What To Watch Out For In Cannabis Industry: Cowen's Vivien Azer Shares Insights At Benzinga Cannabis Capital Conference

With support for legal marijuana at an all-time high, legal cannabis states will generate $25 billion in sales in 2021, according to Vivien Azer, managing director and senior research analyst at Cowen, a provider of investment banking services.

Azer, who specializes in beverages, tobacco and cannabis sectors, was a speaker at Benzinga's Cannabis Capital Conference, which returned this week (Oct. 14-15) to  New York's Marriott Marquis in Manhattan.

Azer projects that by 2025, cannabis sales will exceed $40 billion.

Still, the company's third-quarter preview suggests a slowing in the marketplace, likely due to Covid disruption - something management teams within the space have been seeing when reporting earnings in late July and August, the analyst said. 

However, September was the first month where Azer saw year-over-year growth re-accelerate to +54%.

"We do expect continued growth in the category," during fall, she added.

The analyst sees Pennsylvania as the "biggest wild card" that "presents about a billion dollars of risk to our numbers.

"MSOs have been pretty constructive on a pathway towards adult use in Pennsylvania," Azer said, adding that this is evident in "the cultivation plans for the public operators."

Azer said that New Jersey is on track for next year, followed by New York, which is well on track for 2023.

She projected " continued incremental growth for the industry, just based on a regulatory change that's already occurred."

Defense Bill Is Not The Right Path

Speaking of regulatory changes, the U.S. House of Representatives approved a large-scale defense spending bill recently, just days after passing cannabis banking reform which was part of the legislation, leaving the possibility that cannabis banking could end up on President Biden's desk along with the all-important defense budget.

Azer said that having Congress vote on cannabis as part of the defense bill would take the momentum out of the incremental change that might be possible in 2022.

"We don't think the defense bill is the right path," Azer said, adding that Congress should "vote down" Schumers and Wyden's bill and then "redouble their efforts on an amended version of Safe Banking."

Commenting on the move by New Jersey Senators Cory Booker and Elizabeth Warren, who sent a letter to Attorney General Merrick Garland urging the Department of Justice to decriminalize cannabis by removing it from the federal controlled substances list, Azer said it would take too long to get done.  

"That could run through the entirety of Biden's first term to affect change through that pathway."

What to watch out for going forward: With New Leaf Data Services' revealing that the weighted average spot price of wholesale cannabis in the U.S was down 8%, including double-digit declines in California and Colorado, the discussion around price deflation was a big theme over the course of the third quarter, Azer explained.

And while data doesn't include Florida and Pennsylvania, the analyst stressed the importance of the Trulieve (CSE:TRUL) (OTCQX:TCNNF) Harvest Health & Recreation merger when it comes to price deflation in these states.

"It seems like a lot of the discounting, a lot of the competitive activity is happening at the lower price points in the category, in particular, flower without kind of a secondary knock-on effect on distillate based products like vapes, edibles and beverages," Azer said.

"But it does seem like pricing is holding up for higher-end products. And then, in essence, when you get more discounting at the low end, what you see is an expanding price gap in the portfolio or any given category."

Taking all this into account, Azer said she thinks there is going to be annual price deflation.

Photo: Courtesy of Kym MacKinnon on Unsplash