The Law Giveth and the Law Taketh Away

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

The cannabis industry has been full of surprises in its short history, many of them caused by the unintended consequences of regulations. Some were positive surprises: During the 2020 second quarter COVID-19-lockdowns most regulators somewhat surprisingly decreed cannabis sales an essential service without much discussion. Many even allowed curbside pick-up and delivery for the first time to allow medical patients - and even adults coping with anxiety – safe access to their medication during the pandemic. Cannabis sales continued to boom while many sectors shrank.

The downside surprises have been more along the lines of unrealistic market-performance expectations dashed, in some cases repeatedly. In an industry that’s moving a $200-billion worldwide consumer product category into legal channels for the first time in modern history it’s easy to develop unrealistic expectations and hold on to them too long. As the industry grows in experience around the world it can expect fewer surprises, positive or negative, from unexpected impacts of regulations.

Here’s some of the lessons learned so far:

Lessons From Canada

There is such a thing as too much cannabis. In the run-up to the 4Q 2018 launch of adult-use sales, cash-rich licensed producers (LPs) built up 66 metric tons of dried flower inventory despite the Canadian federal government leaving the allowed number of stores in the hands of clearly recalcitrant provincial regulators. With just a handful of stores open by year’s end, only about 26 tons sold that quarter. Even so, few LPs cut back on their production levels. Monthly demand for dried flower for all uses had grown to about 30 tons by the end of 2020, thanks to federal regulators allowing edibles and concentrates late in 2019, but by then unsold inventories had exploded to a nerve-jangling 1,000-plus tons.

Lessons From US States

No other state does medical cannabis like the Sooner State. Oklahoma allows doctors to recommend cannabis as they see fit, set its retail license fees low with few restrictions, and now finds itself #1 in percentage of the population with medical cards, #2 in dispensaries per capita, and in the top 10 states in cannabis employment. The “Oklahoma Surprise” leaves two questions: 1) which companies will win the competitive battle created by such liberal licensing, and 2) will regulators in conservative states seeking post-pandemic economic benefits and cannabis tax revenue take heed of Oklahoma’s outperformance when setting their own rules?

Lessons From Around the World

No other country does medical cannabis like the USA. America was the driving force behind the United Nation’s Single Convention on Narcotic Drugs in 1961 but is now the country least in compliance with it. Canada’s tightly controlled mail-order medical system is as permissive as it gets outside the US. In the rest of the world pharmacies alone are allowed to dispense products that meet stringent standards common to the pharmaceutical market. The resulting disappointing market growth in Europe and elsewhere is another contributor to Canadian LP’s overabundance of inventory and continued operating losses. International revenue growth at those LPs with the biggest bets on the export market (Canopy Growth CGC, Tilray TLRY and Aurora ACB) has remained well below levels expected when Germany legalized medical sales in 2017.

Nobody is rushing to follow Canada’s lead into widespread adult-use commercialization: Uruguay gets credit for being the first to legalize adult-use, but Canada was the first - and still only - country to fling open the doors of dispensaries to all grown-ups. Almost three years later it now seems likely to keep that distinction for some time, at least among sizable G20 economies. Courts in Mexico and South Africa have recognized cannabis consumption as a human right, but both governments have slow-walked the creation of regulatory regimes that would allow commercial activity. Ruling parties in Germany and other developing medical markets remain opposed to allowing commercial access for all adults.

The Bottom Line

If it sounds like all these lessons add up to the US and Canada dominating legal cannabis spending for the foreseeable future, you’re right: the two countries were 98% of $21.7-billion market in 2020 and will still be 91% of $55.2-billion market in 2025, according to Brightfield Group projections. But for those who do their homework and avoid unrealistic expectations, there are opportunities in every corner of a worldwide market likely to grow at 20%-plus compound annual rates through 2025 and beyond. That kind of overall market growth is a given. For companies, success will go to those who understand how regulations impact revenue and profit growth, and are ready to move quickly when the rules change.

Start your due-diligence research here: The regulatory issues driving growth (or hindering it) in markets in the US, Canada and around the world are comprehensively outlined in the “FTI Consulting/Global Go Annual Report on Cannabis Law & Markets”, a 400-plus page report just published by Global Go Analytics. Click here for more information.

Click here to sign up for the August 31, 2021 webinar “The Ultimate Global Cannabis Playbook” featuring the industry-leading lawyers and analysts who wrote the Law & Markets report. After September 3, you can listen to a replay of the webcast by clicking here.

Photo by Matteo Paganelli on Unsplash

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.