Canadian cannabis update

After tremendous growth fueled by nationwide legalization, Morningstar analyst Kristoffer Inton estimates that national sales will grow annually by 20% - here’s why

Ruth Saldanha 8 July, 2019 | 3:39PM

 

 

Note: This video is part of Morningstar Canada's Cannabis Week Special Report

Ruth Saldanha: Last year, Canada legalized recreational marijuana use which has fueled growth in the industry. Morningstar equity analyst Kristoffer Inton spent some time analyzing the market and finds that Canadian cannabis sales will have a compounded annual growth rate of 20% with most of the growth coming in from recreational use. He is here today to give us his findings.

Kris, what have you found for Canadian cannabis, both in the medicinal and the recreational sides?

Kristoffer Inton: So, I think the main findings are that the Canadian recreational market still has a lot of runway to grow. Legalization was just passed at end of 2018 and expansion of distribution has just – you know, it's deliberately been careful and slow. And over time I think that the governments are going to make sure that there is enough legal distribution to meet the market demand. And so, I think that's the first takeaway.

I think, secondly, the medical market, we actually expect, may shrink through 2030 and a lot of that has to do with the fact that we expect many users that are currently in the medical cannabis market in Canada to shift into the recreational market, the main doctors' association in Canada had actually asked the government to basically pull the entire medical cannabis system. Basically, they argued that they didn't have as good enough understanding about cannabis to be prescribing it and that with the recreational market that it was a redundant option and the Canadian government does plan to revisit this in some years. So, ultimately, we think the recreational market will be far larger than the medical market.

Saldanha: Though legalization kicked in last year, expansion of retail distribution has been rather slow. Do you see this as being a risk? And what are some of the other key risks that you see?

Inton: In any market because of the existence a large black market you almost have this ceiling that all cannabis prices face. So, what we saw when California first passed recreational cannabis, they had put some very large excise taxes on cannabis and basically, the legal cannabis price was much higher than the black market price. And so, you actually saw legal sales fall after that. And so, I think that's one key risk is the pace at which prices increase and how they compare against the black market, that's always going to serve as sort of the natural barrier.

Saldanha: Thank you, Kris. In 2018, the entire Canadian cannabis market was estimated at roughly US$1.6 billion and by 2030, our forecast estimate the market at nearly US$15 billion in constant dollar terms. But we expect the U.S. will be the largest and fastest growing cannabis market in the world. Tomorrow, we'll discuss this market in some detail.

For Morningstar, I'm Ruth Saldanha.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Aurora Cannabis Inc5.45 USD-8.40
Canopy Growth Corp36.91 CAD1.40
Cronos Group Inc11.45 USD-0.69

About Author

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca