Cannabis Industry Trends for 2022
April 19, 2022
By Hubert Klein and Michael C. Bentivegna
The medical and recreational marijuana growing and retail industry, which includes both employer and non-employer establishments, has flourished recently with revenues, profits, employment, wages and the number of businesses growing between 20% and 30% from 2016 through 2021, per IBISWorld. Recent data indicates there have been watershed legalization victories in recent years, most notably during the 2016 and 2020 election cycles. This has helped propel the cannabis industry to one of the fastest growing in the U.S.
Just last year, there has been an increase of 16 additional states, territories and the District of Columbia legalizing various areas of the cannabis industry. This raises the total to 37 different jurisdictions that recognize and legalize various aspects of the recreational and/or medical cannabis industry. In addition, research shows that consumer attitudes are also accelerating legalization efforts at the state level. In 2021, Gallup reported that an estimated 80% of U.S. citizens approve of legal access to medical marijuana, while 60% approve of full adult-use legalization.
The growing acceptance of medical and recreational marijuana is providing growers and investors with unprecedented opportunities. As a result, industry revenue is forecast to continue its growth. The U.S. cannabis industry hit a record of $24 billion in sales in 2021, with expected annual sales of $70 billion by 2026.
In both the 2016 and 2020 elections, states increasingly passed legalization laws. These legislative victories catalyzed industry operations by providing new opportunities for growth. The licensing of commercial recreational marijuana growers in these states contributed to industry revenue growth of 40.8% in 2016, as new entrants flooded the market. In addition to the favorable regulatory environment in many states, medical marijuana growers have continued to benefit from the steadily aging population. As chronic illnesses and cancer become more prevalent as individuals age, these ailments drive demand for medical marijuana products. As recreational marijuana continues to become legalized and accepted by different states, profit for industry operators is anticipated to increase.
What does this all mean? The industry outlook remains positive, and there are several notable trends we are seeing.
According to a report released by the National Organization for the Reform of Marijuana Laws, lawmakers enacted more than 50 new cannabis-related reform laws in 2021 alone. There is continued public and political support for legislative change as a result. For example, in April 2022, the U.S. House of Representatives passed the Marijuana Opportunity Reinvestment and Expungement (“MORE”) Act. This legislation, if passed by the U.S. Senate and signed by President Biden, will remove marijuana from the list of Schedule I drugs as well as eliminate criminal penalties for growers, distributors and individuals who possess cannabis or cannabis-related products.
Industry Growth and Outlook
All recent trends and data point to continued growth for the cannabis industry. According to IBISWorld, revenue growth from 2021 to 2026 is expected to increase at an annualized rate of 18.3% to $26.9 billion. The future of the industry remains uncertain and has a lot of inherent risk associated with that uncertainty. However, the federal government not getting involved in drafting and passing legislation (e.g., MORE Act) is another favorable factor because it appears there has been a change in public opinion, which could ultimately result in a change in public policy.
The continued legalization will fuel further the demand for medical and recreational cannabis products. Experts predict that as surrounding nations, notably, Canada and Mexico, legalize cannabis within their countries, the U.S. government may likely follow suit. For now, it is a waiting game.
Intellectual Property and Brand Development
As the cannabis industry has grown over the past several years, there has been an increased development of intellectual property (“IP”) assets by those involved in both the growing and retail sectors. For many cannabis businesses, their IP is generally their most valuable asset.
IP includes assets such as patents, copyrights, trademarks and name identities. Many growing operations are aligned with or own an interest in a research facility where they develop various genetic strains and refine the product formulation. Other growers, manufacturers or retail establishments develop trademarks or brand identities by way of brand names to differentiate themselves and gain market share and acceptance.
Like most other industries, these assets have value and could be also disputed. Businesses will need to develop policies and procedures to register, protect and defend their intellectual property rights for their strains and branded products. Lastly, it is essential for cannabis entrepreneurs to understand their IP rights and the benefits they can provide as well as the potential problems that may occur when IP rights are ignored or overlooked.
Mergers, Acquisitions and Valuation
According to industry reports, 2021 was a banner year for cannabis M&A activity with 306 transactions reported through December versus 86 transactions reported in 2020. This represented a 306% increase in just one year alone.
According to industry data, 2022 is poised to see another year of significant growth in M&A activity. There is no one definitive reason on what is fueling all this activity, but like other growing industries there are many motivations for selling or acquiring a business: strategic alliances; acquisition of intellectual property, brand name or expertise; gaining market share; removing a competitor; adding or buying out an investor; or litigation.
Whatever the reason, there will be continued forward progress in deal activity in 2022. Add to that there may be federal legalization at some point. According to all indications right now, the cannabis industry is poised for another banner year of M&A activity, and it is only April.