Saturday, 30 May 2020

Green Giants of the Future - The Biggest Winners Of Canada's Cannabis Boom

LONDON: A unique and somewhat controversial market is about to take off in 2018. Only a few years ago, marijuana was seen as a "gateway drug". But now, cannabis has grown into big business, and analysts expect a huge rise in demand as laws and social attitudes change rapidly.

Make no mistake: the demand is huge. In the United States, the legal cannabis industry is worth $6.7 billion, according to Bloomberg. Included in today's commentary: GB Sciences, Inc. (OTC: GBLX), AXIM Biotechnologies, Inc. (OTC: AXIM), Beleave Inc. (OTC: BLEVF), INSYS Therapeutics, Inc. (NASDAQ: INSY), Aphria Inc. (OTC: APHQF)

In Canada alone, cannabis is estimated to become an $8 billion market with 200,000 people using marijuana for medical purposes, and this is a cautious forecast. Demand could increase dramatically after pot is legalized for recreational purposes next year: by 2021, there could be 3.8 million legal users consuming 420,000 kilograms of pot.

Underground producers, who have cultivated marijuana illegally for years could start supplying the markets, if they can obtain licenses and build infrastructure.

Much like bitcoin, the sector has yet to be penetrated by tier-one capital as institutional investors have stayed away.

Investing in cannabis can be tricky. Publicly-traded companies are scarce, most are small-cap and penny stocks, and finding those with strong prospects for growth can be challenging.

Here's a look at some companies that are getting into the cannabis game:

1. Philip Morris

Investors often look at Big Pharma as solid plays in the booming cannabis sector, but alternatively, they should be looking at Big Tobacco. Back in the 1960s, when social interest in marijuana began to grow, rumors circulated that Big Tobacco was buying up brand names for marijuana products.

A government crackdown on drug use put those plans on the back burner, however, but as laws and social attitudes changed, a few of Big Tobacco's most prominent members are looking with renewed interest in cannabis.

Another major reason is the declining sales of cigarettes. For the last several decades, Big Tobacco has focused on emerging markets as smoking faded in the developed world. But legal marijuana represents a brand-new lucrative market.

As regulation in most U.S. states lags, larger firms are wary of investing too much in a sector which could remain constrained.

Philip Morris is no exception. Its 2016 investment in Israel's Syqe Medical was the 2nd largest deal in the cannabis space that year. Rumors circulated in 2016 that the company was about to introduce a weed cigarette, but the news proved false.

While additional signs from the tobacco firm regarding interest in marijuana have been sketchy, smart speculation would point to a growing interest to take advantage of marijuana use. Despite its initial hesitation, it seems likely that Philip Morris will attempt to become more involved in cannabis in the future.

2. Cannabis Wheaton (CBW; CBWTF)

The next big marijuana market is undoubtedly Canada. The country is looking at full legalization on July 1, 2018, which would make it the world's first federally regulated major marijuana sector. Canadian cannabis start-ups are rapidly scaling up production and are likely to become the world's weed multinationals within the next couple of years.

One of the fastest growing Canadian weed companies is Cannabis Wheaton. The company's unique approach to fight the supply deficit takes a leaf out of Netflix's book: "streaming weed," where the company offers growers capital to build out or expand their cultivation facilities in return for a minority equity interest and a "stream" of cannabis.

Previously seen in the mining industry, this strategy should allow Cannabis Wheaton to scale up supply quickly, in order to meet Canada's voracious weed demand, without the risk of putting all of its money into one project.

This strategy has proven to be successful already, CBW has producers lining up. The company has over 15 partners, with 17 facilities and a potential 1.4 million effective square feet of productive acreage. In exchange for the capital invested, CBW gets some of the producer's shares and a percentage of all of the cannabis produced. CBW has established relationships with 39 clinics already and has access to 30,000 registered medical marijuana patients.

Cannabis Wheaton's game plan looks solid and, so far, it is the only company 'streaming' marijuana. The large number of producers it works with has significantly lowered risk for investors. If one producer fails to deliver, say if the crop goes bad or the regulators find a problem, CBW can quickly pivot to another.

This structure allows the company to take profits and re-invest them into new production: the potential for a quick scale-up when pot becomes fully legal in Canada next year is huge, particularly when you factor in CBW's expected low operational costs.

While access to capital and licensing could become a major constraint for smaller cannabis companies, Cannabis Wheaton's flexible royalty model will allow it to become profitable much faster than the competition as production increases.

Recent catalysts for the company's future prospects include a $15 million purchase of shares in ABcann Global Corporation (ABcann) in August, which forms part of a larger investment into ABcann that will add 50,000 square feet of acreage to ABcann's cultivation facility. Another $15 million purchase of ABcann shares is scheduled for next year, with half of the production revenues of such 50,000 square foot expansion going to CBW.

ABcann could become a major supplier to CBW in the future, as it brings this new capacity on-line. With a planned for margin of $4.5/gram, that could translate into a 70 percent internal rate of return.

The company's CEO Chuck Rifici co-founded Canopy Growth Corp. (formerly Tweed Marijuana Inc.) which has a current market cap of over $3.7 billion and now he looks to do the same with Cannabis Wheaton. There is strong political support for CBW's unique business model, which could prevent a major supply deficit in cannabis once it becomes legal for recreational use in 2018.

With support like this, a strong model and high potential for immense growth once legalization takes off, Cannabis Wheaton is definitely a cannabis stock to watch.

3. Altria Group

This tobacco giant, controlling over half the market in the United States, could become the next huge company to enter the legal weed business. Falling cigarette sales and changing regulation could drive the company to a rapid change of strategy. Like Philip Morris, the company is wary to go all-in when the regulatory environment within the U.S. remains so uncertain.

The company is a tried and trusted blue-chip, and has been a reliable source of dividends. Since last year, Altria has invested heavily in vape technology and continues to watch marijuana legislation very closely. So far, Altria has managed to keep its revenue steady by raising prices, but analysts expect Altria to invest in cannabis markets as its current business model is too one-sided.

So far, there's no hard info on the company investing in marijuana start-ups or technology the way Philip Morris has done. Yet given its size and interest in developing new products, it's entirely possible Altria may develop an interest in cannabis.

Altria is the best-equipped company to take advantage of marijuana's increasing legality. It owns a number of highly-profitable cigarette brands and enjoys very low capex requirements each year, due to the scale of its enterprise. Its financial resources are massive, and presently spends almost nothing on advertising, as tobacco products are restricted by law from most media.

Altria's strong net revenue ($14.2 billion in 2016) and immense capital expenditure (over $200 million) make it the ideal M&A predator in cannabis markets.

As cigarette sales trend lower, it seems natural for Altria to broaden its activities into other, similar sectors. Altria getting into the cannabis game seems like a no-brainer.

4. Insys Therapeutics (NASDAQ: INSY)

Next to Big Tobacco, another trillion dollar sector looking at expansion into the marijuana space is Big Pharma. Weed's breakthrough came in the medical sector, as marijuana emerged as a popular and effective medical treatment. Nowadays, medical marijuana is prescribed for a wide range of ailments such as pain relief to depression, anxiety and glaucoma.

While not a marijuana stock per se, Insys Therapeutics is on the cutting edge of the emerging trends in medical marijuana research and development. The company has two drugs approved by the US FDA, named Subsys and Syndros.

While the first drug is one of the company's cash cows, it has little to do with cannabis. Syndros, however, is a pharmaceutical variety of THC (tetrahydrocannabinol) the active ingredient in marijuana. And with the DEA deciding that the drug is safer than 'the real stuff', Syndros could quickly gain traction in U.S. markets.

Insys focus on Research & Development looks like it could start to pay off soon. Its share price has plummeted in recent years, but has stabilized in November. Its new cannabis-based sprays could bring the company back from its slump. One drug, a cannabidiol intended to treat childhood epilepsy, shows particular promise.

5. GW Pharmaceuticals

With its $3 billion valuation and a strong track record, GW Pharmaceuticals is probably the biggest player in the cannabis space.

GW has developed a number of new products in recent years, including drugs aimed at epilepsy, infantile spasms, autism and schizophrenia.

One particularly exciting drug is Epidiolex. Epidiolex is an experimental product used in the treatment of childhood epilepsy. The drug has over-performed in clinical trials, and has managed to reduce seizures by 50 percent. With a success rate this strong, Epidiolex could see strong demand and even better sales once it's introduced to the market.

While firms like Cannabis Wheaton look set to take Canada by storm, GW Pharma is best positioned to take advantage of the growing boom in medical marijuana and cannabis-related products inside the United States. While other companies such as Insys, which we described before are developing their own epilepsy treatment utilizing cannabidiol, markets may become much more competitive in 2018.

Other companies to watch:

Beleave (OTC: BLEVF): Beleave is a biotech company focused on the production of medical marijuana in Canada. Its wholly-owned subsidiary, First Access, applied for a pre-license inspection in March 2017.

Axim Biotechnologies Inc (OTC: AXIM) Axim is an American biotech firm based in New York. The company develops and produces pharmaceutical, nutraceutical, oral health and cosmetic products based on cannabinoids - such as cannabidiol. AXIM is a promising player in the quickly growing medical cannabis market.

The company's flagship products include CanChew, a CBD-based controlled release chewing gum, CanChew Plus, another cannabinoid product that is currently in the clinical trial phase.

Cannabis investors should watch AXIM as it has a number of catalysts that could propel its share price in 2018.

GB Sciences Inc (OTC: GBLX) is a developer of biotechnology, focusing on plant biology. The company aims to be a leader in production of medical-grade cannabis, extracts, and cannabinoid therapies. Through its subsidiaries, GB Sciences conducts business in the development, distribution, and production of cannabis products.

GB's highly ambitious cultivation projects make it a favorite among consumers, as patients are constantly looking for new strains that cater to their independent needs. As Canada prepares for legalization, GB is also quickly becoming a favorite among investors.

MedReleaf Corp: As a licensed producer of cannabis-based pharmaceutical products, MedReleaf Corp has a head start on the coming boom in Canada. Early July has seen a bounce in the stock price, and investors may look to ride it upward from here. Med Releaf could become Canada's second biggest medical marijuana company after Canopy Growth.

Aphria (OTC: APHQF) is a Canada-based cannabis company which focuses on the production, sales, and distribution of legal marijuana. The company's business model focuses primarily on online sales, which is perfect for its patients. A simple point and click and the medication will arrive at the patient's in no time.

(PRN | 2 years ago)