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2021 was a period of strong growth for the global cannabis market and we expect the cannabis sector to build on its success in 2022.
During the last year, the cannabis sector was highlighted by several key themes and we expect these themes to play an important role with how the sector advances and grows in 2022 and beyond. Today, we are going to highlight 5 themes that are expected to have an impact on the growth of the sector and believe our reader should be aware of this.
Additional countries in the European Union (EU) will legalize some form of cannabis
From Germany to Malta, the legal landscape of the cannabis sector has been improving in the EU and we are favorable on the long-term opportunity that is associated with the region. With a population that is considerably higher than North America, the EU represents an attractive long-term growth opportunity.
Over the weekend, Malta President George Vella signed the legislation to legalize recreational cannabis into law. Although the country will not have a commercial market, non-profit cooperatives can cultivate cannabis and distribute it to members. The law allows the clubs to have up to 500 members who can receive up to seven grams per day or up to 50 grams per month.
In 2022, we will be highly focused on the German cannabis market. Last month, the country held an election that resulted in a change in leadership which is expected to be beneficial for the cannabis industry. Germany is expected to be the largest cannabis market in the EU and we are bullish on the near and long-term growth prospects that are associated with it.
States that started to allow for or will allow for the sale of recreational cannabis
Based on our analysis of states that recently started to allow for the sales of recreational cannabis, the amount of time that it takes for a recreational cannabis market to ramp up has decreased and we find this to be an important trend
We attribute the quicker ramp-up period to states’ watching how other recreational markets perform and modifying the program based on challenges that other markets have faced. For example, Oregon and Washington state were early movers on the recreational cannabis market and these states had major issues with saturation. As a result of these issues, many companies could not produce cannabis for as low as its competitors and many operators went out of business as a result.
If you look at states like Illinois and Michigan, you will notice that the states took action to prevent the type of saturation that was witnessed in Oregon and Washington state. So far, Illinois and Michigan have been some of the best performing recreational cannabis markets in the US and we believe the states learned from mistakes that were made in other markets.
Over the next year, we expect states that are entering year two of recreational cannabis sales to record strong growth and will monitor how this markets continue to evolve. We believe that new recreational markets will follow a strategy that is similar to Illinois and Michigan and expect the success of these markets to serve as a catalyst for the entire US industry.
The cost of debt capital for large-scale operators is expected to continue to decrease
During the last few years, we have seen drastic changes on the capital markets side of the cannabis industry. The most important change is related to the shift in the type of capital that is being raised by operators. From 2015 to 2019, most cannabis companies were selling equity through the form of secondary private placements to raise capital.
In 2019 and 2020, the trend started to shift toward debt capital and this is trend that our readers should be aware of. Canadian Licensed Producers (LPs) have been highly impacted by the change and the higher cost of capital that is associated with debt when compared to equity.
In the US, the cannabis industry has also seen a similar shift in the type of capital that is raised by companies. A few months ago, we read an article from MJBizDaily that analyzed recent debt financings for large and small US multi-state operators (MSOs). The data showed that smaller operators have been offered debt capital that have higher interest rates than larger-scale operators. We find the trend to be especially significant when the debt financing is above $50 million and our readers need to be aware of the trend.
An increase in the amount of merger and acquisition (M&A) activity
Although the average size (from a $ standpoint) of acquisitions in the cannabis industry has decreased in 2021 when compared to prior years, we have noticed an uptick in the number of transactions.
The strategy behind the acquisition trend has also changed and operators seem to be more focused on purchasing assets that will make them more profitable or provide leverage to a certain aspect of the cannabis value chain.
Earlier this year, Jazz Pharmaceuticals’ (Nasdaq: JAZZ) acquired GW Pharmaceuticals for more than $7 billion. The transaction was the largest acquisition in the history of the cannabis industry and we were favorable on this development when it was announced. We are not surprised by the price tag that was associated with GW and will monitor how Jazz Pharmaceuticals benefits from it.
In 2022, we expect the acquisition trend to continue and believe that operators will continue to focus on purchasing businesses that will prove to be immediately accretive. We expect smaller cannabis companies to be the greatest beneficiaries of the current acquisition trend and will monitor how this aspect of the industry evolves in 2022.
How pro-cannabis legislation advances in the US congress or Senate
During the last month, the US cannabis sector has been trading in a volatile pattern. We attribute the volatility to the SAFE Banking Act not being included in the National Defense Authorization Act (NDAA).
In 2022, we expect the regulatory environment for the US cannabis industry to improve and believe this is a key potential catalyst for the sector. Cannabis is one of the few topic with bi-partisan support in the US and we find this to be significant.
Although there is significant support for the legalization of cannabis in the US, many members of congress and the senate have different opinions on the type of regulation that should be passed. This disconnect has temporarily blocked the path to legalization in the US and this is a trend that we hope changes in 2022. We expect any position legislation developments in the US to be a major catalyst for the cannabis sector and our readers should be aware of this.
If you are interested in learning more about key trends for the cannabis industry in 2022, please send an email to support@technical420.com with the subject “Cannabis Industry Trends For 2022” to be added to our distribution list.
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