Q3 Proves To Be Another Tough Quarter For Cannabis

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It’s been a tough year for cannabis investors and Q3 offered little relief. While the future of the cannabis industry remains bright, the current economic landscape has hamstrung the performance of many publicly-traded cannabis companies. This Q3 review offers a glimpse of how cannabis investors fared through Q3 and developments that may impact the space as we head into the end of the year.

Cannabis indices still suffer heavy losses through Q3

Since our last update in mid-July, the major cannabis indices tracked by New Cannabis Ventures have not improved. If anything, the long, slow decline has continued amidst a flagging economy beleaguered by inflation and supply chain issues. 

The Global Cannabis Stock Index, which measures the health of publicly-traded medical and adult-use cannabis companies, registered at $16.97 on June 10, then a new low from the index’s previous peak of $92.48 in February 2021. The slide has continued, though, reaching a low of $11.26 at the end of September. As of this writing on October 18, the index stood at $12.09 and showed little sign of rebounding. 

The American Cannabis Operator Index, which measures the health of publicly traded U.S. companies in cultivation, distribution, manufacturing, and retail, offered a less bleak (though still unimpressive) picture. Following a recent dip to a low of $18.32 in late September – a new low since its February 2021 peak of $116.17 – the index rebounded and has momentarily stabilized around $22. 

Finally, the Ancillary Cannabis Index, which measures the performance of publicly-traded non-plant-touching cannabis businesses, fared the worst. During our last report, that index had slid to $32.43 from a high of $104.08 in April 2021. It has declined even further, reaching a bottom of $17.77 in mid-October.

The continued challenges facing the cannabis industry in Q3 are underscored by a gradual decline in sales. From July to August, New Cannabis Ventures reported a 0.8% decrease in sales nationwide. Despite this decrease, sales across the largest 11 markets totaled a substantial $1.67 billion.

Signs of cannabis reform in Washington, DC

In early October, President Joseph Biden announced thousands of pardons for people convicted of federal charges for simple cannabis possession, along with a review of how cannabis is scheduled by the federal government. 

Cannabis is currently considered an illegal Schedule I drug under the U.S. Controlled Substances Act. Despite progress in state-legal markets, this designation has prevented interstate commerce and restricted cannabis businesses’ abilities to access the American banking system, secure funding, or even take normal tax deductions available to other industries. 

If the review of federal cannabis policy results in significant reform – possibly even the de-scheduling of cannabis – it could unlock the potential of the legal cannabis industry in a way that has not yet been seen in the U.S. If cannabis were de-scheduled, it could set the stage for expanded banking access, including to much-needed capital, as well as an end to IRS Section 280E, which prevents cannabis businesses from taking deductions for “ordinary and necessary” business expenses, effectively requiring business to pay tax on gross income instead of profit.

Whether these federal reforms materialize remains to be seen, but the announcement by the White House should encourage investors even amidst a continued economic downturn.

Cannabis struggles in a weak economy, but its future remains bright

Another tough quarter has many cannabis investors feeling the pain, but those who believe in the industry’s future should not be disheartened. Renewed promises of federal cannabis policy reform offer near-term hopes that state-legal markets may soon give way to interstate commerce with a less stringent tax policy and access to banking and lending like never before. Moreover, the poor performance of the market at large suggests that the challenges facing the cannabis industry are not unique and could abate with a broader economic recovery. 

Market research supports the idea that the cannabis industry’s outlook is strong. Grandview Research projects the global cannabis industry will grow from a value of $28.26 billion in 2021 to $197.74 billion by 2028, a CAGR of 32.04%. Expanded legal markets, evolving research, and innovative new technologies will all help spur the industry forward, the report reads. 

Grandview Research also indicated ongoing medical research and clinical trials as a critical driver of growth for the industry. For example, small biotechs are working with synthetic cannabinoid formulations, testing them for a wide range of applications like the treatment of bone pain in cancer patients and the prevention of occupational stress and burnout. 

As more research into cannabis is completed, the pharmaceutical sector of the industry will begin to expand and attain regulatory approvals much like the anti-convulsant product Epidiolex™ developed by GW Pharmaceuticals (which was acquired by Jazz Pharmaceuticals in 2021). Currently, pharma remains an undervalued market that will likely grow as research develops further.

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