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VSThe share prices of the annabis company have been hit hard for nearly a year that some investors might qualify as extreme given the potential for federal legalization of marijuana in the foreseeable future. Now businesses in Pennsylvania have more potential bad news from the state’s health department.
Failure to comply with a new state agency order could result in the suspension or revocation of cannabis licenses. Two marijuana growers with a high concentration in Keystone State are Jushi Holdings (OTC: JUSHF), and Trulieve Cannabis (OTC: TCNNF), both of which sell vape products in the state.
Image source: Getty Images.
The ingredients are under the microscope
On November 16, the Pennsylvania Department of Health ordered a mandatory review of all vaporized medical cannabis products, expected by November 30. The review targets products with “added ingredients” and includes products used in the inhalation process and for vaporization. .
Some of the additives the agency may look for include vitamin E acetate, which has been linked to e-cigarettes and lung damage from vaping. The additive is used in some vape cartridges and can become a dangerous carcinogen when heated and inhaled. But it should be noted that these types of additives are more often found in products from illicit market products, rather than those sold by regulated multistate operators (MSOs).
Pennsylvania represents a market opportunity for 360,000 active certified medical marijuana patients and more than $ 2 billion in sales since the launch of the medical marijuana program. Any significant finding resulting in restriction of product sales, license suspension or even license revocation could have a major impact on the offending producer. A setback could result in a loss of market share which could take years to regain.
Jushi’s money makes it a bit of a risk
Jushi celebrated the opening of his new Beyond / Hello store in Pennsylvania on October 22, just weeks before the order from the state’s health department. Its most recent retail store – the state’s 16th – brings Jushi’s total to 26 across five states, meaning Pennsylvania is now home to 61% of Jushi’s total retail stores.
Such a concentration of stores in one state exposes Jushi to some risk, which would only further complicate recent financial difficulties, as noted in his third quarter earnings release. Revenue grew in the quarter 117% on a year-over-year comparison to $ 38 million, but the company did not come out of the third quarter unscathed. Income and earnings before interest, taxes, depreciation and amortization (EBITDA) have both been guided downward, driven by slower store openings, increasing regulatory complexities and higher overheads.
This is the second consecutive quarter of declining EBITDA, from a range of $ 40 million to $ 50 million in the first quarter to a recent $ 21 to 25 million in the fourth quarter. The company has $ 54 million in cash and cash equivalents at the end of the third quarter. That being said, after spending $ 32 million in the quarter, there is cause for concern about the continued growth of the business.
Trulieve’s size is everything
Trulieve has what Jushi lacks: size and retail spread. Among its extensive product catalog, the vertically integrated operator sells concentrates and vaporizer cartridges under its Muse brand in more than 150 dispensaries across 11 states, with a leadership position in what the company considers to be its core states that are Arizona, Florida and Pennsylvania – where it has 19 retail stores in the state.
Where Trulieve has another advantage over Jushi is highlighted in its third quarter earnings report. Revenue was $ 224 million, a 64% year-over-year increase for the quarter, while EBITDA was $ 98 million. Sadly, growth took its toll on Trulieve as its spending saw a cumulative 95% jump for the first nine months and a 105% spike for the third quarter year over year.
Fortunately, there is liquidity to the tune of $ 214 million, which can provide some support in the event of regulatory setbacks.
What is the impact for investors?
The order issued by the Pennsylvania Department of Health should be of interest to investors for a number of reasons. It could be that the state puts in place more stringent regulations as the country prepares for federal legalization, and the state could be seen as a model for wider regulatory deployment.
But it is more than likely to exercise a tighter grip on its own statewide regulations to ensure that licensed producers are held accountable for the products they offer, while the state is preparing for the legalization of recreational marijuana, as introduced by a bipartisan Senate bill in early October. In any case, this should be seen as one step back and two steps forward.
Jushi and Trulieve are both growing and have a strong footprint in the state which is the fifth largest in the country in terms of population. Both companies are vertically integrated multi-state operators who have met the necessary regulatory requirements to obtain licenses, so a product review is unlikely to be a long-term challenge to overcome.
For now, I’d be less concerned about the impact on Trulieve based on its size and long-term potential. Jushi can be a bit riskier with a smaller cash reserve and smaller footprint. The state hasn’t provided decision dates on product reviews, but it might be a good idea to keep an eye out for any cannabis-related news from Pennsylvania.
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Jeff Little has no position in the stocks mentioned. The Motley Fool owns shares and recommends Jushi Holdings and Trulieve Cannabis Corp. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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