In its THEMES 2022 handbook, which focuses on cannabis and 13 other areas, investment bank Cowen stated that its analysts view U.S. federal cannabis legalization as inevitable and provided various industry predictions.
Cowen analysts estimate in the report, published Dec. 6, that the U.S. cannabis industry’s total available market will reach $84 billion in 2026.
Below are some other observations, views and predictions outlined in the report.
States’ Growth
Whether U.S. federal legalization occurs in 2022, which as the THEMES report declares “is conceivable … either as a result of bipartisan legislation ahead of the November midterm elections, or potentially in the lame duck period,” states with large populations are still growing their cannabis markets and garnering public support, analysts say.
In addition, states have served as leaders in how they incorporate social justice into their legalization efforts, according to the report, which notes the policymaking intent of social equity programs.
“COVID-19 has also served to accelerate state-level legalization, particularly in geographies with industries hit especially hard by the pandemic,” the report states. “New York State notably passed its cannabis legislation on March 31, 2021, relatively soon after its introduction earlier in the same year, and in partial response to a budgetary gap caused by loss of tourism and hospitality revenues.”
States that could experience significant growth over the next several years include New York, Pennsylvania, New Jersey, Virginia and Arizona, per THEMES. By 2025, Cowen analysts predict, those markets could reach $3.1 billion, $2.8 billion, $1.4 billion, $1 billion, and $2.4 billion, respectively.
Eventually, New York could become the second-largest cannabis market in the U.S. behind California, with $5 billion in sales, the analysts estimate.
Multi-State Operators Expanding
Multi-state operators (MSOs) have merged with and acquired companies to expand, providing clear vectors of growth across the country.
“MSOs have layered in assets to realize improved profitability from vertical integration within each state while also growing regional, and in some cases national, brands despite the structural limitations of a state-by-state legal framework,” according to the report.
Between 2019 and 2020, the 15 leading U.S. MSOs increased their average adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) from -33% to -22%, per THEMES.
Cowen analysts say they are keeping an eye on MSOs with the potential to impact state-legal markets such as New Jersey, New York, Pennsylvania and Virginia.
The report states: “In addition, we see opportunities for MSOs to create optionality for boosts to profitability as they add ancillary asset-light businesses to their portfolios. New models emerging around electronic payments and other business service platforms are poised for growth as state and Federal-level legalization frameworks evolve, and these enabling assets could also provide early mover advantages to the MSOs acquiring or developing them.”
Various Lobbying Approaches and Paths to Federal Legalization
The THEMES report specifically highlighted that it’s possible that the U.S. federal government could pass legislation that would defer cannabis legalization to states.
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“This should resolve the current 280E federal prohibition on tax deductibility of expenses by cannabis businesses, and would also allow cannabis companies traditional access to U.S. securities exchanges, commercial banking services, and capital markets,” the report states.
Cowen analysts believe that cannabis legislation is unlikely to receive the necessary bipartisan support to pass if it includes social justice measures, such as criminal record expungement and social equity provisions.
The report states: “Should the Senate fail to reach agreement on a STATES Act approach, we believe that SAFE Banking legislation would be enacted as a fallback position. This could be kept narrow to only address access to commercial banking and insurance, or it could serve as the foundation for a compromise bill that stops short of legalization but offers relief from the 280E tax burden and opens cannabis to capital markets, including stock exchange listings. There would likely be a Federal excise tax to offset the cost of 280E relief and to fund some social justice measures.”
Various cannabis industry lobbyists have sought to move different pieces of legislation forward, “diluting the impact of lobbying efforts,” according to the report.
Cowen will track how lobbyists can be unified in how they approach federal legalization, per THEMES.
“We will view signals of coordination positively, while evidence of continued fragmentation could augur negatively for any wide-ranging Federal cannabis relief,” the report states.
