Post Election Take: Life Sciences
April 30, 2025 - No Discernible Impact to LPs or Retailers
Results from the Canadian election indicate that Mark Carney will remain as Prime Minister, with the Liberal Party expected to form a minority government. In our view, the election results carry no discernible impact to cannabis policy as it pertains to LPs or retailers as cannabis was not mentioned during the campaign, was not part of the Party’s platform, and is not seen as a pressing subject for the government. High excise taxes are the key issue the industry faces because it significantly diminishes LPs’ domestic profit pool. For instance, we estimate that LPs in our coverage paid $380.4mm in LTM excise taxes, representing an average of 31.7% LTM gross sales. Over the past two years, there have been discussions around excise tax reform, but despite the industry’s lobbying around the issue, no reform has materialized.
Similarly, there has been no other significant reform desired by LPs, such as increased THC limits in edibles and beverages. Considering that other issues appear to take precedence over cannabis in the public discourse, we believe investors should not expect meaningful federal cannabis reform over the near-term. Thus, our Canadian cannabis sector thesis remains unchanged: we favor retailers over LPs because the retail market is consolidating, benefitting large retailers such as High Tide and SNDL. We expect LPs to still face challenges in the domestic market due to excessive fragmentation and excise taxes, and therefore to mostly focus their growth efforts on
higher-margin international markets.
Highlights:
No Discernible Impact to Cannabis Policy
Since adult-use legalization in 2018, and following the expansion of product formats in 2019, the Canadian cannabis industry has not seen meaningful changes to federal regulations. Over the past few years, discussions around excise tax reform have not come to fruition. Considering that cannabis was not mentioned during the campaign and was not part of the Liberal Party’s platform, we believe the results from the election have no discernible and near-term impact on major federal cannabis policy issues impacting LPs.
Excise Taxes Remain the Key Issue for LPs
Over the LTM, we estimate that LPs in our coverage paid a total of C$380.4mm in excise taxes, representing an average of 31.7% of each company’s respective gross cannabis sales. The high excise taxes detract from margins and diminish the profit pool available for LPs, representing a significant barrier to sustainable profitability and FCF generation. We believe a reduction in cannabis excise taxes would be the most consequential change in cannabis policy in Canada, immediately and materially benefitting LPs; however, we view a low likelihood of it happening near-term considering that cannabis policy does not appear to be a pressing issue for the Canadian government.