🗳️🌿2020 Election: Cannabis

Adult-use in NJ, AZ, MT, SD. Medical in MS. Ayr ➡️ AZ. Copperstate Farms ➡️ MedMen AZ Retail/Cultivation. Aphira ➡️ SweetWater. Mushrooms in OR.

Blue Wall. Blue Wave. Green Wave. Cannabis won the election, showing bipartisan support (overall, 67% of Americans are supportive) in favor of decriminalization and another four states adding adult use programs. From all the polls I’ve been tracking the past few months, none of this was surprising (some might think MT/SD was), as evidenced by U.S. Operator stocks were flat yesterday (AYR had the biggest gains given AZ entry) on a day when a majority of sectors were rallying. Although everything did rip higher today (both trading days below).

Summary / Thoughts:

  • 🧹Cannabis sweep. Adult-use in NJ, AZ, MT, SD. Medical in MS (more details below). About one-third of the US population now live in adult use states (16 states + DC).

  • 🐻CA Cannabis ballot measures also won. Costa Mesa (66% Yes for retail) is probably the highlight but in total, 31 local marijuana ballot initiatives passed, establishing or moving towards future licensing opportunities.

  • 🗽Federal Legalization. Although a blue wave doesn’t seem likely, a Democratic White House, House, and 8 Republican Senators from adult use states (MT, SD, AK, and MI) should further drive momentum on Cannabis reform as an issue both parties can agree on. MD, CT, NY, and PA to should pass adult use programs (more below) in the next year or two. SC, NC, KY may take a serious look at medical programs. As more states flip to adult use, additional support in the Senate from Republicans is expected.

  • 🍕Domino Effect. The first domino has fallen and pressure has officially been applied to NY, PA, CT, and MD to allow adult use. Otherwise, those states will be leaving tax money on the table as residents flock to NJ. The measure is expected to generate ~$126M annually in taxes. Both Governors from NY & PA are supportive, but the States have faced delays.

  • 📊Expanded Total Addressable Market (TAM). Cowen has updated its 2025 TAM to expand by ~$3B in 2025E to $34B. If legislative initiatives pass in NY, CT, RI, and PA by 2023, up to $7B could be added to the 2025E TAM. Federal legalization and a $100B TAM by 2030E remains unchanged.

  • 🌿Top MSOs stocks become even more attractive. Already trading near 52-week highs, Curaleaf (AZ +NJ), GTI (NJ), Cresco Labs (AZ), TerrAscend (NJ), Acreage/Canopy (NJ), and Harvest (AZ) should further benefit. Curaleaf has #1 Market Share in NJ and #2 in AZ. Harvest has #1 market share in AZ. TerrAscend is 1 of 4 MSO within Northern NJ and should have a 120,000 sq ft cultivation and processing facility by year-end.

  • More M&A. Companies were already working on acquisitions to take advantage of expected ballot measure results which were polling favorably. Ayr Strategies timed their Arizona entry the day after the ballot measure for adult-use passed, spending $81M+ (3 dispensaries, an operational and in-process Cultivation). Copperstate Farms (1.7M sq ft facility and 40-acre greenhouse) announced they will be acquiring Level Up (two dispensaries and a 25,000 sq ft Cultivation that MedMen divested). Not to be outdone, Aphria announced they were buying Atlanta-based SweetWater for $300M (420 Pale Ale and runs 420 Fest — The Avett Brothers headlined last year!) which is a huge flex (cannabis buying beer, beer profits funding cannabis growth). I expected to see a few more major deals announced before the year is over. [Also, if Aurora/Canopy/Cronos goes after New Belgium (Hemperor HPA) or Sierra Nevada (Dankful IPA)..I’m just going to leave this tweet here and definitely write a blog post detailing all the ways they just “copy” each other.]

  • 🍄Psychedelics. Oregon became the first state to legalize psilocybin. While some cities have moved to legalize and regulate access to the drug, Oregon will become the first state in the country to legalize it on a statewide basis if the measure passes and becomes law. Medical use will come after a two-year development period. Cannabis was illegal across the United States just 8 years ago, changing in 2012 when voters in Colorado and Washington approved recreational marijuana. The state-by-state battle for Cannabis could help more states approve psilocybin, faster as well. MindMeld is the company to watch here.


STATE WINNERS

  1. New Jersey (67% Yes). $2.5B+ market in 2025E. Should steal some customers that have been going to MA for Cannabis. MA market (with a pandemic shutdown for ~3 months) reached $1B in gross sales in ~22 months, I’d imagine NJ gets there in 12-15 months from launch. Recreational cannabis sales become effective date of January 1, 2021 but likely won’t start until after as lawmakers still need to figure out the process/program (mid-Summer 2021 looks more likely).

  2. Arizona (60% Yes). $1.5B+ market in 2025E. Return of the ballot measure — after failing in 2016 as Proposition 205, Proposition 207 passes. Less impact of customers coming from nearby states given CA/NV is already recreational, but should see marginal customer gains from NM (~$160M Medical Market).

  3. Montana (59% Yes). 59% of Montana voters approved of I-190, the adult-use legalization initiative. Residents can possess, use and grow marijuana on January 1, 2021 but sales sales do not start until January 2022.

  4. South Dakota (53%/69% Yes). Likely to be owned by small, local operators as MSOs aren’t paying attention to markets of this size. Became the first in the union to pass a constitutional amendment legalizing adult-use cannabis sales without first having an established medical program [much more efficient]. Cannabis remains illegal until July 1, 2021, when South Dakota residents can start to possess, consume and grow up to three plants. Medical use will start sales on July 1, 2021. The state has until April 1, 2022 to develop rules and regulations for selling recreational cannabis.

  5. Mississippi (68%/74% Yes). The state has until July 1, 2021 to establish rules and regulations.

MORE / SAFE / STATES

Kris Krane (4Front/President) points out that the SAFE Banking Act, considered the most likely cannabis proposal to pass in the current Congress, will likely remain so in the incoming session given its inclusion with COVID relief. The STATES Act faces an uphill battle with a split Senate/House. The MORE Act is likely a non-starter in a Mitch McConnell-controlled Senate.

SNL

If you’re curious about the below graphic or need 3:03 minutes of comedy, watch this past Saturday’s SNL Weekend Update. After this long week, definitely watch SNL this Saturday (Dave Chappelle is hosting!).


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