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Cannabis Market 2023 Year-End Review

2023 has been yet another year of uncertainty for the cannabis industry, with little progress in terms of legislative clarity or market growth. The sector has been market in a holding pattern in both the US and Canada, unable to make meaningful strides forward as it waits for a breakthrough. It’s been a frustrating year for many in the space, and the hope is that 2024 will bring some long-awaited relief.

In the American market, operators are eagerly awaiting the enactment of policies that would help businesses cope with tough financial realities. The SAFER Banking Act, a bill intended to provide relief to the US cannabis industry by allowing companies to access banks and credit unions, has encountered a roadblock in the form of GOP opposition. While Chuck Schumer has worked tirelessly to drum up bipartisan support, his efforts have so far fallen short.

This legislative purgatory has hindered growth and investment in the cannabis sector, leaving many wondering when — or if — the industry will finally be able to unlock its true potential.

In Canada, the cannabis industry has faced several challenges in 2023, including oversupply, stiff competition and regulatory hurdles. Many companies have struggled to turn a profit, and some have been forced to shut down. Still others have resorted to drastic cost-cutting measures like layoffs, production cuts and facility closures.

Experts see a shift toward stabilization

“(The market is) more or less the same, frankly,” he said during the conversation. “Obviously, 2023 was more intense than 2022 in terms of profitability (and) growth, (but) a lot of companies have continued to underperform. They’re burning cash less than before, but they’re still not financially sustainable at this stage, and they’re still relying on the money that they’ve raised in the past to sustain their financial operations.”

He noted the continued need for operators to be strategic with their cost-saving measures, an unfortunate reality in a market crowded with too many players. “(Companies) have been underperforming less, because in 2022 and 2023 they were very active with their cost-reduction programs,” El-Cheikh said. “Companies are doing better only because they reduced their costs. They divested a lot of non-core assets, but they’re not financially sustainable. We’re still seeing a lot of oversupply because many players (who) were supposed to exit the market haven’t exited yet.”

For his part, Nawan Butt observed small changes that indicate the Canadian market is maturing.

Butt continued, “Investors are finally starting to rightsize their expectations as well. What we’re seeing is that valuations are becoming more stable as the view of the future becomes more stable. So rightsizing investors are starting to understand, and the stabilization of valuations is an indication of that as well.”

The market appears to have eliminated the players who expected to achieve quick success, leaving a pool of patient actors who understand the reality of how new markets, such as the cannabis industry, develop and grow.

Meanwhile, some of the industry’s most successful operators have chosen to diversify their portfolios or expand into new markets while they wait for new legislation. Tilray Brands (NASDAQ:TLRY,TSX:TLRY) and Canopy Growth (TSX:WEED,NASDAQ:CGC) are two of North America’s biggest cannabis companies, with a combined market capitalization of over US$2 billion as of December 7. Both have established operations in multiple countries and have made moves this past year to take advantage of Europe’s growing market for medical cannabis.

Tilray has had a major presence in Europe for years, and in 2023, its expansions included increased distribution in Italy and the Czech Republic as medical cannabis legalization spread across Europe. Meanwhile, Canopy Growth focused its efforts on the German medical cannabis market, announcing the rebranding of its medical cannabis services in the country from Spectrum Therapeutics to the aptly named Canopy Medical on September 6. In July, Canopy Growth completed the acquisition of an EU-GMP-certified cannabis processing facility in Portugal, a country in which all drugs have been decriminalized since 2001, although only medical cannabis is legally sold.

Attitudes toward cannabis continue to change

This year, headlines suggested that the US federal government could take steps to support cannabis reform. However, despite more talk, another year has gone by with nothing concrete being achieved. False hope seems to be something that those in the cannabis industry have, unfortunately, gotten used to.

While positivity remains, Butt has seen market participants become hesitant to rely on words from lawmakers since the US Department of Health and Human Services (HHS) recommended that the Drug Enforcement Agency (DEA) reschedule cannabis from a Schedule I drug to a Schedule III drug this past summer.

“The HHS providing their recommendation in under 12 months is an unprecedented sort of timeline,” he said. “Historically for similar actions it has taken a lot longer for them to make their case. Getting in (to the DEA) so much quicker means that there is an available body of work that they were able to review fairly quickly. (This) shows either the efficacy or the safety of cannabis, or the lack of the ability for cannabis to be abused in its proposed infrastructure.”

When the HHS made its official recommendation on August 30, several cannabis companies saw their share prices rise. For example, Cronos Group (NASDAQ:CRON,TSX:CRON) saw an increase of 17.82 percent on the NASDAQ between market close on August 29 and August 31, and Canopy Growth saw a 42.29 percent increase on the same exchange. Their share prices continued climbing through mid-September to reach Q3 highs. Although they declined in the second half of September, they were still elevated compared to a month prior.

On September 27, the SAFER Banking Act was approved by the Senate Banking Committee, resulting in another short-lived bump. However, in the days and weeks that followed both events, with no word from the DEA and no date set for a Senate vote, cannabis stocks fell close to pre-recommendation prices.

“The recommendation by the HHS to reschedule cannabis … is a huge positive that the market had initially reacted on, but a lot of that has been starting to be discounted in the market again,” Butt noted.

Legislation moves slowly, and despite years of hearing the same issues being debated, some are still optimistic. “Hopefully we should be hearing from (the DEA) within the coming months, or if not a couple of months here,” he said.

Investor takeaway

Despite increasing public support, the US cannabis industry has been hindered in 2023 by slow processes and Republican-led opposition to reform. In Canada, there have been signs that the market is maturing, but companies continue to rely on expense-cutting tactics to stay afloat. Overall, the cannabis industry is still in a state of flux, but it is clear that the space is growing and evolving.

Securities Disclosure: I, Meagen Seatter, hold no direct investment interest in any company mentioned in this article.

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