Marijuana Madness Turns Into A Cannabis Crash

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Sales disappoint, stocks tumble and startups scramble for financing

The party is over for cannabis companies.

Share prices of marijuana producers tumbled last week, some by nearly 40%, after a string of disappointing quarterly reports and mounting skepticism about the industry’s rosy growth forecasts.

Among the news this week: Two U.S. companies scrapped a merger initially valued at nearly $700 million. One Canadian producer said its prospects had become so uncertain that it was pulling its forecast for next year. Another warned it needed to find new sources of funding.

“The capital markets have dried up,” said Brian Athaide, chief executive of Green Organic Dutchman Holdings Ltd. TGOD 7.21% , a marijuana grower. The Toronto-area company said Thursday that construction financing for two cultivation and processing facilities, one slated for more than 1.3 million square feet, was being delayed.

Meanwhile, the stock of Hexo Corp. HEXO -5.69% , a producer in a joint venture with Molson Coors Brewing Co. TAP.A 13.02% , fell 38% last week. On Thursday, the Quebec company withdrew its revenue outlook of 400 million Canadian dollars (about US$300 million) for fiscal 2020, ending July 31, and said it expects fiscal 2019 revenue of between C$46.5 million to C$48.5 million.

Hexo Chief Executive Sébastien St-Louis cited lower sales and pot prices for the outlook, and said the company was making significant changes to its sales and operations strategy. The news came a week after Hexo’s finance chief had resigned. The stock closed Friday at C$3.35.

The darkening industry outlook derailed at least one large merger. Los Angeles-based MedMen Enterprises Inc. said Wednesday that it was scrapping its proposed all-stock takeover of Chicago-based PharmaCann LLC. Both companies operate dispensaries in several U.S. states.MedMen cited the difficult market conditions as one reason for walking away, noting that the Horizons Marijuana Life Sciences Index, which tracks cannabis stocks, has almost halved this year.

“The underperformance has made it increasingly more critical to allocate capital efficiently given the current industry headwinds,” MedMen said in a news release. A MedMen spokesman declined to comment.PharmaCann didn’t respond to a request for comment.

Most cannabis stocks are listed on exchanges in Canada, which has emerged as the leading financial market for the industry following the country’s legalization last year of recreational marijuana sales.

In the U.S., the use, sale or possession of marijuana is illegal under federal law, but a number of states have legalized cannabis.

Canada’s cannabis sector is dominated by five companies whose total market value has plunged from about $40 billion in September 2018 to roughly $17 billion as of Friday.

The largest company is Canopy Growth Corp. , whose stock has declined more than 30% this year despite the backing of Corona brewer Constellation Brands Inc., which controls 38% of the company’s stock.

Constellation, which made a $4 billion investment in Canopy in August last year, wrote down the value of the investment by $1.3 billion when it reported earnings earlier this month. On Thursday, Constellation’s finance chief was appointed Canopy’s board chairman.

Investors have grown pessimistic about the industry’s near-term outlook. Some companies are producing significantly more cannabis than they are able to sell in a Canadian retail market that is hampered by the government’s slow pace of licensing stores.

“People are less than pleased with the results out of Canada recently,” said Glenn Mattson, an analyst at Ladenburg Thalmann. “They are unhappy with the lack of retail infrastructure, and the ability to build up that infrastructure.”