Legalization 2.0 to move the needle for the derivatives market.

David Kideckel, PhD, MBA 647-776-8240

Canada is expected to legalize the sale of cannabis derivatives on October 17, 2019. We believe the introduction of cannabis derivatives into the market will lead to meaningful revenue growth and improvement in profitability for the cannabis sector over the medium to long-term. With the upcoming Canadian federal election on October 21, 2019, we view the regulatory outlook to remain unchanged over the medium-term. 

Expected Launch of Cannabis Derivatives
The Canadian Cannabis sector is close to a critical juncture, as the market awaits the legalization of cannabis derivative products on October 17, 2019. It will take at least two more months for new cannabis products to become available for purchase, as federal license holders are required to provide Health Canada a 60-day notice of intent to sell new products. If Health Canada takes more time than expected to provide regulatory approvals, derivatives product sales may suffer delays.

Cannabis Legislation and Regulations Should Remain Unchanged Over the Medium-term
The probability of a revision of the Cannabis legislation seems low, even with a potential changing of the guard in government, in our view. Since the legalization of recreational cannabis in Canada, the Conservative party’s stance over cannabis legislation and regulation has shifted. The Conservative party leader has already declared that a Conservative government would keep cannabis legal. In our view, the Conservative Party may try to implement changes to current cannabis regulations. Potential regulatory amendments related to packaging and branding may improve the cost-effectiveness of legal cannabis players and provide branding opportunities for Canadian licensed producers (LP), given Health Canada’s current stringent approach to packaging laws.

Concerns over Vaping may Benefit Legal Cannabis Players
Over the last few weeks, vape-related illnesses have been reported in the U.S. Based on preliminary evidence from recently published news articles, we believe that most vape-related issues arise from the illicit market. If Health Canada decides to impose more stringent regulations on vape-related products, there may be a slower roll-out of vaping products. Yet, over the medium to long-term, those reports may be favourable for legal cannabis companies as consumers may prefer to rely on licensed suppliers instead of illegal suppliers. We find any decision to ban vapes altogether as unlikely since the ban may lead to a proliferation of illicit vaping products.

Significant Scope for the Rerating of the Sector
In our view, the temporary concern over vapes’ safety will not have a meaningful impact on the long-term growth of cannabis derivative sales. We believe that the sector will rerate gradually, as many cannabis companies are set to experience a significant improvement in profitability over the next few quarters.