Canada plans to legalize recreational cannabis before July 1, 2018, and the industry continues to steal headlines as this has created great opportunity for both companies and investors.
Although the opportunity is significant, the process of becoming a licensed medical cannabis producer is very lengthy and expensive. These factors have resulted in the country having a supply and demand issue for the medical cannabis market.
Legal recreational cannabis is supposed to significantly increase the amount of cannabis in demand and Health Canada, which is responsible for the regulation of the medical cannabis market has made it easier for companies to get the required licenses.
Health Canada Streamlines Application Process
In late May, Health Canada announced that it has made some changes to streamline the application process to become a licensed medical cannabis producer. These changes will also increase overall production.
Since the licensing program came into effect in 2013, 45 medical marijuana production licenses have been granted (currently 428 companies applying to become licensed cannabis producers). Some of the changes announced by Health Canada include:
• The hiring of new employees to speed up the application process
• Permitting licensed producers to manage production based on their vault capacity
• Increased freedom to modify and expand their facilities
The biggest change announced by Health Canada pertains to production management. Under the new regulations, licensed producers can increase production within their facility to the maximum they are authorized to store, based on the capacity and security level of their vault(s) or safe(s). This will allow licensed producers to better manage production as necessary to meet demand.
Also, licensed producers will be able to store low-value cannabis waste products in a secure area outside of their vault. This will immediately impact the storage capacity of the LP’s, enabling increased production of finished cannabis products.
An Industry Ready to Bounce Back
Although these companies have been very attractive and profitable investment opportunities, they have been under significant pressure this year and the stocks have come well off its 2017 highs.
Several analysts warned cannabis investors about the massive investor fatigue plaguing cannabis licensed producers. One of the best way to protect yourself against this trend is by focusing on companies that have differentiated itself from its peers. We want to highlight five these companies and explain what and if they have a competitive advantage.
• Canopy Growth: The largest and most diverse licensed producer in Canada. The company has made two large acquisitions in the last two years (Bedrocan and Mettrum Health) and is an attractive stock due to its global presence (Australia, Canada, and Germany), its continued execution and track record, its improving fundamentals, and its management team.
• Aphria: One of the lowest cost producers due to its greenhouse production style. The company has made investments in the burgeoning United States cannabis industry and is levered to states like Arizona and Florida.
• Aurora Cannabis: One of the fastest growing licensed producers and has one of the strongest balance sheets when compared to its peers. Through acquisitions and investments, Aurora has become levered to international markets like Australia and Germany
• Cannabis Wheaton: Operates under a streaming model and does not actually touch the plant. Has secured deals with 17 producers across Canada. The shares have plunged after announcing a new financing deal and we continue to monitor trading after Cannabis Wheaton announced that Hugo Alves was appointed as President and Director of the company.
• Emblem Corp: The company is focused on two major markets. The development of biotech treatments derived from cannabis and the production of high-quality cannabis. Emblem has come off its recent lows and seems to have found a bottom. This is a stock to watch.
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Authored by: Michael Berger