There is a growing number of cannabis companies announcing entry into national & international stock exchanges – here we explore investing in the cannabis industry.
As increasing numbers of countries and states move to legalise and regulate the purchase, production and cultivation of cannabis, the market is responding accordingly. The legally sanctioned cultivation and consumption of cannabis for adult use and medicinal purposes is becoming increasingly prevalent; and products containing cannabis and its derivatives are enjoying a market surge. But what do people need to know about when it comes to investing in the cannabis industry?
In 2018, the global medical cannabis market was worth $13.4bn, with a projected compound annual growth rate of 26.4%; meaning its value could increase to $148bn by 2026. Sales of products containing CBD reached $1.9bn (€1.71bn) in 2018; and are expected to rise to $20bn (€17.98bn) by 2024. With a growing number of cannabis companies announcing their entry into national and international stock exchanges, MCN explores the world of cannabis investment.
Investing in the cannabis industry: the next big thing?
To date no cannabis firms are listed on the FTSE, leaving UK investors to test the waters of international stock markets. Growing numbers of North American companies are listing on American and Canadian exchanges, while Europe has seen a boom in exchange-traded funds.
Zeta Ceti, founder and CEO of Green Rush Consulting, told MCN: “The main benefits of investing in the cannabis industry is that as an investor, you will be in on the ground floor of a new industry which may yield the most return. There is also a significant amount of innovation in the space with lots of room for growth. The key drawbacks are significant risk, uncertainty; and poor management teams without proper execution.”
What can we learn from Canada?
Canada has been at the forefront of the global cannabis market, both in commercial and medicinal terms. The country’s early adoption of legalised medical – and, later, adult use – cannabis, in tandem with the light regulatory approach favoured by the Canadian government, has contributed to a boom in Canadian cannabis production; both with the formation of new businesses dedicated to cannabis products and the expansion of existing entities to meet growing consumer demand.
Moreover, Canada’s permissive approach to cannabis cultivation has meant that Canadian producers are frequently relied upon to import cannabis to countries whose legislation is a few years behind Canada’s, but whose demand is growing just as rapidly. Few EU Member States are prepared to produce their own cannabis derivatives; and even when intra-EU cultivation projects are fully operative it will be some years before they are able to meet internal market demands.
Exploring the growth in the European medicinal cannabis market
Since the beginning of 2019, there have been a dozen mergers and acquisitions or private placement deals with values above €5m involving companies focused on medical cannabis in Europe. In total, north of €100m of new money has been invested in medical cannabis-focused companies across Europe over the past 18 months. While this represents a sharp increase compared with the period before 2019, we are still far from the levels experienced in North America, where more than $3bn was invested in the medical cannabis market through more than 450 deals in 2019.
Significant growth despite numerous limiting factors and constraints
In Germany, medical cannabis products are sold exclusively in pharmacies and are only prescribed by doctors as a last resort medicine, if the patient has exhausted all other avenues of treatment. There were 267,348 prescriptions in 2019.
Despite a continuously growing demand, the market remains highly constrained. Firstly, only a limited number of doctors (roughly 2,000 to 3,000, less than 5% of the German total) prescribe medical cannabis products. The vast majority of doctors are not yet comfortable or educated enough in the subject to do so.
Secondly, supply of the medicines is still insufficient. At present, only around 10% of the 20,000 pharmacies in Germany sell medical cannabis products.
Also, 2019 was characterised by several interruptions in the supply chain, when quality issues temporarily took brands like Aurora off the shelves. Prescriptions are for specific brands and if the brand is not available, the patient must return to the doctor for another prescription. Currently Germany depends 100% on imports, with cannabis flowers being supplied from Canada, the Netherlands and marginally from Portugal. There are around 10 EU GMP (Good Manufacturing Practice) certified cultivators allowed to export their products to Germany, limiting the sources of supply. In the coming few months, the situation will evolve as more cultivators are expected to be granted authorisation to sell into Germany.
Who will be the likely winners?
Distributing medical cannabis flowers in Germany is currently relatively straightforward, as demand exceeds supply. The main challenge for distributors is to secure high quality medical cannabis. However, as the market grows, the main success factor will be the ability to reach all key stakeholders. Distributors will need to have large dedicated sales teams on the ground to target the country’s 70,000 doctors and 20,000 pharmacies.
As the market matures, it will converge towards more traditional pharmaceutical standards. Winners will be the companies with experience from the pharma world, capable of securing deals with insurance companies; offering a flawless supply chain and logistics setup; and a portfolio of products tailored to patients’ needs. From a product perspective, we expect to see improvements in the galenical formulation and the product consistency, stability and above all efficiency.
We predict that the winning companies will be first movers that are able to:
Secure stable, long-term and high quality supply via solid offtake agreements, ensuring that their own brand products are constantly on the shelves of pharmacies;
Have an established nationwide sales team to address the full depth of the market so their products are prescribed and distributed in progressive cities like Berlin or Hamburg, as well as in the small towns of rural Germany;
Target all stakeholders: patients, doctors, pharmacies and health insurers;
Offer a full range of quality products tailored to the various needs of patients; and