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08 May 2018
New York, May 08, 2018 -- The ongoing legalization of marijuana in US states and its likely nationwide
legalization in Canada will affect many of its rated entities, or
has already, Moody's Investors Service says in a new report.
US state and local governments are collecting sales and excise taxes,
as well as licensing fees, on marijuana sales, while the legalization
of marijuana represents both a challenge and an opportunity for alcoholic
beverage, tobacco, consumer products and pharmaceutical companies.
In the US, 29 states have legalized some form of marijuana use,
while nine, plus the District of Columbia, allow recreational
use, though the drug remains prohibited at the federal level.
Canada is expected to legalize marijuana nationwide this summer.
"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. "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."
Similarly, though it's difficult to predict how anticipated
legalization would affect the revenues of Canadian provinces, since
demand and pricing, among other things, are as yet unknown,
marijuana-related earnings would likely remain negligible as a
proportion of overall funds. In addition, the provinces are
expected to come under pressure to pass some of this revenue to municipalities,
which are predicting higher policing and social program costs.
"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."
For alcoholic beverage companies, marijuana could replace alcohol
on some occasions, but also could be used to formulate new drinks,
Moody's says. Beer maker Constellation Brands Inc.,
for example, late last year acquired a 9.9% stake
in Canadian cannabis company, Canopy Growth, in order to explore
development of a new category of beverages that includes cannabis.
Meanwhile, lawn-care company Scotts Miracle Gro is betting
on hydroponics in its acquisition of Sunlight Supply Inc.,
and US leaf tobacco merchant Alliance One International Inc. has
invested in Canadian cannabis companies.
US tobacco companies would be well prepared to enter the marijuana market
if the drug is legalized at the federal level. Nationwide legislation
would create opportunities for companies including Altria and Vector Group
at a time when cigarette smoking is on the decline. Further,
in entering the marijuana market, they would benefit from their
sophisticated distribution systems, sprawling sales forces and expertise
in selling a highly-regulated product.
For US pharmaceutical companies, the nationwide legislation of marijuana
would pressure sales of some products, including those used to treat
pain, anxiety and depression, but would also create a long-term
opportunity for companies seeking commercialization.
"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."
Moody's research subscribers can access this report, "For
governments and corporates, legal marijuana brings both gains and
pressures," at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1116675.
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