Over the past couple of years, marijuana has been a significant moneymaker for investors. Although not every pot stock has moved higher, buying a handful of the most popular growers and ancillary players would likely have yielded a return that ran circles around the broader market.
There are, however, pretty big question marks overhanging the industry as we head into the second half of 2019. Here are the four questions Wall Street and investors will be looking to get answered before the year comes to a close…
1. When, exactly, will Canadian derivative sales begin?
It probably goes without saying that the highlight of 2019 for the marijuana industry is the expected waving of the green flag by regulatory agency Health Canada on derivative products, such as edibles, cannabis-infused beverages (not containing alcohol), topicals, vapes, and concentrates. Oils and sprays are already legal.
Earlier this year, Health Canada signaled its intentions to legalize these alternative consumption options by no later than the one-year anniversary of Canada’s recreational marijuana legalization date, October 17. But that doesn’t narrow down exactly when Health Canada will be sounding the horn on derivative sales.
The reason marijuana derivatives get so much attention is because they’re a significantly higher-margin product than traditional dried cannabis flower. Dried flower in select U.S. states that’ve legalized adult-use weed has steadily dropped in price, and the same will likely happen in Canada a few years from now. That makes derivatives an especially important piece of the puzzle for all major cannabis growers.
For example, CannTrust Holdings (NYSE:CTST), which currently projects as anywhere from the third- to fifth-largest grower in Canada at 200,000 to 300,000 kilos per year, announced in late March its intention to acquire up to 200 acres of land for outdoor growing purposes. Although CannTrust hasn’t been too specific, the expectation is that a majority of this outdoor-grown cannabis will be used for extraction purposes in the creation of derivative products, such as edibles and concentrates. This suggests that perhaps half, or more, of CannTrust’s sales could come from high-margin derivatives.
Getting more clarity on the derivative sale kickoff tops the list of questions we want answered.
2. Can Health Canada make a dent in its application backlog?
Next on the list, investors are going to want to know whether or not recent policy changes made by Health Canada have begun to resolve the country’s thus far persistent supply shortage of marijuana.
As reported by Marijuana Business Daily, Health Canada was buried underneath a backlog of nearly 840 applications, as of January 2019. While many of these licensing applications are for cultivation, they also include processing, distribution, and sales (with the average sales application taking nearly a year to approve, as of May 2018). Although this backlog of applications isn’t the only reason there’s a cannabis shortage — a lack of compliant packaging, and a late start to capacity expansion by growers is also to blame — it’s probably the most visible reason.
Recently, Health Canada announced a change to the cultivation application process designed to weed out unqualified candidates (pun fully intended). All future applicants will need to have their grow farms fully constructed prior to submitting their paperwork. This should eliminate underfunded companies and allow Health Canada to approve growers that are ready to produce.
For instance, Aphria (NYSE:APHA), which slots in as possibly the No. 3 grower in Canada at 255,000 kilos a year, when fully operational, has been waiting more than a year for Health Canada to OK its Aphria Diamond campus. Aphria Diamond, which was formed of a joint venture between Aphria and Double Diamond Farms and involves retrofitting existing greenhouses for cannabis production, will be capable of 140,000 kilos of Aphria’s 255,000 kilos. However, nothing can be done till the green light is given by Health Canada.
Wall Street and investors will be looking for evidence that Canada’s licensing backlog, and underlying supply problems, are ebbing in the second half of 2019…
Continue reading at THE MOTLEY FOOL