Jack SmithA new report from Moody’s highlights the impact that legalized marijuana could have in the U.S. and Canada and the implications for other recreational substances, such as alcohol could be damning.
Moody’s estimates that marijuana could replace alcohol “on some occasions,” but spirits makers aren’t sitting on their laurels. Beer maker Constellation Brands (NYSE: STZ) purchased a 9.9 percent stake in Canopy Growth, a Canadian cannabis company. Additionally, Scotts Miracle Gro (NYSE: SMG) and leaf tobacco company Alliance One International have both acquired or invested in cannabis-related companies.
In the report, Moody’s notes that the legalization of marijuana could impact tax revenue from alcohol and potentially create “modest downward pressure on the use of pharmaceutical products,” especially those used to treat pain, anxiety, and depression as marijuana would theoretically replace them for treatment.
The negative effect would be felt greater at smaller pharmaceutical companies, particularly those with nascent drug pipelines, Moody’s says.
“Some small, unrated pharmaceutical companies are developing products based on the chemical cannabidiol, with one product advancing to the FDA review stage,” said Michael Levesque, a Moody’s Senior Vice President. “Thus far, large, traditional pharmaceutical companies haven’t invested heavily in cannabidiol, but that could change if smaller drug makers develop a market for these products.”
There is uncertainty about how the U.S. tobacco companies would enter the sector if and when marijuana is legalized at the federal level. Altria (NYSE: MO) and Vector Group (NYSE: VGR) have seen cigarette smoking on the decline for several years and there remain several questions about heated tobacco products and their long-term viability.
Still, the legalization is likely to have some modest positive impact on tax revenue, especially for the areas where it’s already legal.
“For US states and local governments that allow retail sales of marijuana, the related tax revenue is marginally credit positive,” said Grayson Nichols, a Moody’s Vice President-Senior Analyst in a press release. “Even for states with mature industries, such as Colorado, and large states like California expected revenue will remain only a small share of annual general fund revenue, given the limited opportunities for significant market expansion.”
In the U.S., 29 states have legalized some form of marijuana use. Nine states, including the District of Columbia, allow it to be used for recreational use, though it is still illegal at the federal level.
Canada is expected to legalize marijuana across the entire country sometime this summer. However, recent industry reports have noted that Prime Minister Justin Trudeau and his team could push that back to the fall, as opposed to July, as had been previously thought.
As with the U.S., Moody’s notes its difficult to anticipate how legalization would impact tax revenue in Canadian provinces.
“Given Canadian provinces’ limited experience with legalization, competitive pressures and calls to offset the costs of increased policing, we anticipate limited fiscal gain from legalized marijuana,” observed Michael Yake, a Moody’s Vice President – Senior Credit Officer. “On the other hand, legalization has the potential to reduce judicial burden, boost employment and offer a new revenue stream for First Nations populations. Suffice to say, if passed, the transition to adopting legal cannabis is expected to be complicated in the medium-term.”
That uncertainty has impacted the share price of many Canadian-based cannabis companies, including those in the Green Market Cannabis Index.
