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The cannabis industry is still developing and needs more time to see its projected potential come to life. What were some of the most important tailwinds in 2022 that affected the industry and will lay strong foundations in the years to come? Many experts seem to agree that President Biden’s signature on the marijuana research bill is among the most important.
The Irony Of Cannabis Scheduling
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“On the federal level, it appears that the most meaningful regulatory progress was President Biden passing the Medical Marijuana and Cannabidiol Research Expansion Act,” Patrick Rea, managing director of what is thought to be the longest-running cannabis investment fund, Poseidon Asset Management told Benzinga.
Tim Seymour, director and founder of Amplify Seymour Cannabis ETFs (ARCA:CNBS) agreed. “The research bill was the most meaningful cannabis regulatory progress point in 2022. It is unanimous, bi-partisan and an opportunity to change the science conversation.”
It is obvious to anyone involved in the space that the dearth of cannabis research due to its status as a Schedule 1 drug has been a constant contributor to the industry’s slow progress. Here’s the irony: without authoritative research, it is nearly impossible to prove that cannabis has medical value and low abuse potential which would remove it from the Schedule 1 list of substances. This DEA classification, meanwhile, has prevented cannabis from being researched by scientists.
New Markets Also Important
Other industry experts were not so focused on the research bill, but rather highlighted the importance of new adult-use markets. For example, Brain Vicente, attorney, marijuana rights advocate and founding member of national cannabis law firm Vicente Sederberg, LLC, told Benzinga that one of the most significant regulatory steps made in 2022 was the launch of adult-use shops in New Jersey.
“This action created legal access to cannabis for millions of New Jersey residents and also created pressure on New York and other surrounding states to act similarly.”
Dan Muller, founder & CEO of Aeropay’s cannabis payments platform seems to share that view. “The legalization of cannabis in the state of New York cannot go unnoticed,” Muller told Benzinga. “With it, you’ll start to see mainstream companies including transportation, financial services, banking, accounting, and more enter the cannabis space.”
And while many in the space also agree that one of the biggest fiascos in the industry was the failure of the SAFE Banking Act, Muller isn’t too worried about that. People often confuse the marijuana banking bill with federal legalization, he says but “today, there are some very established and diligent financial institutions currently serving the cannabis industry and more entering the market every day.”
While this is true, we can’t underestimate the challenges facing the industry due to the lack of financial services. James Hagedorn, CEO of lawn care giant Scotts Miracle-Gro (NYSE: SMG) recently said on Fox Business that ”this is about dysfunction in banking, people today have to pay taxes on legal businesses with duffel bags of cash and counting machines like Scarface.”
In Washington state, for example, armed robberies of marijuana shops reached an all-time high as too much cash on hand makes workers targets.
“I’m sure I can speak for the entire industry when I say we are disappointed in the failure of Congress to pass SAFE Banking,” Jen Drake, COO of Ayr Wellness (OTCQX: AYRWF) told us. She added that “the SAFE Banking Act is a critical piece of incremental legislation for the safety and longevity of patients, customers, employees, and operators both big & small. Specifically with smaller operators, SAFE has the potential to make a huge difference in the availability of capital. The overwhelming consensus of the industry is to continue to fight for reform, regardless of size.”
According to Seymour, Chuck Schumer’s failure to move the SAFE Act forward will continue to impact the industry as one of the greatest challenges for operators in addition to the lack of access to capital and persistence of illicit markets.
Doubtless, the lack of banking access will continue to impact the investing side of the industry. Poseidon’s Rea cannabis’ federally illegal status over the last several years has already “muted the interest of angel investors – a group that supported the launch of the legal industry since 2015.”
What Else Can We Expect In 2023? Maturation, Long-Term Opportunities, M&As, Mainstream Strategies
Muller believes that 2023 will be “a year of maturation for the industry, prioritizing transparency, compliance, and financial responsibility.”
Despite the many challenges across the space, quite a few industry veterans share the optimism. Even though Rea notes that many cannabis businesses are bound to fail this year, he also believes that many others will remain standing. “Investors with conviction will continue to invest understanding this is a long-term opportunity and not a quick flip,” he said.
According to Rea, it can be expected that more benefits will be provided to large companies, mostly multi-state operators, as they have lower costs of capital and growing footprints of assets and operations. On the other, “smaller companies are going to see most of the stress.”
Cantor Fitzgerald analyst Pablo Zuanic recently shared a similar view. He said that without the SAFE Act and with a divided Congress, he’s even more confident “of the durability, scalability, and long-term outlook of the larger and better-capitalized U.S. MSOs.” In other words, sit tight and hang on to your cannabis stocks.
Among other challenges the industry will continue to deal with is the drop in cannabis prices due to oversupply issues. “It is a function of entrepreneurial exuberance and investor ignorance around publicly available consumption data,” Rea said. “At Poseidon, we track consumption per person per state and apply historical averages to emerging markets and investment opportunities.”
Poseidon’s co-founder and managing director, Morgan Paxhia, also told Benzinga that there will be many M&As in 2023. “We foresee a healthy return of mergers and acquisitions for many areas of cannabis, such as operators, ancillary technologies, hydroponics, etc,” he said, adding that it could be possible to also see “mainstream strategies, like alcohol, tobacco, and CPG.”
Naturally, more states will embrace weed this year. Vicente of Sederberg says the states most likely to legalize adult-use cannabis in 2023 include Minnesota, New Hampshire, Hawaii and Louisiana.
Photo: Benzinga Edit with image from Kelly Sikkema, Esteban Lopez, and 愚木混株 cdd20 on Unsplash
© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.