These Medical Marijuana Producers Are About to Take a Big Hit in Pennsylvania

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Cannabis company stock prices have taken a nearly year-long hit that some investors might describe as extreme considering the potential for federal marijuana legalization in the foreseeable future. Now, companies in Pennsylvania have more potential bad news coming down the pike from the state's department of health.

Failure to comply with a new order from the state agency could result in suspension or revocation of cannabis operator licenses. Two marijuana producers with a heavy concentration in The Keystone State are Jushi Holdings (OTC: JUSHF), and Trulieve Cannabis (OTC: TCNNF), both of which sell vape products in the state.

Ingredients are under the magnifying glass

On Nov. 16, the Pennsylvania Department of Health ordered a mandatory review of all vaporized medical cannabis products, due by Nov. 30. The review is aimed at products with "added ingredients," and includes products used in the inhalation process and for vaporization.

Some of the additives the agency may be looking for include Vitamin E Acetate, which has been linked to e-cigarette and vaping lung injury. The additive is used in some vape cartridges, and can become a dangerous carcinogen when heated and inhaled. But it's worth noting that these types of additives are more often found in products coming from illicit-market products, rather than those sold by regulated multi-state operators (MSOs).

Pennsylvania represents a market opportunity of 360,000 active certified medical marijuana patients, and more than $2 billion in sales since the medical marijuana program was launched. Any significant conclusions that result in restricted product sales, license suspension, or even revocation of license could have a major impact on the producer at fault. A setback could result in market share loss that might take years to regain.

 

Jushi's cash makes it a bit of a risk

Jushi celebrated the opening of its newest Beyond/Hello retail store in Pennsylvania on Oct. 22, only weeks before the order given by the state's department of health. Its newest retail store -- the 16th in the state -- brings Jushi's total to 26 spread across five states, meaning Pennsylvania now houses 61% of the total retail stores for Jushi.

Such a heavy concentration of stores in one state does put Jushi at a bit of risk, which would only further complicate recent financial struggles as outlined in its third-quarter earnings release. Revenue did show growth in the quarter of 117% on a year-over-year comparison, to $38 million, but the company did not come out of Q3 unscathed. Revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) were both guided downward, driven by slower store openings, growing regulatory complexities, and higher corporate overhead.

This marks the second consecutive quarter that EBITDA has declined, from a range of $40 million to $50 million in the first quarter to a recent $21 million to $25 million going into the fourth quarter. The company has $54 million in cash and equivalents on hand as of the end of Q3. That being said, after blowing through $32 million during the quarter, there's cause for concern on how the company will continue to grow.

Trulieve's size is everything

Trulieve has what Jushi lacks: retail size and spread. Among its vast catalog of products, the vertically integrated operator sells concentrates and vaporizer cartridges under its Muse brand through over 150 dispensaries spread across 11 states, with a leading position in what the company deems its cornerstone states of Arizona, Florida, and Pennsylvania -- where it has 19 retail stores within the state.

Where Trulieve holds another advantage over Jushi is highlighted in its third-quarter earnings report. Revenue came in at $224 million, representing a 64% increase year over year for the quarter, while EBITDA came in at $98 million. Unfortunately, growth has taken a toll on Trulieve, as its expenses saw a cumulative jump of 95% for the first nine months, and a 105% spike for Q3 on a year-over-year comparison.

 

What's the impact for investors?

The order given by the Pennsylvania Department of Health should be of interest to investors for various reasons. It could be that the state is putting tighter regulations in place as the country prepares for federal legalization, and the state could be viewed as a role model for a larger regulatory rollout.

But more than likely it's just getting a tighter grip on its own statewide regulations in order to make sure licensed producers are held accountable for the products they offer, as the state readies itself for recreational-use marijuana legalization as introduced by a bipartisan Senate bill in early October. Either way, it should be seen as one step back, and two steps ahead.

Jushi and Trulieve are both growing and have a solid footprint in the state that is the fifth-largest by population in the country. Both companies are vertically integrated multi-state operators that have abided by the regulatory requirements necessary to obtain licenses, so it's unlikely a review of products would put up a long-term challenge to overcome.

For now, I'd be less concerned with the impact on Trulieve based on its size and long-term potential. Jushi may be a bit riskier with a smaller cash reserve and smaller footprint. The state has not provided decision dates on the product reviews, but it might be a good idea to keep an eye out for any cannabis-related news coming out of Pennsylvania.

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