| The US cannabis industry is in a rough patch, with low prices, scant financing and no sign of federal legalization on the horizon. Stock valuations have steadily slid since President Biden took office, and multistate operators are feeling the heat of illicit competition. It's a wide arrange of challenges — and a far cry from the optimism surrounding the industry of previous years. Offering insights on the outlook is Vivien Azer, managing director at Cowen and an analyst for cannabis, tobacco and beverages. As the first senior Wall Street analyst to cover marijuana, Azer has tracked the industry's progress from the very early days. Last year, Forbes placed her on its "Cannabis 42.0" list of influential industry figures, while Business Insider named her as a "rising star" of marijuana investing in 2018.  Vivien Azer Here, she answers our questions on pot prices, a lack of available financing and which states are handling their cannabis markets best. (Spoiler: They aren't New York or California.) The interview has been edited for length and clarity. With illicit markets still thriving, low prices for cannabis represent a big problem for cannabis companies. Is there any relief on the horizon? Or is this something that companies are just going to have to battle through? There has been some relief in price deflation, in particular west of the Mississippi. In California, for instance, where the industry contends with substantial legal and illicit market production, we saw that at peak declines, wholesale cannabis prices were falling 45% in July 2022. However, as we exited the October harvest cycle, we can see the year-over-year declines in wholesale pricing easing. To be sure, prices are still down — but a lesser 12% by the end of March 2023, according to data from Cannabis Benchmarks. We have also seen easing rates of decline in Oregon and Washington. Meanwhile, wholesale price declines continue to deteriorate east of the Mississippi, in particular in Massachusetts, where wholesale pricing was down over 50% most recently, as well as in Rhode Island. Bloomberg's Tiffany Kary earlier wrote about how the banking crisis is hurting cannabis companies by further restricting their already-limited access to financing. Now that we are a couple weeks out from the collapse of SVB, what does the situation look like for the industry? Do you foresee this being a manageable situation or one that will grow in impact? The lack of passage of SAFE Banking in the 117th Congress was a headwind for the industry. As a reminder, there had been hope that SAFE would be passed in the lame-duck session that ended in December, which would have allowed the cannabis industry to access formal banking services. The cost of capital was already high in the cannabis space and it has climbed in the absence of SAFE. The key markets of New York and California have had some well-publicized problems with their legal markets, from illicit competition, high taxes and lots of regulation to a very slow rollout. What should US states looking to allow the sale of cannabis learn from their experiences? Is there a particular state that's doing things right? States that have had the most successful transitions have had ample retail doors open on day one, and they've had sufficient inventories to satisfy incremental demand. This has tended to be states that allow existing medical operators to also sell adult-use cannabis, without a laborious reapplication process. We have seen this play out in Illinois, Nevada and Missouri. When operators have certainty that they will be able to commence adult-use operations on legal day one, they are more inclined to invest capex dollars to support incremental production and inventory-building activities ahead of new demand when the market transitions from medical-only. Ultimately, illicit cannabis is pervasive across the United States, so the best mechanism for migrating consumers to the legal market is ample, high-quality product at competitive prices. Where in particular are you watching state-level legalization efforts? New York is among the newest adult-use states in the US with a disappointing transition. Regulatory delays and a nuanced tiered-licensing framework have left the market considerably under-served. In contrast, Missouri legalized at the start of 2023 and allowed all existing medical operators to participate in the adult-use market — and sales have been off to a strong start. See Also: World's Biggest Pot Economy Just Inhaled More Fiscal Stimulus We're going to be getting a new wave of quarterly reports in the coming weeks. What are you going to be watching most closely? In Canada, industry landscape trends continue to be muted. While the category grew 18% in 2022, that was a deceleration from 47% growth in 2021, and included a notable headwind from price deflation. While the category continues to grow, price deflation continues to be a key challenge, reflecting excess legal supply from the close to 1,000 operators in the market. What's your outlook for M&A in the cannabis industry? It seems asset levels are currently depressed as federal legislation sputters. Do you think we're starting to see an opportunity for a big player from, say, the tobacco or alcohol spaces to swoop in? Or is that still a long way off? In Canada, we saw Tilray acquire Hexo recently. This transaction had been well-telegraphed as the two companies had already established a strategic relationship that had facilitated cost optimization at both organizations ahead of the deal. Consolidating Hexo's adult-use market share was attractive to Tilray — as were the incremental cost savings from the acquisition. This reflects the challenged operating backdrop in Canada, in particular for the larger legacy operators. We believe it will remain true that if cannabis markets broadly remain challenged and deflationary, consolidation will continue to be a necessity. | 
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