerns appear to be behind us as licensed producers and brands have released effective, consistent, and safe products that differentiated their offering from the grey market and e-cigarette products that put a stain on the category. And while the sales cycles for vapes may ebb and flow due to the longevity of products, we believe that they will maintain this popularity.
We were close. After Canada legalized cannabis, many assumed that other countries would quickly follow. Mexico is a perfect example of how legalization both takes time, and will also take a back seat to more pressing issues. Governmental priorities understandably shifted in 2020 as governments delayed or in some cases dropped cannabis-related agendas to respond to the pandemic and other high priority issues on their plates.
Mexico’s legalization initiative progressed towards the end of the year, though. After the country’s top court ruled that prohibiting cannabis is unconstitutional, it gave lawmakers an August 2019 deadline to draft a bill. This was extended to April 2020 and then again to December 2020. In November, Mexico’s senate finally approved a bill. Now, the bill must get approval from the country’s lower chamber and then the president.
Result: Half points. The path to legalization progressed, but just not at the pace we had hoped.
The FDA provided guidance throughout calendar 2020 with respect to what it deemed to be non-compliant CBD products, but did not create a cohesive framework governing product claims and marketing guidelines for products containing CBD. The guidance trickled out, but the FDA, like many government arms, was pulled in new directions as the pandemic surged. We remain hopeful that the wave allowing for certainty in how products containing CBD can be formulated, marketed and sold is on deck for 2021.
As with many sectors, financial activity slowed down a bit in 2020. Public offerings screeched to a halt, venture capital funding dried up, and acquisitions were few and far between. Add to the mix the precarious state of cannabis at the federal level in the United States and it meant that the ancillary companies were not the acquisition targets we thought they would be. As de-stigmatization becomes the norm, we anticipate that acquisitions in the cannabis space also become more commonplace, including big tech’s buyouts of specialized canna-tech companies.
Result: Incorrect. But with LeafLink raising $40 million from Founders Fund, a more traditional technology venture capital firm, we believe that this prediction is on the horizon.
The second of our two predictions around acquisition activity in the cannabis space also came up short. It appears that only full federal legalization in the U.S. will unlock the major acquisition opportunities for cannabis start-ups. And while our prediction didn’t come true this year, there was one splashy acquisition that went in the opposite direction. Aphria, a Canadian licensed producer, agreed to buy SweetWater Brewing Company, a Georgia-based brewery that Aphria hopes will unlock the company’s potential in the U.S. and cannabis beverage markets.
While 2020 was a watershed year for U.S. cannabis, it wasn’t helped along by the federal government. The two chambers struggled to agree on a pandemic relief bill, much less a way forward on cannabis legalization. The House of Representatives eventually passed the MORE Act in early December, and while a good sign for the industry, it’s also largely symbolic. We’re encouraged by the progress at the state-level though, and there is enough opportunity waiting to be unlocked to carry the U.S.’s green wave into 2021.
Final Score: 4.5/10
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.
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