/ Equity

Companies Betting “High” in Cannabis Market

By Imperial College Investment Society

Author: Jieni Wang Wang {Co-Editor Imperial College Investment Society}

August this year, the beer producer, Constellation Brands Inc. supplying Corona and Modelo paid $4billion for a 38% stake in a Canadian cannabis cultivator, Canopy Growth Corp., marking the largest investment in the cannabis industry. Companies like Coca-Cola Co. and Diageo PLC, the largest alcohol distiller in the world is also taking interest in this industry, as Coca-Cola Co. have had talks with Aurora and other cannabis producer to develop CBD-infused beverages after taking on Costa Coffee in a $3.0bn deal earlier this year.

So what is CBD?
CBD, also known as cannabinoids, produced by cannabis plants is a non-psychoactive compound (unlike THC - the component in the same plant that creates “high”) that does not bind well with the same cannabinoid receptors as THC, and have no significant effect on the central nervous system.
They are mostly used as CBD oils with pharmaceutical benefits such as helping relaxation, anti-inflammatory and can be used to treat childhood epilepsy and other neural disorders.

In June, the British company GW Pharmaceuticals had Epidiolex, its CBD derived medication to be approved by FDA. It is the first time for a cannabis-based drug to be approved and serves as a “historic milestone” according to Justin Gover, CEO of GW Pharma. The company revealed that it would cost about $32,500 per year for the treatment, however in order to be competitive in price, Julian Gangolli from GW expresses that Epidiolex would be priced cheaper than dispensary CBD.

While CBD marches into the medical industry, beverage companies have already taken their ground in the wellness category. Lagunitas, a subsidiary of Heineken in California has developed a THC-infused sparkling water, and India Globalization Capital Inc. has announced execution of distribution and partnership agreement of “Nitro G”, a CBD-infused energy drink. Since then their share price increased over 400%. The CEO of IGC Ram Mukunda see this as an “unique opportunity for the development and commercialization”.

The sudden surge in interest puts cannabis cultivators into pressure of meeting market demands. The Canadian cultivator Aurora Cannabis is building facilities such as the 1.2m sq ft. “Aurora sky”, automating agricultural process and regulating growth environment. They are also putting money into the business by acquisition of CanniMed Therapeutics, a Canadian medical marijuana producer, and buying MedReleaf for $2.5bn as well as investing in the cannabis producer The Green Organic Dutchman.

Despite all these efforts, the supply would still only meet 30%-60% of the market demand after legalization of marijuana in Canada on the 17th, feeding the black market and tax evasions. According to BDS Analytics that during the last year, global spending over cannabis reached $9.5bn, and expected 22% compound growth rate reaching more than $22bn in 2022. While study from C.D Howe Institute shows that the demand is expected to increase from 210 tonnes to 610 tonnes, thus with the retail price of C$9 per gram, the Canadian government would miss out roughly C$774m in revenue. 230% growth in 5 years according to study by Arcview and BDS Analytics with 73% coming from the US.

Entry into the stock market
Tilray (TLRY), the first medical cannabis producer that had IPO in the US saw its share price increase from $17 per share to $300 in this year September, and recently they have plan to sell convertibles in a private placement in Canada, as senior unsecured obligations convertible into cash, stock and shares. Since their products being approved by DEA to import medical cannabis into the US, they have bought Alef Biotechnology based in Latin America to do medical research on marijuana with $250,000 Canadian dollars and $4.75m in stock, hoping to bring business into Chile and Latin America.
Following Tilray, producers like Canopy Growth Corp (TSE), Cronos Group (CGC) and Aurora Cannabis (ACB) have taken entry in NYSE, OTCQX and Nasdaq.

Generally speaking, there are three categories that cannabis related business on the stock market fall into: cultivation companies like Canopy Growth Corp (CGC), Aurora Cannabis Inc.(ACB), with most of them supplying the Europe market; pharmaceutical companies like AbbieVie(ABBV), GW Pharmaceuticals(GWPH), and businesses facilitating supply chains of cannabis including GrowGeneration Corp(GRWG) and The Scotts Miracle Grow Company(SMG).

Despite the stock price boom in companies like Tiray, many investors have concerns that this “thematic” investing tends to attract a lot of passive funds, showing “bubble-like signs”, according to Financial Time columnists.
Insys Therapeutics (INSYS) a pharmaceutical company with its drug approved by FDA in 2016 and listed on Nasdaq, saw its share drop from $44 to $4 in two years.

Undoubtedly, this industry is expanding, and the CEO of cannabis producer Canopy Growth Corp believes that many people still don’t realize how quickly it is growing. “I don’t think it’s appreciated yet how quickly things are opening up in Europe, Latin America, and even likely the US”, said the CEO of the company with presence in 11 countries including Denmark, Germany and Czech Republic, with 10% of sale in the last quarter coming from thousands of Germany pharmacies.

There might be more and more countries joining the league. Lebanon is looking to move into the cannabis growing industry recently and had McKinsey hired to make their economic plan. Cultivated in Bekaa Valley, they claim that their “quality we have is one of the best in the world”.

The industry’s spending in marijuana, both for medical or recreational use is heavily dependent on regulations. While the impending legalization in Canada is driving investments, only 9 states in the US allows recreational use and it is still classified as Schedule I drug at the federal level.

Cultural attitude is a major factor holding the investment back. From a 2016 study carried by Deloitte, 40% of US adult population favouring legalization, and similar has shown for Canada, making it difficult for political decisions.

It is definitely a new industry in a new era, challenging to both investors and policy makers. With the market flushed with penny stocks and everchanging regulations, it is hard for investors to identify the right companies in this new niche which is susceptible to frauds.