cannabis leaf in hand close up

Progress towards the legalization of marijuana in Canada, and various U.S. states, will present potential revenue opportunities and challenges for governments and companies in both countries, suggests Moody’s Investors Service in a report published on Tuesday.

Overall, marijuana-related earnings will be “negligible” as a proportion of total revenues for the provinces, the report states, and provinces will likely come under pressure to pass along some portion of any additional revenues to municipalities to help finance higher policing and social program costs.

“Given Canadian provinces’ limited experience with legalization, competitive pressures and calls to offset the costs of increased policing, we anticipate limited fiscal gain from legalized marijuana,” says Michael Yake, vice president and senior credit officer with Moody’s, in a statement.

“On the other hand, legalization has the potential to reduce judicial burden, boost employment and offer a new revenue stream for First Nations populations. Suffice to say, if passed, the transition to adopting legal cannabis is expected to be complicated in the medium-term,” he adds.

In the U.S., the legalization of marijuana has been marginally credit positive for governments in the 29 states that have legalized some form of marijuana use (nine states and the District of Columbia allow recreational use), the report states. However, Moody’s expects these revenues will remain “only a small share” of their total annual revenues.

On the corporate side, makers of alcoholic beverages could be impacted, the report states, as “marijuana could replace alcohol on some occasions, but also could be used to formulate new drinks.” Late last year, the brewing company, Constellation Brands Inc., “acquired a 9.9% stake in Canadian cannabis company, Canopy Growth, in order to explore development of a new category of beverages that includes cannabis.”

A U.S. tobacco company has also invested in Canadian cannabis companies.

For pharmaceutical companies, marijuana legalization would pressure the sales of some of their products, including drugs that are used to treat pain, anxiety and depression, the report says, but this would also create a long-term opportunity for companies to commercialize cannabis drugs.

“Some small, unrated pharmaceutical companies are developing products based on the chemical cannabidiol, with one product advancing to the FDA review stage,” says Michael Levesque, senior vice president at Moody’s, in statement. “Thus far, large, traditional pharmaceutical companies haven’t invested heavily in cannabidiol, but that could change if smaller drug makers develop a market for these products.”