Just a short reminder that if you haven’t already signed up for the upcoming investment lunch at Maitland AMO on the global cannabis industry, it is only two days away now.
I think there are a few places available for institutional investors or advisers – see the graphic below for details.
In the meantime, my colleague Roger Baird at AltFi has put together an excellent short internal primer on the sector. Read on.
Investors are betting that relaxing cannabis legislation around the world will lead to a ‘green rush’ of new products ranging from recreational pot, to use in medicine, chocolate truffles, juices, alcoholic drinks and even dog food. The gamble is this product can be wrested from criminals and ‘backyard’ producers to become an industry worth €123bn in Europe by 2028, according to consultancy Prohibition Partners, and $32bn in the US alone by 2022, according to research firm BDS Analytics. America’s Constellation Brands, which owns Corona and Modelo beers, upped its stake in Canadian pot grower Canopy Growth to 38 per cent, at a cost of $4bn last August, as it looks to develop pot-infused soft drinks. Altria, the tobacco giant better known for Marlboro, took a $1.8bn stake in the cannabis company Toronto-based Cronos Group in March. Holland’s Heineken, America’s Coca-Cola, and Britain’s Imperial Tobacco have all shown interest in developing cannabis products.
The marijuana market broadly breaks down into three segments — recreational, medical and wellness. Cannabis contains over 100, elements, or cannabinoids, and research continues on their effects and medical applications. However, in medical and wellness products the key component is cannabidiol (CBD), a non-psychoactive element, claimed as a treatment for a range of illnesses such as epilepsy, nausea, Multiple Sclerosis, Alzheimer’s, cancer and anxiety. Pot also contains tetrahydrocannabinol (THC), the element that produces mind-altering highs. There is rising speculation that mature economies in the US and Europe (particularly Germany, UK and The Netherlands) may to relax regulation, fuelling the rise in pot stock valuations.
The starting gun on the marijuana market was fired in Canada in October 2018. It became only became the second country, after Uruguay, to legalise the use of recreational cannabis, but the first G7 nation to do so (Uruguay’s parliament legalised marijuana in 2013, but the first legal over-the-counter sales did not begin until 2017).
Justin Trudeau, at the time Canada’s newly elected prime minister supported the move, in 2015, and over that period over 100 firms listed in Toronto and New York in advance of the change in the law. Investors and policymakers across Europe and the US look towards Canada to see how this social experiment will work, and whether it will divert profits from criminals to city traders. Across developed markets, US states and European countries, are taking unsynchronised steps to liberalise cannabis use. Medical pot gets the most government attention. Some experts add that legalised marijuana could be an important weapon in the fight against the West’s rising opioid epidemic, which costs the US alone $78.5bn a year, including healthcare, lost productivity, addiction treatment, and criminal justice involvement, according to the US Center for Disease Control and Prevention. However, investor’s rush to back listed firm’s in this sector led to an explosion of ‘pot stocks,’ which has seen market valuations rocket.
Canadian producer Canopy Growth, which earlier this year reported third-quarter sales of C$97.7m (£57m), listed on the New York exchange last May. Within ten months its valuation has jumped by around 80 per cent to $16.4bn — more than the combined value of broadcaster ITV and retailer Marks & Spencer. Amid these giddy valuations, more discerning investors are keen to gauge the true scale and pace of this usual market.
The world’s richest nation is obviously a key market, with projections that the industry could be worth $32bn by 2022, according to research firm BDS Analytics.
Medical marijuana is already legal across 34 states, and 10 states (plus Washington DC) have legalised marijuana for recreational use. Colorado and the State of Washington became the first states to vote to legalise marijuana for recreational purposes in 2012. However, marijuana remains illegal under federal law. President Barack Obama’s administration said it would allow state-level rules to stand without much federal interference, however, the Donald Trump administration has sent mixed signals about where it stands. Former Attorney General Jeff Sessions rescinded a memo stating that federal authorities would not crack down on states with legal cannabis markets last January. But his successor, William Barr, suggested during congressional testimony last month (April 2019) that he would support the right of states to decide on this issue. Regardless, the US industry continues to make strides betting the current mood towards liberalisation will continue.
Legal cannabis sales jumped 34 per cent to $10.bn last year, according to a report by industry site Leafly and Whitney Economics. It added that 211,000 full-time American jobs depend on the marijuana industry. A number of leading US listed firms such Canopy Growth, Aurora Cannabis and Tilray have shown enormous growth over the last year or so, on the back of liberal legalisation in Canada and US relaxations (See above for Canopy Growth). Legalisation represents these firms with further opportunities, as well as making them acquisition targets. However, a number of market watchers have raised concerns about overvalued stocks in this sector.
In February, even Canopy Growth chief executive Bruce Linton warned: “I think it’s entirely true that cannabis has become frothy and I’m not saying that necessarily specifically about our [stock]. But you could list 85 or 90 names that are probably publicly listed that I as the operator of one of the first and most dominant [companies] have never heard of those companies.”
Fresh focus on British regulation of this market came last June after Billy Caldwell, a 12-year-old boy with severe epilepsy, was admitted to hospital after his medical cannabis oil was confiscated by UK customs officials at Heathrow following a flight from Canada. He was later discharged and the Home Office granted his mother, Charlotte, a temporary license for the use of the banned substance. But calls gathered for a more co-ordinated government response. In November, the Home Office allowed doctors to prescribe “cannabis-based medicines when they agree that their patients could benefit from this treatment”. However, the department added that this “announcement does not pave the way towards legalising cannabis for recreational use. The penalties for unauthorised supply and possession will remain unchanged.” But politicians as diverse as Brexit Party leader Nigel Farage and former deputy Prime Minister Nick Clegg have called for the decriminalisation of cannabis, with many stressing the tax benefits and the opportunity to take soft drugs out of the sphere of violent gangs.
Cambridge-based GW Pharmaceuticals, founded in 1998, is valued at £3.5bn and has won approval for two drugs — Sativex, for multiple sclerosis, approved in over 25 countries outside of the US. While its Epidiolex treatment, for epilepsy, won approval from America’s Food and Drug Administration last June. The firm’s sustained success has helped propel the UK into the world’s largest producer of legal cannabis, according to a United Nations report.
Ninety five tonnes of marijuana was produced in Britain in 2016 for medicinal and scientific use, accounting for 44.9 per cent of the world total, said the UN’s International Narcotics Control Board.
This has encouraged a number of London-listed firms to ditch previous business plans and instead focus on cannabis-based medicines. Oil and gas investment firm Highlands Natural Resources, which is listed on the main market, raised £1.3m to launch a cannabis operation in Colorado to sell hemp oil. While small firm Imperial X has moved from mining into medicinal cannabis products because “they are now legal in an increasing number of states in the USA, as well as other countries around the world.” Global investors will have to decide whether these trends liberal trends will continue to take hold, or whether populist governments around the world will seek to row back from them.
Two recent report links:
More on the event