Yahoo Finance Will the Canadian Medical Cannabis Market Survive?
Quarterly earnings results covering the post-recreational-marijuana-legalization period in Canada will flood the media in February, allowing the market to assess the performance of the industry players and to somehow refine expectations for the local cannabis market and the seemingly weakening medical cannabis segment.
High revenue-growth rates are backed into anything marijuana related today, as the nascent adult-use market is expected to catapult revenues and earnings for the pot industry going forward, but lower wholesale prices and excise taxes are hurting margins, yet the medical cannabis segment affords licensed producers (LPs) the opportunity to capture the full retail margins through direct sales to clients.
Could the medical cannabis segment survive to deliver growth?
Market leaders, including Aurora Cannabis (TSX:ACB)(NYSE:ACB) and Canopy Growth, have reiterated their strong commitment to the medical marijuana market and are investing in intellectual property to advance leadership in the potentially lucrative segment, but there have been some concerning signs of weakness in this niche.
Significant signs of weakness
According to Health Canada, dried medical cannabis volumes sold to clients declined 25% from April 2018 to September 2018, yet the amount released for sale by LPs increased exponentially from 3,325 kilograms in April to hit 9,944 kilograms in September, and inventories increased 105% to 101,720 kilograms over the six-month period.
Growth in total active registered patients significantly slowed in September, and total shipments to medical clients declined 13.7% from their peak in July.
As a slight consolation, medical cannabis oil sales saw a somewhat steady increase from 3,734 kilogram equivalents in April to 4,455 kilograms in September, but the amounts released for sale significantly and increasingly outstripped sales volumes since June.
In fact, leading industry player Canopy Growth reported a 10% sequential decline in medical sales in the last quarter prior to October 17, and Aurora’s poor sales performance was masked by new acquisitions. Both companies seemed to project the message that they were less focused on growing the medical market during the hectic days just before recreational sales debut, but total market volumes data shows that there were significant product surpluses on the market in September.
The medical marijuana market is likely on a slow-growth path right now, as sales get cannibalized by the adult-use market, yet the LPs really need to capture the higher retail sales margins in this segment.
Is it therefore all doom and gloom for this important niche? Maybe not, and I am willing to give the medical cannabis growth thesis the benefit of doubt.
Too early to call?
The recent quarterly results installment from Organigram Holdings (TSXV:OGI) revealed flatter medical cannabis sales performance, with a significant jump in cannabis oil to constitute 65% of medical marijuana sales for the smaller and potentially low-cost producer.
One may argue that medical cannabis patients had no option but to continue to order from the LP, which appeared much more adequately prepared to continue shipping product from inventory during a period of acute product shortage, but that argument would also support the idea that medical sales are not as elastic as recreational demand can be, and this market could exhibit some resilience and resume its growth path, as LPs become stable and increase their focus on this niche market segment.
Further, some Canadian LPs appear less focused on this market segment right now, as they fight to capture early-mover advantages in the new adult-use market.
Actually, Organigram is no longer focused on this niche segment, and the company recently sold its patient-focused subsidiary Trauma Healing Centers, as it considered it a non-core operation. It makes sense to a producer intent on becoming a cost leader, as patient acquisition costs have been expensive historically.
That said, demand may remain intact for medical cannabis oils and capsules, as some LPs increase the concentrations of cannabinoids in oils meant for the medical segment and sell weaker concentrations into the recreational market. People who really need the medical grade drug may continue to go for higher concentration medical product options.
Most noteworthy, from its latest earnings guidance, Aurora’s patient numbers improved for the December 2018 quarter to 71,000 active registered patients, up from 67,484 active medical product buyers in a most recent quarter. Medical sales growth could pick up from here for those producers who continue to focus on this important niche.
Foolish bottom line
Canadian medical cannabis sales weakened on the eve of the adult-use marijuana market, but this may just be a short-term phenomenon. Those LPs that can profitably serve this segment will continue investing for growth in this potentially profitable niche.
More reading
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Fool contributor Brian Paradza has no position in any of the stocks mentioned.
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