Key Points
The United States is slowly moving toward the legalization of marijuana.
The next big step is the rescheduling of the drug at the federal level, which won't make it legal, just less illegal.
Canopy Growth's business won't be dramatically impacted either way.
Canopy Growth (NASDAQ: CGC) is one of a handful of marijuana stocks that were all the rage early on as investors thought pot would be a huge growth market. Pot demand has grown dramatically, but marijuana stocks didn't live up to the early hype. But will that change if the classification of marijuana changes at the Federal level in the United States? Not for Canopy Growth, here's why.
A slow progression for pot?
Marijuana has been legal to use in an increasing number of states. Some have focused on medical use, while others have gone all the way to legalizing recreational use. That opened the way for companies to grow and sell marijuana.
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There was just one problem. Marijuana is also regulated at the Federal level. For a long time, marijuana was considered to be in the same category as heroin. Now, however, the drug has been rescheduled, putting it in the same classification as acetaminophen, an over-the-counter pain medication. While pot is still regulated, the marijuana industry's path forward is much clearer. That could open up more opportunities for growth for marijuana companies in the U.S. market.
Canopy Growth isn't likely to benefit from rescheduling
Canopy Growth is a pot stock, so in the big picture, rescheduling is good news. However, Canopy Growth's core operations are in Canada and Europe. With regard to the U.S. market, the company's annual report explains:
We are not considered a U.S. Marijuana Issuer (as defined in the Canadian Securities Administrators Staff Notice 51-352 – Issuers with U.S. Marijuana-Related Activities (the "Staff Notice")) nor do we have material ancillary involvement in the U.S. cannabis industry in accordance with the Staff Notice. While we have an investment in Canopy USA, which is a platform that is intended to enable such U.S.-based companies that may themselves participate in the U.S. cannabis market to operate, the transaction structure was intended to ensure that we do not violate the federal laws of the United States respecting cannabis and do not allow us to participate in cannabis activities in the United States or direct the activities of Canopy USA. Where a noncontrolled affiliate has expressed an intent to enter the U.S. cannabis market, we have taken steps to insulate ourselves from all economic and voting interests.
That's a lot! The summary is that Canopy Growth is an investor in Canopy USA, but it doesn't directly control Canopy USA. That's issue number one. The second issue is that Canopy USA is more focused on recreational use than medical use, which Canopy Growth explained limits the benefit that Canopy USA will see from the rescheduling. Indeed, the rescheduling was meant to increase access to the drug for medical purposes and to make it easier for companies to do research around marijuana. Making it legal for recreational purposes is a goal that is further down the road.
Canopy Growth isn't in the right place at the right time
What's notable is that Canopy Growth is heavily involved in the medical marijuana market in Canada. In fact, the company recently strengthened its market position there by acquiring MTL Cannabis. But the uncertain legal environment in the United States led the company to take a different approach, limiting its exposure to and business control in the U.S. market.
That wasn't a bad business decision, given the circumstances and the opportunities available elsewhere. But it has left the company in a situation where U.S. rescheduling just isn't as big a deal as investors may hope. And it doesn't have as much control as investors may like to capitalize on such changes, anyway.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.