Further consolidation of the cannabis industry and more cross-border transactions and listings on the Toronto Stock Exchange are likely over the next 18 months, but full U.S. legalization is not, cannabis analyst Pablo Zuanic said Monday.
“We do not expect major breakthroughs at the federal level in the U.S. before the third quarter of 2023, so, news flow from [Washington, D.C.] in the interim may at best result in ripples among U.S. cannabis stocks (not waves),” Zuanic said in his first research report since leaving Cantor Fitzgerald earlier this year to start up his own firm.
“The bigger positive catalysts in the near term will revolve more around company initiatives, whether in terms of strategic partnerships such as consumer packaged goods or cross-border transactions, further industry consolidation, and potential TSX listings,” Zuanic said.
After a quick start to adult-use cannabis sales in Maryland this summer, it’s difficult to predict where the next adult-use market will emerge, but Zuanic said Pennsylvania remains a possibility, as does Virginia, which plans to introduce an adult-use market in 2024.
Among his 10 predictions for the next 18 months, Zuanic said he sees a 70% chance that SAFE Banking legislation to open up the U.S. financial system to cannabis companies will pass Congress, with potential passage by the Senate in the spring of 2024 putting pressure on the House to do the same.
Zuanic sees a 65% change that the Biden administration will reschedule cannabis over the same time period, but any move to change it to a Schedule II or Schedule III drug from its current status as a Schedule I drug now “could complicate matters for cannabis businesses,” he said.
While rescheduling would potentially remove the tax burden of 280E requirements for cannabis companies and allow them to write off basic business expenses and pay fewer taxes, it would also legalize medical cannabis at the federal level and potentially bring the Food and Drug Administration into the role of a regulator, he said.
“FDA involvement may imply stiffer guidelines on prescribing and greater quality-control standards,” Zuanic said. “Would state med-program rules prevent federal interference? Not if marijuana is federally rescheduled.”
Zuanic said there’s also a greater than 70% chance that more companies will seek a listing on the Toronto Stock Exchange rather than the Canadian Securities Exchange and over-the-counter listings, which dominate the space now.
TerraAscend
TSNDF,
-5.11%
TSND,
-5.88%
recently moved its listing to the Toronto Stock Exchange, and the same move could help other companies such as Curaleaf
CURLF,
-4.81%
raise more capital.
“We praise the vision of TerrAscend’s chairman, Jason Wild, in seeking a TSX
listing,” Zuanic said. “At the least, it opens strategic options for this (mostly) U.S. operator and could/should result in greater capital access.”
A company with global ambitions such as Curaleaf “cannot afford to not seek the TSX path,” Zuanic said.
He cautioned that investors should pass over companies with governance issues and lackluster track records for acquisitions.
“We prefer to avoid companies with a history of buying ‘related’ assets at steep prices; with well above average executive compensation (unliked to performance); with stacked boards; with a history of proven rule-breaking (here we do not include unproven allegations), such as cross-state shipping, improper labelling, THC inflation, to name a few,” Zuanic said.
This post was originally published on MarketWatch
