Equity Research Cannabis Alcoholic Beverages CANNABIS: $75B OPPORTUNITY; CATEGORY CROSS-CURRENTS KEEP US CAUTIOUS ON BOOZE APRIL 4, 2018 We expect cannabis can generate $75 bn in sales by 2030 (assuming federal legalization), driven primarily by consumers ages 26+ (given that 55+ is the fastest growing cannabis cohort). Access to legal cannabis drives lower levels of binge drinking (as measured by our proprietary analysis on binge intensity and number of binges per month). Adult-use cannabis states binge drink 13% fewer times per month than non-cannabis states, and 9% below the national average. We remain constructive on our Outperform- rated cannabis stocks: KSHB, WEED and LEAF, and cautious on big beer (TAP). Vivien Azer 646 562 1351 [email protected]Brian Nicholas Velez 646 562 1353 [email protected]Gerald Pascarelli, CFA 646 562 1362 [email protected]COWENRESEARCH COWEN.COM
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Equity ResearchCannabis
Alcoholic Beverages
CANNABIS: $75B OPPORTUNITY; CATEGORY CROSS-CURRENTS KEEP US CAUTIOUS ON BOOZEAPRIL 4, 2018
We expect cannabis can generate $75 bn in sales by 2030 (assuming federal legalization), driven primarily by consumers ages 26+ (given that 55+ is the fastest growing cannabis cohort).
Access to legal cannabis drives lower levels of binge drinking (as measured by our proprietary analysis on binge intensity and number of binges per month).
Adult-use cannabis states binge drink 13% fewer times per month than non-cannabis states, and 9% below the national average.
We remain constructive on our Outperform-rated cannabis stocks: KSHB, WEED and LEAF, and cautious on big beer (TAP).
We expect cannabis sales of ~$75 bn by 2030, supported by new analysis on categoryretention gaps and population-weighted, state-based analysis on cannabis first use andbinge drinking (where cannabis access points to more cannabis trial and use, and less bingedrinking, and an opioid solution). Maintain Outperform on KSHB, WEED, & LEAF; and remaincautious on big beer, including TAP.
Bottom Line
Ahead of our 2nd Annual Cannabis Summit, we revise up our cannabis market target by $25bn, as we now look for the industry to generate $75 bn in sales by 2030 (vs. $50 bn by 2026previously). Underpinning this estimate is proprietary analysis on binge drinking behavior,as well as the role that legal cannabis access has in terms of driving trial (measured bycannabis first use rates for 18+ consumers). This work builds on our prior assertions thatcannabis acts as a substitute social lubricant for consumers. We believe this is the first timedetailed state-level binge drinking statistics have been analyzed and juxtaposed againstcannabis use, where we found that legal cannabis states (as of 2016) binge drink 13% fewertimes per month than non-cannabis states.
COWEN.COMPlease see pages 59 to 62 of this report for important disclosures.3
What's New
We now expect the category to generate ~$75 billion in gross sales by 2030 (up from $50bn by 2026). This new forecast reflects:
■ Binge Drinking Intensity Variances. States for which adult use cannabis is available (as of2016) already had binge drinking intensity rates that fall ~9% below the national average,and ~11% below non-cannabis states. Newly added states (like CA, NV) currently havehigher rates of binge drinking intensity, and lower levels of cannabis consumption, thoughwe expect mean reversion for these states too, given the historical precedent. As such,we believe it’s reasonable to assume that as more legal cannabis states come on-line,alcohol binge drinking intensity should fall.
■ Binge Drinking Volumes: Binges Per Month. While the CDC estimates ~17% of the U.S.population reports binge drinking, only 1 in 6 report doing so 4+ times per month. In legaladult use cannabis states, the number binge drinking sessions per month (for states legalthrough 2016) was ~9% below the national average.
■ Category Spending. While we had forecast a 2026 total cannabis market of $50 bn by2026, new forecasts suggest that the market is already that size. As such, we are revisingour forecasting methodology, including a higher per capita spending estimate. With areported 35 mm annual cannabis consumers, current estimates imply annual spendingof $1,500 per year (well ahead of our initial $1,000 forecast). This likely reflects theresponse bias in the number of cannabis users (given its Schedule I status). As such, weraise our estimate by 25% as an offset.
■ Category Retention. Lots of consumers have tried both alcohol and cannabis in theirlifetime: ~209 mm for alcohol and ~115 mm for cannabis (as of 2016, according togovernment forecasts, for which cannabis is subject to a response bias as a Schedule Inarcotic). But, while consumers come back to alcohol at consistently high rates, the sameis not true for cannabis (at least as reported). However, the gap has been closing overthe last decade and we expect that trend to persist. And, despite the convergence inconsumer consumption, our ~$75 bn estimate still puts cannabis category retention ~34pts behind alcohol on a past year basis.
■ First Use Cannabis Benchmarking. Our new analysis introduces cannabis “first use”data (the % of 18+ consumers who have tried cannabis in the last year). To be clear, thisdoes not reinforce the notion that cannabis is a gateway drug; we address that in the“Unintended Consequences” section of the note. But, among consumers over the ageof 18, in legal cannabis states, they show a greater propensity for cannabis trial, whichultimately looks to translate to higher levels of past month cannabis incidence.
■ Expanded Opioid Research. According to a November 2017 White House report,the opioid epidemic costs our country ~$500 bn per year (and that cost is growingexponentially). Newly published research reinforces the work that we have already done,showing that for some, cannabis is an effective opioid substitute (in particular in treatingchronic pain).
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COWENEQUITY RESEARCH April 4, 2018
Stock Implications
We remain Outperform rated on the three cannabis companies under our coverage: KSHB,WEED, and LEAF. While this report focuses on the U.S. and has direct implications forKSHB, the trends that we've historically seen for cannabis in the U.S. tend to be mirrored inCanada, building on our conviction around the cannabis opportunity for WEED and LEAF asthe Canadian market expands to adult use later in 2018. Meanwhile, our extensive analysison the impact that legal cannabis access can have on overall drinking patterns reinforcesour conviction that cannabis and alcohol are substitute products. We believe that lower-end beer is most exposed to this substitution risk, such that we remain cautious on MarketPerform-rated TAP.
What to Watch
Growing consumer support for legal cannabis, and increased access, looks to be drivingmeaningful change at the state level. We expect to see ballot initiatives to legalize cannabisfor adult use in both Michigan and Illinois in the upcoming November election. As well, anumber of states are looking at expanding cannabis access (both medical and adult use) viathe legislative and executive branches (with New Jersey the most likely in 2019). Expandedaccess to Maine, Massachusetts and New Jersey could prompt other states in the Northeastto make changes.
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COWENEQUITY RESEARCH April 4, 2018
Cannabis: $75B Opportunity; Category Cross-Currents Keep Us Cautious On Booze
Next week, we head to Los Angeles for Cowen’s 2nd Annual Cannabis Summit. We
launched on the sector with a collaborative analysis spanning 10 Cowen Analysts in
September 2016 (here). A lot has changed since then.
18 months ago, we estimated that the legal cannabis market would generate $50 bn in
legal sales by 2026. Today, we think the direct and indirect revenue opportunities (and
risks) are far greater. Assuming federal legalization, we believe cannabis can generate
gross sales of ~$75 bn by 2030 (and ~$17.5 bn in tax revenue), though still far less than
the over $210 bn in sales that the alcohol industry generates today.
Our new proprietary analysis supports our view that cannabis is a substitute social
lubricant for alcohol, and will likely continue to present an incremental headwind to
alcohol sales, in particular beer. Our revised outlook reflects the following:
1. Legal Bud Weighing on Binge Drinking. Herein, we build on our work around alcohol
and cannabis substitution by introducing unique analysis around the evolution of
binge drinking trends across the U.S., segmented by cannabis states. We found that
states with access to adult use cannabis binge drink ~5% less frequently per month
than medical cannabis states (using 2016 legal status) and ~13% less frequently
than non-cannabis states. As cannabis access expands, we expect further pressure
on alcohol sales, given this notable divide in consumer consumption patterns.
2. Extended Outlook: $75 bn Opportunity by 2030. We extend our outlook for the
cannabis market to 2030, while also revising our underlying methodology to reflect
both the market’s evolution and a better understanding of those underlying drivers.
In addition to refining our user evolution analysis, we also adjust our spending
estimates to account for the response bias in government user numbers. Initially,
we had estimated per capita annual spend of ~$1,000 (with no meaningful increase
in the next decade). However, with the market now estimated to be $50 mm, today
this calls into question that rate of spend, given the estimated 35 mm consumers in
the category. As such, we revise up our targeted spend by ~25%, which partially
mitigates this disparity, as we continue to believe that underlying spending is likely
~$1,000 per year.
Figure 1 Per Capita Spend Estimates Reflect a Notable Response Bias Among Consumers
Source: State Reports, NSDUH and Cowen and Company
This outsized user growth among older consumers has driven a notable shift in
underlying past month cannabis user demographics. Consumers under the age of 30 are
still a large block (38% of admitted consumers in 2016, vs. 45% in 2006). However, the
far more notable change has been the proportion of past month users over the age of
55, who now account for 17% of past month users, up from only 5% 10 years ago.
Figure 48 21-25 Year Olds Remain the Largest Cohort…
Figure 49 …But, 55+ is the Fastest Growing
21-25
29%
26-29
16%30-34
12%
35-39
11%
40-44
11%
45-49
9%
50-54
7%
55+
5%
Past Month User Mix (2006)
21-25
23%
26-29
15%
30-34
14%
35-39
10%
40-44
7%
45-49
7%
50-54
7%
55+
17%
Past Month User Mix (2016)
Source: NSDUH and Cowen and Company Source: NSDUH and Cowen and Company
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COWENEQUITY RESEARCH April 4, 2018
Cannabis Use by Education Level. The shift in cannabis consumption by age cohort is
mirrored by changes in other consumer segments. From an education perspective, we
continue to see outsized admitted past month incidence led by consumers with lower
levels or educational attainment. However, as was true with the age segmentation, the
most robust growth is coming from more highly educated consumers, that have
historically under-indexed to cannabis consumption.
Figure 50 Cannabis Growing in Popularity with Most Cohorts
Figure 51 Strong Cannabis Uptake Among Highly Educated Consumers
6.6%
11.3%
10.0%
8.3%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Past Month Cannabis Incidence
< High School High School GraduateSome College College Grad
-1.4%
4.1%
10.0%11.6%
1.4%3.1%
8.6%7.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
< High School High School
Graduate
Some College College Grad
Past Month Cannabis Users by Education
5-Yr CAGR 10-Yr CAGR
Note: Ages 18+
Source: NSDUH and Cowen and Company
Note: Ages 18+
Source: NSDUH and Cowen and Company
Interestingly, these past month user rates don’t seem to be a function of lifetime trial.
Indeed, lifetime trial is in fact higher among consumers with higher levels of educational
attainment. This helps to explain the outsized growth that we are seeing from more
highly educated consumers, as these adults had already tried cannabis, and simply look
to be re-engaging with the category, as the groups’ past month use to lifetime trial ratio
looks to be approaching levels that we have seen for consumers with lower levels of
educational attainment.
Figure 52 While Incidence Varies by Education…Trial Is Generally High
8.3%
32.6%
10.0%
44.5%
11.3%
53.5%
6.6%
48.5%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Past Month Lifetime
Cannabis Use by Education
< High School High School Graduate Some College College Graduate
Note: Based on 2016 data
Source: NSDUH and Cowen and Company
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COWENEQUITY RESEARCH April 4, 2018
Cannabis Use by Income. This normalization in consumer cannabis trends by age and
educational cohort is also mirrored by income-specific data. Growth in the absolute
number of users has been fairly consistent by income cohort. What’s perhaps more
interesting is the consistency in lifetime trial, which is over 40% regardless of income
bracket. As such, while past month use has historically been inversely correlated with
household income, the normalization of cannabis consumption would point to an
outsized opportunity to re-engage lapsed, higher-income consumers.
Figure 53 Lower-Income Consumers Over-Index to Cannabis
Figure 54 Cannabis Trial Consistent Across Income Groups
3.1%
2.3%2.7%
2.3%
3.9%
2.8%
3.7%3.1%
0.0%
2.0%
4.0%
6.0%
< $20K $20K-$49.9K $50K-$74.9K > $75K
10-Yr Change in Cannabis Incidence by Income (2005-2015, in %)
Past Month Past Year
11.3%
41.0%
8.9%
41.0%
7.8%
45.2%
6.6%
47.3%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
Past Month Lifetime
Cannabis Use by Income
< $20K $20K-$49.9K $50K-$74.9K > $75K
Note: Ages 12+
Source: NSDUH and Cowen and Company
Note: Based on 2015 data
Source: NSDUH and Cowen and Company
Cannabis Use by Gender. While the gender gap in past month and past year cannabis
use remains wide (with male incidence higher than for women), the gap has been
closing. Specifically, in 2016 male cannabis incidence was 11.7%, while female cannabis
incidence was 6.7%, both on a past month basis. However, over the last decade, male
past month cannabis incidence has risen 3.5 pts, while female cannabis incidence has
increased 2.9 pts.
Figure 55 While Male Incidence Surpasses Female Incidence…
Figure 56 …Female Usage Has Been Accelerating Faster
13.3%
17.3%
7.7%
11.2%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Cannabis Past Year Cannabis Incidence
Male Female
8.0%
11.7%
4.1%
6.7%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Cannabis Past Month Cannabis Incidence
Male Female
Source: NSDUH and Cowen and Company Source: NSDUH and Cowen and Company
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COWENEQUITY RESEARCH April 4, 2018
Political Pivot
As we think ahead to expanded cannabis access, increased consumer support should
continue to drive a political pivot. Seemingly, the robust support that was broadly seen
during the 2016 election cycle was a good earlier indicator that consumer demands and
political action likely needed to converge further.
Since the 2016 election, there is already ample evidence that political momentum
around cannabis (both medical and adult use) continues to build. Indeed, we have
already seen:
1) West Virginia. Governor Jim Justice (R) signed a medical cannabis bill in April 2017.
In a deep red Republican state, this move is telling, given that West Virginia has one
of the highest rates of opioid morbidity in the country (as discussed below).
Implementation won’t occur sooner than July 2019.
2) Vermont. Vermont became the first state to legalize cannabis for adult use through
their state legislature. While the measure does not include taxation or legal retail, it
is an interesting shift from the 100% ballot-led moves we have typically seen.
3) Utah. In mid-March, Governor Gary Hubert (R) signed House Bill 195, which will
give restrictive medical marijuana access to terminally-ill patients.
2018 Elections
1) Michigan. MI is close to approving a ballot measure for adult use cannabis in the
upcoming 2018 election, which requires supporters to obtain ~250,000 verified
signatures before moving on. After approving medical cannabis in 2008, MI is one
of the largest medical cannabis states in the country, with almost 270,000 qualified
patients as of September 2017 (representing over 20% growth since the year-ago
period).
While the election is still seven months away, it is already becoming a relevant issue
in the upcoming primaries. Among Democratic candidates for Attorney General,
Dana Nessel has been a vocal supporter; her Democratic opponent Patrick Miles
recently flipped into the “yes” column, after not having commented.
2) Illinois. After state senators voted 37-13 in March 2018 to put adult-use
legalization on the November 2018 ballot, it’s already become a hot-button topic in
the upcoming Gubernatorial race. Incumbent Bruce Rauner (R) opposes marijuana
legalization (though he did decriminalize small possessions and extended the state’s
medical cannabis program through 2020). His Democratic opponent J.B. Pritzker,
who won a 6-candidate primary with 45% of the vote (~20 pts ahead of the runner-
up), has made legalizing adult use cannabis as a key campaign point.
Of note, the primary election that determined these candidates in Cook County
included a non-binding measure on adult use legalization. Cook County, which
covers Chicago, the second largest municipality in the U.S., voted overwhelmingly
for adult use cannabis (at 63%), which we find to be a noteworthy straw poll.
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COWENEQUITY RESEARCH April 4, 2018
3) Oklahoma. After Jeff Session announced the repeal of the Cole Memo, Oklahoma’s
Governor Mary Fallin (R) announced the inclusion of a medical marijuana ballot
measure for the state’s June 26, 2018 primary. This move comes as a result of a
2016 petition that gathered ~66,000 signatures from state residents in support of
adding the measure to the ballot.
If successfully passed, the measure would allow those aged 18 or older to carry
“small amounts” of cannabis and grow a “restricted number” of plants, with both
requiring a doctor’s permission.
Adult-Use States on the Horizon
1) New Jersey. NJ has been contemplating the legalization of adult use cannabis since
2016. Then Senate President Stephen Sweeney (D) noted that legalization would
be a “game-changer” for the state and indicated his intention to pursue legalization
in 2018 (upon the election of a new governor). Newly-elected Governor Phil
Murphy (D) unveiled his budget in late March, which included a provision for
legalization by January 2019 (with an estimate for $60 mm in tax revenue
generation). The State Assembly has until June to ratify the budget.
2) Connecticut. While exiting Governor Dannel Malloy (D) has historically been against
cannabis legalization, in the Governor’s FY19 Budget, while not in the formal
budget proposal, his administration did include an alternative to the recommended
revisions, which included the possibility for “legalizing and taxing the recreational
use of marijuana.”
CT’s Gubernatorial primary, which has crowded fields on both sides, will be held on
August 14, 2018 (ahead of the general election in November). In the meantime, the
General Assembly has the opportunity to consider legalization as well, with several
bills in Committee, though the measure continues to see Republican opposition.
3) Delaware. The Adult Use Cannabis Task Force studied the issue for six months,
with the committee concluding their work in March 2018. While the vote was
close, the committee will release their report, which findings can be utilized by the
General Assembly in crafting potential legislation.
4) Rhode Island. In April 2017, Governor Gina Raimondo (D) endorsed the formation
of an exploratory committee around the legalization of adult use cannabis.
5) New Mexico. In February 2018, the Senate Rules Committee voted four to three to
include a ballot in the upcoming November election to vote on adult use cannabis
legalization. As well, the state legislature is considering adding opioid use disorder
as a qualifying condition for medical cannabis patients.
6) Minnesota. House File 2714 and House File 926 were submitted in May and
February 2017, respectively, in order to have the question of adult use cannabis
legalization appear on the November 2018 ballot. Out of the Democratic-Farmer-
Labor candidates, five out of six of them, including the retiring DFL Governor Mark
Dayton, have said they favor legalizing cannabis for adult use.
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COWENEQUITY RESEARCH April 4, 2018
Medical States on the Horizon
1) Nebraska. In January 2018, Legislative Resolution 293CA was introduced by
Senator Anna Wishart (D) to add a constitutional amendment for medical cannabis
use, subject to regulation. Governor Pete Ricketts (R), a known cannabis-opposer,
will face opposition from cannabis-enthusiast Krystal Gabel (R) in the upcoming
election.
2) Missouri. New Approach Missouri, the leading campaign trying to bring legal
medical cannabis to Missouri recently collected 250,000 signatures to get medical
cannabis on the November 2018 ballot. The petition has until May 2018 to collect
signatures before filing with the secretary of state for verification.
3) Utah. In addition to approving restrictive medical marijuana use to terminally ill
patients, Governor Gary Hubert (R) also approved House Bill 197 and Senate Bill
130, which would allow the state Department of Agriculture and Food to contract
the production and storage of approved marijuana products, and to approve the
sale of CBD oil, respectively.
This mounting focus on cannabis is not a surprise given the broad-based support for
legalizing cannabis evident in the November 2016 elections, where 8 out of 9 cannabis
ballot measures passed (and Arizona losing by a small 130 bps margin). As a result,
~60% of the U.S. population now resides in a state that has (or will have) access to
medical cannabis. And, by year-end 2018, assuming MA and ME open on time, adult-use
cannabis will cover ~25% of U.S. GDP.
Figure 57 Clear Support For Cannabis Across Most Voting States in 2016
Election 2016 - Cannabis Ballot Results
State Ballot Number Approval Disapprove
Legalization Ballot Initatives
California Proposition 64 57.1% 42.9%
Maine Question 1 50.3% 49.7%
Massachusetts Question 4 53.7% 46.3%
Nevada Question 2 54.5% 45.5%
Arizona Proposition 205 48.7% 51.3%
Medical Ballot Initiatives
Arkansas Issue 6 53.1% 46.8%
Florida Amendment 2 71.3% 28.7%
Montana I-182 57.9% 43.7%
North Dakota Measure 5 63.8% 36.2%
Source: Ballotpedia and Cowen and Company
COWEN.COM 29
COWENEQUITY RESEARCH April 4, 2018
Attractive Tax Revenue Opportunity
One reason that we believe cannabis legalization will continue to gain momentum is that
in CO, WA and OR collectively, tax revenue generation has meaningfully exceeded
expectations. According to the Cato Institute: “One area where legal marijuana has
reaped unexpectedly large benefits is state tax revenue.”
In total, CO, WA and OR are now expected to generate $1.4 billion in cannabis tax
revenue in the upcoming biennial fiscal year, 24% higher than was expected 12 months
ago. Moreover, each of these three states has consistently raised their tax revenue
forecasts on a 12-month basis (e.g., 12 months before the preliminary data was
released), in each of the full fiscal years that adult use cannabis has been legal.
Impressively, cannabis is expected to account for 1.3% of GDP for these three states
between 2017 and 2019 (according to state budget forecasts), with the contribution
from cannabis taxes to GDP having doubled in 2016, and having increased another 50%
in 2017 in CO, WA and OR combined.
Taking our 2030 estimate for total gross cannabis sales of $75 bn, and assuming all of
that is through legal channels, we estimate that the cannabis category could ultimately
generate ~$17.5 bn in tax revenues, including:
1) ~$3 bn in Federal Taxes (assuming a 5% federal excise tax),
2) $11.5 bn in States Taxes (assuming a 20% state excise tax),
3) ~$3 bn in Local Taxes (assuming a 5% tax rate).
Figure 58 Tax Revenues Generally Ahead of Expectations
Figure 59 CO Has Been a Consistent Positive Revision Story
1.7%
1.1%
0.3%
1.0%
2.4%
1.0%0.8%
1.3%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
CO WA OR CO+WA+OR
Cannabis % Contribution to Overall Revisions
(2017-2019 - Biennium)
12 Month Ago Expectations Current Expectations
0.3%
0.6%
0.9%
1.3%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
2015 2016 2017 2017-
2019E
% Cannabis Tax Contribution (CO+WA+OR)
Note: CO and WA based on Sept Expectations and OR based on May expectations for current year, June expectations for past year; Not adjusted for changes in tax structure
Source: Colorado Legislative Council Staff, Washington Economic and Revenue Forecast Council, Oregon Office of Economic Analysis, and Cowen and Company
Source: Colorado Legislative Council Staff, Washington Economic and Revenue Forecast Council and Cowen and Company
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COWENEQUITY RESEARCH April 4, 2018
Colorado
FY 16/17 tax receipts of $211 million, ~75% higher than expected two years
ago (Dec. 2015).
~50% increase in taxes YoY, in the 4th year of adult use.
Figure 60 CO Steadily Raised Outlook…
Figure 61 …As Tax Receipts Grow 50% in Year 4
$0
$50
$100
$150
$200
$250
Total Proposition
AA Taxes
Total 2.90% Sales
Tax
Total Taxes on
Marijuana
CO Projected Cannabis Taxes (FY 16/17)
Dec-14 Dec-15 Dec-16 Dec-17
+75%+83%
+50%
2%6% 6%
11%15%
11%14%
19%22%
33%32%
44%49%49%
0%
10%
20%
30%
40%
50%
60%
Se
p-1
4
De
c-1
4
Mar
-15
Jun
-15
Se
p-1
5
De
c-1
5
Mar
-16
Jun
-16
Se
p-1
6
De
c-1
6
Mar
-17
Jun
-17
Se
p-1
7
De
c-1
7
CO Projected Growth for FY 16/17 Cannabis
Taxes
Source: Colorado Legislative Council Staff, Washington Economic and Revenue Forecast Council and Cowen and Company
Source: Colorado Legislative Council Staff and Cowen and Company
Oregon
FY17 tax receipts came in over 2x what was forecast in the prior year, at $70
million (up from $33 million in May 2016).
The biennium tax outlook for OR looks equally encouraging, with an expected
$160 million in receipts as of December 2017, up 156% since May 2016.
Figure 62 Tax Revenue Generation in Oregon…
Figure 63 …is Expected to Accelerate
$11$12
$28$22
$33
$21
$70
$0
$20
$40
$60
$80
FY 2016 FY 2017
Gross Marijuana Revenue Projections (not incl. licenses and fees), USD in mm
HB2041(2015) SB 1511 (2016) May-16 Actual
$47$62 $62 $62
$157 $160 $160
$0
$50
$100
$150
$200
Gross Marijuana Revenues Porjections (FY 2017-
19 Biennium), USD in mm
Source: Oregon Legislative Revenue Office, Oregon Office of Economic Analysis and Cowen and Company
Source: Oregon Legislative Revenue Office, Oregon Office of Economic Analysis and Cowen and Company
COWEN.COM 31
COWENEQUITY RESEARCH April 4, 2018
Nevada
While Nevada is a relatively newer state, trends look encouraging. In the first seven
months of legalization (after the market opened on July 1, 2017), tax revenue collection
has totaled ~$36 mm. What is more, in the last four months, tax revenue generation
has exceeded $5 mm (which is the targeted collection that the state budgeted for). On
its current trajectory, tax revenue generation looks poised to at least come in $11 mm
ahead of the state’s two-year estimate (for $120 mm in tax collection).
Figure 64 After Seven Months, Nevada’s Run-Rate Is On-Track to Meet Its 2-Yr Target
$36
$131
$0
$50
$100
$150
Jul-
17
Au
g-1
7
Se
p-1
7
Oct
-17
No
v-1
7
De
c-1
7
Jan
-18
Feb
-18
Mar
-18
Ap
r-1
8
May
-…
Jun
-18
Jul-
18
Au
g-1
8
Se
p-1
8
Oct
-18
No
v-1
8
De
c-1
8
Jan
-19
Feb
-19
Mar
-19
Ap
r-1
9
May
-…
Jun
-19
Nevada Cumulative Cannabis Taxes at T3M Run-Rate ($ in mm)
Note: Assumes a $5.6 million run-rate beginning in February 2018 (which is the trailing 3-month average)
Source: Nevada Department of Taxation and Cowen and Company
Washington
WA is a cautionary tale on excessive taxation, in particular when competing with a large
and established illicit market.
Biennial total cannabis excise taxes and license fees for 2015 – 2017 came in
at $469 million, 250% higher than the February 2014 projected cannabis
excise taxes and license fees.
Washington originally set their cannabis tax as a 25% tax rate on the producer,
processor and retailer, but changed it to a single 37% rate charged at retail in
July 2015. This change coincided with a change to tax modeling methodology,
which has improved the accuracy of Washington’s forecasting.
Figure 65 WA Made a Notable Tax Change…
Figure 66 …Though Tax Growth Rates Remained Impressive
$749
$0
$200
$400
$600
$800
Feb-
14
Sep-
14
Nov-
14
Feb-
15
Jun-
15
Sep-
15
Nov-
15
Feb-
16
Jun-
16
Sep-
16
Nov-
16
Mar
-17
Jun-
17
Sep-
17
Nov-
17
Feb-
18
WA Projected Cannabis Excise and License Taxes (FY 2017-2019 Biennium), USD in mm
96%
75%64%
86%
67%63%60%58%55%55%47%46%
58%58%60%
0%
20%
40%
60%
80%
100%
120%
Sep-
14
Nov
-14
Feb-
15
Jun-
15
Sep-
15
Nov
-15
Feb-
16
Jun-
16
Sep-
16
Nov
-16
Mar
-17
Jun-
17
Sep-
17
Nov
-17
Feb-
18
WA Projected Growth (FY 2017-2019 Biennium)
Note: Legislation was passed changing the tax structure between the Feb 2015 and June 2015
Source: Washington Economic and Revenue Forecast Council and Cowen and Company
Note: Legislation was passed changing the tax structure between the Feb 2015 and June 2015
Source: Washington Economic and Revenue Forecast Council and Cowen and Company
COWEN.COM32
COWENEQUITY RESEARCH April 4, 2018
Criminal Justice Cost Savings: $3bn + Opportunity
According to the ACLU, over 8 mm individuals in the U.S. were arrested for cannabis
related charges between 2001 and 2010 (with 88% arrested for simple possession).
Indeed, in 2010, cannabis accounted for 52% of total drug-related arrests. And, among
those arrested, African-Americans are four times more likely to be arrested, even
though use rates between African Americans and Whites are fairly similar (with even
higher proportions of arrests in select states). While cannabis clearly represents an
important social justice issue, legalization would also offer meaningful cost savings. The
same ACLU study estimated that states spend $3.6 billion annually enforcing marijuana
Our valuation methodology is primarily based on Price-to-Earnings (P/E), followed byRelative Price-to-Earnings (vs. the S&P 500), Price-to-Sales (P/S) as well as Enterprise Valueto EBITDA (EV/EBITDA). In cases where GAAP net income includes large, non-cash items(e.g., restructuring charges), we may use non-GAAP EPS.
Cannabis:
Our valuation methodology is primarily based on DCF, followed by Price-to-Sales. In caseswhere GAAP net income includes large, non-cash items (e.g., restructuring charges), we mayuse non-GAAP EPS.
Investment Risks
The global beverage industry is subject to a number of potential headwinds. For alcoholicbeverages, heightened regulation and taxation are key risks, as is emerging access to legalcannabis. For non-alcoholic beverages, declining consumption, in particular for carbonatedsoft drinks, represents a key headwind, as do health and wellness concerns around artificialsweeteners. What is more, energy drinks have also come under scrutiny, which has resultedin softer demand, as well as litigation and regulatory risks.
Cannabis: Cannabis is an emerging industry and is subject to regulatory headwinds. Whileover 50% of the population is in favor of legalization, only a few states have thus farlegalized cannabis for recreational use and the product remains illegal at the federal level.Looking forward, much work and change still needs to occur in order for this industry torealize its full potential.
Risks Pertaining to U.S. Cannabis-Related Companies: If you are considering investing in aU.S. company that is connected to the cannabis industry, be aware that cannabis-relatedcompanies may be at risk of federal and/or state criminal prosecution. The Department ofTreasury has issued guidance that The Controlled Substances Act (“CSA”) makes it illegalunder U.S. federal law to manufacture, distribute, or dispense cannabis and cannabis-relatedproducts. Many states impose and enforce similar prohibitions. Notwithstanding the federalban, however, many U.S. states and the District of Columbia have legalized certain cannabis-related activities.
Risks Pertaining to Canadian Cannabis-Related Companies: In Canada, cannabis is anemerging industry and is subject to regulatory headwinds. While medical cannabis is legalin Canada, legislation has also been introduced to legalize adult-use sales no later than July2018. An initial regulatory framework has been laid out for the adult-use market, lookingahead, the category will be subject a number of potential headwinds, including taxes andrestrictions on from factors and packaging.
COWEN.COM 59
COWENEQUITY RESEARCH April 4, 2018
ADDENDUM
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Further information on subject securities may be obtained from our offices. This research report is published solely for information purposes, and is not to be construed as an offerto sell or the solicitation of an offer to buy any security in any state where such an offer or solicitation would be illegal. Other than disclosures relating to Cowen and Company, LLC,the information herein is based on sources we believe to be reliable but is not guaranteed by us and does not purport to be a complete statement or summary of the available data.Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice. The opinions and recommendations herein do not take intoaccount individual client circumstances, objectives or needs and are not intended as recommendations of investment strategy. The recipients of this report must make their ownindependent decisions regarding any securities subject to this research report. In some cases, securities and other financial instruments may be difficult to value or sell and reliableinformation about the value or risks related to the security or financial instrument may be difficult to obtain. To the extent that this report discusses any legal proceedings or issues,it has not been prepared to express or intended to express any legal conclusion, opinion or advice. Our salespeople, traders and other professionals may provide oral or writtenmarket commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed in our research. Our principal trading area and investingbusinesses may make investment decisions that are inconsistent with recommendations or views expressed in our research. Cowen and Company, LLC maintains physical, electronicand procedural information barriers to address the flow of information between and among departments within Cowen and Company, LLC in order to prevent and avoid conflicts ofinterest with respect to analyst recommendations.For important disclosures regarding the companies that are the subject of this research report, please contact Compliance Department, Cowen and Company, LLC, 599 LexingtonAvenue, 20th Floor, New York, NY 10022. In addition, the same important disclosures, with the exception of the valuation methods and risks, are available on the Firm's disclosurewebsite at https://cowen.bluematrix.com/sellside/Disclosures.action.
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From time to time “Cowen Credit Research and Trading” research analysts provide investment recommendations on securities that are the subject of this report. Theserecommendations are intended only as of the time and date of publication and only within the parameters specified in each individual report. “Cowen Credit Research and Trading”investment recommendations are made strictly on a case-by-case basis, and no recommendation is provided as part of an overarching rating system or other set of consistentlyapplied benchmarks. The views expressed in this report may differ from the views offered in the firm’s equity research reports prepared for our clients.
Notice to UK Investors: This publication is produced by Cowen and Company, LLC which is regulated in the United States by FINRA. It is to be communicated only to persons of a kinddescribed in Articles 19 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. It must not be further transmitted to any other person without ourconsent.Notice to European Union Investors: Individuals producing recommendations are required to obtain certain licenses by the Financial Regulatory Authority (FINRA). You can review theauthor’s current licensing status and history, employment history and, if any, reported regulatory, customer dispute, criminal and other matters via “Brokercheck by FINRA” at http://brokercheck.finra.org/. An individual’s licensing status with FINRA should not be construed as an endorsement by FINRA. General biographical information is also available for eachResearch Analyst at www.cowen.com.
Additionally, the complete preceding 12-month recommendations history related to recommendation in this research report is available at https://cowen.bluematrix.com/sellside/Disclosures.action
The recommendation contained in this report was produced at April 03, 2018, 17:30 ET. and disseminated at April 04, 2018, 05:28 ET.
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COWEN AND COMPANY EQUITY RESEARCH RATING DEFINITIONS
Outperform (1): The stock is expected to achieve a total positive return of at least 15% over the next 12 months
Market Perform (2): The stock is expected to have a total return that falls between the parameters of an Outperform and Underperform over the next 12 months
Underperform (3): Stock is expected to achieve a total negative return of at least 10% over the next 12 months
Assumption: The expected total return calculation includes anticipated dividend yield
Cowen and Company Equity Research Rating DistributionDistribution of Ratings/Investment Banking Services (IB) as of 03/31/18Rating Count Ratings Distribution Count IB Services/Past 12 MonthsBuy (a) 460 62.33% 111 24.13%Hold (b) 266 36.04% 13 4.89%Sell (c) 12 1.63% 0 0.00%(a) Corresponds to "Outperform" rated stocks as defined in Cowen and Company, LLC's equity research rating definitions. (b) Corresponds to "Market Perform" as defined in Cowenand Company, LLC's equity research ratings definitions. (c) Corresponds to "Underperform" as defined in Cowen and Company, LLC's equity research ratings definitions. Cowen andCompany Equity Research Rating Distribution Table does not include any company for which the equity research rating is currently suspended or any debt security followed by CowenCredit Research and Trading.
Note: "Buy", "Hold" and "Sell" are not terms that Cowen and Company, LLC uses in its ratings system and should not be construed as investment options. Rather, these ratings termsare used illustratively to comply with FINRA regulation.