How to Invest in Canadian Cannabis… A Scientist’s Perspective

 

Canada is quickly becoming a global leader in cannabis investment as the new Liberal Prime Minister, Justin Trudeau, begins to put his mark on Canadian Marijuana policy. Already the prospect of more liberal marijuana laws in Canada is drawing investment dollars from south of the border. Poseidon Asset Management, a San Francisco-based hedge fund focused on the legal cannabis industry, is adding to its investment in its Canadian holdings in anticipation of a growing market in Canada. They also see prospects for Canadian cannabis products in the global marketplace as more and more countries consider changing their marijuana laws. Despite the still to come challenges of legalizing cannabis in Canada, which is going to be a lot harder than people think, Canada’s nascent cannabis industry generate as much as $5-billion in revenue for federal and provincial governments.

Despite these tremendous opportunities most funds investing in the cannabis space in the US stay at arm’s length to the plant, preferring to invest in systems and technologies for growing or into vaporizer technology for which there appears to be an endless variety of high-tech options to enjoy cannabis without combustion. American institutional investors looking to invest in businesses that handle the plant itself have been heading north where medical access is legal and where the government is strictly controlling its production and distribution. This level of scrutiny provides institutional assurance and protection from possible violations of the law. After all, it’s not permissible to invest in the production or sale of controlled substances like marijuana.

In fact, most of the money raised for Canadian cannabis companies is coming from overseas. There’s no doubt that Trudeau’s election as Prime Minister will accelerate that trend further giving Canada the chance to become a global leader.

The prospects of being able to attract investment in the Canadian market is even bringing US companies to Canada to list their shares. Companies like Golden Leaf Holdings (CNSX:GLH), an extract producer operating in Oregon, have chosen to list themselves in Toronto because they can better attract US Investment there.  Another company, Nutritional High International Inc. (C.EAT) sells edible cannabis products in the US and has been trading on the Canadian Securities Exchange since March 2015. You should expect to see more and more companies that operate in the US, list their shares on Canadian exchanges where their businesses are welcome and investors are focused.

Still, investing in the plant is risky, even if you do it through a Canadian exchange. If money invested in a company in Canada is used to produce a product that is illegal in the US, then repatriating that money back to the US could be considered a violation of anti-money laundering laws. For years prohibition has criminalized not only the drugs but all the money involved as well, further complicating the process of legalization. Legalization requires addressing the rules and regulations of multiple related agencies designed to protect us from the dangers of cannabis, repealing and revising those which prevent the smooth operation of legal cannabis businesses. It is necessary to address policies across multiple agencies relating to agriculture, manufacturing, finance, insurance, and medicine to ensure that they are revised to include cannabis and cannabis-derived products and services. The challenges of creating a new industry while dismantling the war on drugs make for complicated policies and painful compromises.

The largest companies operating in the Canadian cannabis space have seen a lot of trading since the Liberal party won the election, potentially vastly increasing the size of the potential market. The Liberal party promised to “design a new system of strict marijuana sales and distribution”. Currently cannabis is only available for medicinal purposes from licensed suppliers in special circumstances. The market for medical cannabis in Canada under the current program is estimated to be worth about $80M (USD). At present, there are 25 companies licensed by Health Canada to provide cannabis to qualified patients. These include Mettrum Health Corp. (CVE:MT), Aphria Inc. (CVE:APH), and OrganiGram Holdings Inc. (TSX-V:OGI). All of these companies are benefiting from strong trading in the aftermath of the Liberal party victory as the potential for a recreational market in the next few years settles in. Full legalization of cannabis will materially affect the size of the market and the opportunity for profit. According to an estimate by GMP Capital analyst Martin Landry, the market for cannabis in Canada, which currently stands at $80M per year, could be work as much as $5B given full legalization.

Many investors are counting on strict controls over the production of cannabis to legal markets. Controls have been in place since the Canadian Medical Marijuana Program began. Recently those restrictions have been challenged by patients demanding the right to be able to grow their own, rather than be forced to purchase from a licensed producer. Recently, a judge in Vancouver ruled that medical marijuana patients have the right to grow their own cannabis, striking down a ban introduced by the Harper Administration. The claimants said that cannabis grown by licensed producers was too expensive and did not allow them to control the strains or dosages their treatment required. The court agreed, finding the restrictions to be arbitrary and not proven to reduce risk to health and safety or to improve access to medical cannabis. This decision pushed shares of Canopy Growth Co. (XTSX:CGC), OrganiGram Holdings, and Aphria Inc. down but most have since recovered and been driven up by news that a drug developed by GW Pharmaceuticals (GWPH) has shown success in the treatment of pediatric epilepsy not well controlled by other drugs. This supports the broader thesis that the end of cannabis criminalization is here and the beginning of the debate over legalization has begun.

It’s reasonable to expect that no matter how the Trudeau government chooses to legalize cannabis in Canada, it’s likely that licensed producers will continue to play a central role in the Canadian cannabis industry given the investment Health Canada has made into the program.

Canopy Growth Corp., formerly Tweed Marijuana Inc., is the largest Canadian Cannabis company by market cap. It’s currently valued at $301M despite little revenue. It is well funded and ready to take advantage of any changes in the market due to it’s size, revenue, and funding.

Full legalization of marijuana is far from a done deal, the Prime Minister does not have the power himself to legalize cannabis. It will require a bill to be drafted and passed by the House of Commons and the Senate. At best we should hope to see legislation ready within the next year and a half. You can be assured that there will be considerable pushback and highly contentious debates over the issue as both sides of the aisle seek to use the issue for political advantage. With that said there are a number of debt-ready companies well positioned to take advantage of whatever change comes, whenever it does.

Authored by: Tyler Strause

 

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