Canadian companies are beginning to look beyond their own borders towards the international cannabis market. 

Cannabis legalization is the correction of a nearly century-long mistake, and the legalization of cannabis in Canada appears to be just the beginning. The first fully developed nation to introduce a legally regulated recreational cannabis industry is quickly being followed by countries like New Zealand and Luxembourg. Countries in Europe, South America and Asia are also opening up to the medical market.

The future of the cannabis market is global, and this is something that Canadian cannabis players have realized from the earliest days of the Canadian legalization process. Many forward-thinking Canadian cannabis companies have set their visions beyond the True North, setting up the beginnings of the first international cannabis brands. With this head start, established Canadian cannabis companies find themselves with a unique opportunity to secure a coveted first-mover advantage in the race towards establishing a vertically integrated international cannabis company.

 

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As an increasing number of jurisdictions worldwide move to legalize adult-use or medical cannabis, the global legal cannabis market is projected to hit more than US$146 billion by the end of 2025, according to an April 2018 report by Grand View Research. Driving this growth is an increasing acceptance of the plant’s medical uses and benefits as well as growth in the non-psychoactive CBD market. The history of the earliest cannabis markets like California and Canada shows that medical legalization can often pave the way for further cannabis legalization, suggesting the potential for even further growth as these new medical cannabis markets mature.

Canadian companies with the means for international expansion are keeping close eyes on emerging markets. Canada is a relatively small market on a global scale, but huge international markets like Germany, Spain and Israel offer Canadian cannabis companies the potential for massive growth. Canadian companies that manage to establish themselves in these markets could quickly gain a valuable first-mover advantage and position themselves for growth well beyond the domestic supply chain.

While emerging domestic players are beginning to learn the ins and outs of the complex cannabis business, including the high learning curves associated with efficient, consistent and quality production, Canadian players are beginning to apply these lessons to new markets. This gives Canadian companies a noteworthy advantage on their way to becoming leaders in the international cannabis industry.

International cannabis market

While the potential presented by international markets is huge, entry into any new market will always come with its own risks and challenges. Canadian companies looking to move into international markets will need to do so with a strong understanding of the local legal cannabis landscape. Regulations pertaining to growing practices, licensing, distribution, the supply chain and other operations in foreign jurisdictions may not necessarily mirror Canadian policies. Furthermore, since the regulatory landscapes of emerging cannabis jurisdictions are far from established at this point, there is a degree of uncertainty in regards to what the regulations will look like as they continue to develop.

Additionally, non-domestic companies will find that some federal governments place restrictions on foreign ownership of property, particularly when it comes to the ownership of agricultural land.

While ownership restrictions can present a challenge, this process will not be entirely new to established Canadian cannabis producers that have previously navigated the regulatory process. Canadian companies that have been successful in the domestic market should be able to leverage their experience in order to navigate the regulatory frameworks of new markets.

In addition to understanding the legal regulatory landscape, Canadian international cannabis companies need to understand the consumers in their new markets. The preferences of South American consumers, for example, are informed by entirely different cultural influences and tastes than those of Canadian consumers.

“The cannabis sector is on the verge of opening in every major market around the globe, led by Europe. We are comfortable being early to the game in knowing how large these markets are going to be,” said Daniel Cohen, CEO of PharmaDrug (CSE:BUZZ), formerly known as Aura Health.

International partnerships are one of the greatest tools that Canadian cannabis companies have at their disposal when entering new international markets. Aspiring international cannabis companies begin the expansion process by partnering with local players in their targeted jurisdiction. The leadership team of any domestic company is often full of professionals with years of experience with the local market culture and regulatory landscape. Through international partnerships, Canadian companies are able to benefit from the knowledge of their partners.

The other major benefit to these strategic partnerships is that ownership of a local company often allows international companies to enjoy lower tax rates, expedited licensing and other benefits enjoyed by local companies.

Canadian cannabis market opportunities

Canadian cannabis company Aura Health is developing an international distribution network that is expected to allow the company to serve Germany, Israel and additional European markets. In May 2019, the company completed its acquisition of German pharmaceutical distribution company Pharmadrug Production. Pharmadrug holds a Schedule I European Union narcotics license, which allows the company to distribute medical cannabis products throughout Germany and elsewhere in Europe. The company is expected to distribute 190,000 grams of pharmaceutical-grade cannabis in German pharmacies this year.

As part of its international growth strategy, Aura Health also owns a 54 percent interest in Israeli cannabis producer HolyCanna. The company is developing a 60,000 square foot greenhouse production facility in Central Israel where the climate is conducive to low-cost cannabis production. In addition to HolyCanna, Aura’s retail subsidiary CannabiSendak enables vertical integration throughout Israel, with opportunities to export to international markets thanks to Israel’s updated export laws.

“We are very pleased to share our operational progress with our shareholders and demonstrate our commitment to executing our European strategy. We believe the German and European medical cannabis markets represent a significant opportunity and we continue to identify and develop the assets to seize this opportunity,” explained Cohen.

In anticipation of a global cannabis extracts market, Aura Health has also partnered with Nutritional High (CSE:EAT,OTCQB:SPLIF) to develop international markets. Under the terms of the agreement, Nutritional High is expected to provide Aura with the knowledge and expertise to extract cannabis oil using Nutritional High’s cryo ethanol process.

Canada’s biggest players have recognized the opportunity they have to become world leaders in the cannabis industry. Aphria (TSX:APHA) began 2019 by completing its acquisition of CC Pharma, a company licensed to import and distribute cannabis to more than 13,000 pharmacies throughout Europe. In September 2018, Aphria also formed a partnership with Danish Schroll Medical in an arrangement that will focus on worldwide cannabis distribution. In November 2019, Auxly Cannabis Group (TSX:XLY) acquired an 80 percent stake in Uruguay licensed producer Inverell. Similarly, Canopy Growth (TSX:WEED) has set its sights on international markets with the establishment of partnerships such as its creation of Spectrum Denmark with Danish licensed producer Danish Cannabis, AusCann Group in Australia and Alcaliber in Spain.

Takeaway

Canadian companies with international aspirations have not wasted time forming strategic partnerships and laying the groundwork for international expansion. Established Canadian companies have a clear advantage in these early days of the international market, but as domestic players begin to compete in the marketplace that advantage could begin to fade. Through international strategic partnerships and optimal expansion strategies, Canadian cannabis companies have a rare opportunity to establish themselves as international giants while their competition is still getting on its feet.

This article was originally published by the Investing News Network in July 2019.


This INNSpired article was written according to INN editorial standards to educate investors.

INN does not provide investment advice and the information on this profile should not be considered a recommendation to buy or sell any security. INN does not endorse or recommend the business, products, services or securities of any company profiled.

The information contained here is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Readers should conduct their own research for all information publicly available concerning the company.

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Cannabis Market Update: Q3 2020 in Review

Click here to read the previous cannabis market update.

During the first few months of investment time in 2021, cannabis faced some volatility alongside optimism about federal changes in the most important market for the drug.

The cannabis business found its stride during Q1 thanks to policy change signals and consolidation.

To find out more, the Investing News Network (INN) asked experts about progress in the market during the first major period of the new year, and which developments investors should watch out for.

 

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Cannabis market update: New York and US potential boost operations

New York state’s legalization of recreational cannabis was a huge Q1 announcement that added pressure to the US federal government when it comes to cannabis policy, said George Mancheril, co-founder and CEO of Bespoke Financial, a debt financing business with a particular focus on servicing cannabis businesses.

“It’s going to add to the chorus of voices in the federal scene to basically move sooner rather than later,” he explained to INN.

Following the US election in 2020, the momentum for cannabis businesses went on the upswing, as did company valuations, with the idea of expansion at the heart of it all, according to Mancheril.

Before starting Bespoke Financial, Mancheril learned from traditional investment banks, working in the lending, fixed income and debt markets with Goldman Sachs (NYSE:GS) and Guggenheim Partners.

Nawan Butt, portfolio manager with Purpose Investments, agrees with Mancheril. The financial expert told INN the ongoing legalization process seen in the US market is leading to expansion.

“It’s becoming more of a national move, then small pockets of proliferation. That’s very exciting about cannabis right now,” said Butt, who co-manages the Purpose Marijuana Opportunities Fund (NEO:MJJ).

This proliferation effect is causing a change in valuations and enthusiasm for US-based operations. Mancheril told INN that by the end of Q1, multi-state operators (MSOs) had raised approximately US$3.3 billion.

The cannabis lender said he sees the industry as having grown from the woes of 2019; it is now undergoing a return to form as excitement about the US opening up increases.

The expert explained that there is likely to be a windfall of capital in the wake of major federal changes in US cannabis policy, although the timeline for these changes is becoming increasingly hard to predict.

Leading up to that capital influx, Mancheril said he wants to see operators really drill down on the value of desired assets and whether they make sense.

“What I’d hope is that we continue to see bullish sentiment, but with some measure of responsibility, and let’s not just get over ahead of ourselves,” Mancheril told INN. “The idea is let’s minimize the volatility and continue growing responsibly.”

 

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As far as struggles go, Butt explained that the cannabis industry has cemented itself as a growth-type sector, and as such there are macro pressures affecting the way these assets operate.

“We’ve seen this preference for cash flows at growth in the current or in the near future, rather than in the far future, and that’s what we’re seeing as far as valuations go in the broad market,” Butt said.

Cannabis market update: Volatility continues to rule as industry foundations build

Despite the industry’s potential and the growing pains it has gone through as a whole in both the US and Canada, volatility remains a key factor in the cannabis investment scene.

Butt explained that the current shareholder base, which is dominated by hedge funds and retail investors, still lacks enough institutional support to avoid the day-to-day volatility cannabis has come to be known for.

These two investor groups, Butt said, can be easily spooked and excited by the news of the day when it comes to their investments.

“A lot of these institutions’ strategies are not about short-term profits, but they’re about long-term sustainability of the businesses themselves,” Butt said.

“That’s why you see a lot of volatility in the space, and that’s essentially what we’ve seen over the past, I’d say, three to two months as well,” he added.

That means investors shouldn’t expect an end to volatility anytime soon.

“It’s not about whether we continue to expect volatility, because we do,” Butt said. “We really think that the volatility will be taken out when the shareholder base becomes more institutional, but it’s really about understanding why there is volatility in the first place.”

Cannabis market update: Canadians talk up US business, but questions remain

A surge of mergers and acquisitions has taken over the Canadian cannabis sector recently as more producers see potential in America.

One of the biggest announcements in this regard came when Organigram Holdings (NASDAQ:OGI,TSX:OGI) secured a C$221 million investment deal from British American Tobacco (NYSE:BTI,LSE:BATS).

Using the funds, the two will work in tandem to develop new branded products designed for the international stage, including in the US. Organigram CEO Greg Engel previously told INN that the US represents a critical opportunity for Canadian companies, but the entry point isn’t as clean as it could be.

 

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While the long-term potential may be exciting for investors, Butt told INN he’s still unsure how the approach will work for Canadian companies.

The Purpose Investments expert said there will be plenty of space for the biggest Canadian names to pursue US market entries, beyond the initial hemp-derived CBD moves some operators have mde, since the US represents the biggest market in the world.

“But there’s just way too many unknowns right now to say exactly what that participation is going to look like, or when that participation will happen,” he said.

“What we do know is that currently the US MSOs are in a wonderful sort of position to expand on their market leadership that they have. And it will be tough for Canadians to come in and compete with them,” Butt said.

Canadian players still retain the upper hand at times in terms of valuation, which is confusing for both Butt and Dan Ahrens, chief operating officer and portfolio manager at AdvisorShares.

“The performance in quarterly earnings of US companies has been rather spectacular. They’ve knocked it out of the park in most instances,” Ahrens told INN.

Butt praised the recent performance reports from MSOs across the board, pointing to year-over-year growth lines and projections for continued positive performance. In his view, share prices still don’t reflect company value. “Those are really being discounted at this point,” Butt told INN.

“We’ve seen the Canadian licensed producers be really hot stock performance-wise, outpacing the US (MSOs), and I’ll say it’s rather nonsensical to me,” said Ahrens, who oversees the AdvisorShares Pure Cannabis ETF (ARCA:YOLO) and the recently launched AdvisorShares Pure US Cannabis ETF (ARCA:MSOS).

Cannabis market update: Investor takeaway

The cannabis investment proposition finds itself at an interesting moment in time, as the entire sector eagerly awaits confirmation in the US at the federal level.

While for the Canadian companies waiting on the sidelines, this development may feel like a major necessity to address current financial struggles, for US-based operators, the heat around the corner could represent future positivity for already thriving operations.

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