The challenges ahead for cannabis producers

Breaking ground in an undefined market can be exciting—but it’s also risky.

In a new report, EY takes a look at the burgeoning cannabis market and the challenges companies in the space will have to meet going forward. Those include “an uncertain operating landscape” and the fact that “the rules that will govern the recreational industry have yet to be finalized.”

There’s also the unanswered question of just how much capacity will be needed to meet consumer demand.

Read: Marijuana tax proposal out for comment

“Maturity levels of [licensed producers, or LPs] in Canada differ drastically, with few operating like a developed organization while the rest are nascent startups with the technical capabilities, but operationally underdeveloped,” says EY in the report. That’s why “it’s a critical time for the cannabis sector, and an opportune moment to ask important questions about the future.”

Read: As marijuana rules become clearer, risks remain

As an investor, another thing to consider is cannabis producers “will have to be able to compete with other established adjacent industries—such as tobacco, pharmaceuticals, alcohol and consumer products,” given companies in those industries will also look for ways to capitalize on demand for recreational marijuana, the report says.

By talking to LPs, EY identified the following key themes.

• Producers are mainly focused on vertical integration of their businesses (75%) and large-scale production (37%).
• Innovation is seen by the LPs surveyed as creating new products (85%), extracting efficiently (85%), and getting new technologies or patents (71%).
• Producers plan to invest most heavily in clinical trials (50%).
• The LPs surveyed expect industry consolidation over the next three years (87%), along with the entrance of big players from established industries (75%), persistence of the black market (75%) and existence of niche players (75%).
• The top-three demands from consumers are expected to be product variation (75%), increased accessibility (62%) and more education around cannabis use (50%).

Read: CSA, TSX outline expectations for issuers with U.S. marijuana activities

In its report, EY includes a Q&A with Bruce Linton, founder of Canopy Growth Corp. Read the full report.

Survey methodology: EY says it interviewed senior executives and a board member from 11 LPs with varying size, scale, revenue and value-chain activities, and also sought insights from a government representative.

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The staff of Advisor.ca have been covering news for financial advisors since 1998.