Thursday, 27 June 2019,DAC Beachcroft, London

Event review

Publishing date: 28 July 2019

Last night’s Master Investor seminar in the City of London on the investment potential of medical cannabis brought a number of key issues into focus, writes Victor Hill.

Mad about the weed

I was delighted to chair a gathering last night of some of the leading experts in the field talking about the rise and rise of medical cannabis before a highly distinguished audience. Hands up, I have little medical knowledge and I am prejudiced against smoking of all kinds; though, yes, I admit I am an oenophile, and therefore not entirely opposed to mild self-intoxication…Hence this was a fantastic opportunity to learn why we all need to wake up and smell this particular (cannabinoid enhanced) coffee. So let me share with my readers the main lessons that I took away from this highly successful event.

But first a hazard warning. This burgeoning sector is still highly controversial. Simon Stevens, CEO of the NHS, told the Royal Society of Medicine last month that the UK was at risk of making a big mistake by normalising drug use in the legalisation of medical cannabis. At the moment in the UK cannabis is classified as a Class B drug. The possession or sale of any products that contain THC, the psychoactive compound that gives users a “high”, is illegal. However, products which do not contain THC but the medically beneficial compound CBD are now legal.

Like our hosts last night, the eminent international law firm DAC Beachcroft, I’m not proselytising for the legalisation of recreational cannabis – I’m just trying to assess the current state of play.

Science first

Cannabis is a flowering plant that originated in Central Asia and the Indian sub-continent. It goes by many names, the most common being marijuana or “pot”. The plant contains 483 known compounds of which two are of fundamental importance.

The psychoactive compound – i.e. the ingredient that makes people high – is delta 9 tetragydrocannabinol, or THC for short. The compound which seems to have remarkable medicinal benefits, particularly with regard to pain management, is cannabidiol or CBD. This compound has no psychoactive effects and is used, as well as for pain management, to reduce anxiety and for the management of epilepsy. CBD is now being added to all kinds of products including drinks.

There are even more extravagant claims about the health benefits of cannabinoids. There is some medically unsubstantiated evidence that they could beneficially be used in the treatment of cancer. I would treat these claims with caution at present. But the point is that we are only just beginning to understand the extraordinary properties of this substance. As well as cannabinoids, cannabis plants contain organic compounds called terpeneswhich animate the taste and smell of the plant. There is some research underway, as Melissa Sturgess shared last night, on the ability of terpenes to kill specific sorts of cancer cells.

One important issue in the debate about medical cannabis is that it has been shown to be an effective substitute for opioids. Opioid addiction is a huge issue in the USA right now and is heading that way over here. There are millions of people who are addicted to pain killers which, long-term, have highly deleterious effects on health. There is some evidence that judicious use of medical cannabis can wean people off of opioids.

A history of proscription

Cannabis was used for centuries for pain relief but was added to the UN Convention on Narcotic Drugs in 1961. Since then it has been a forbidden substance in most countries. In America it has been considered a “dangerous illicit substance” since President Nixon’s War on Drugs in the late 1960s.

But the prohibitionists are now in retreat as politicians progressively accept that cannabis has substantive medical applications. New Mexico became the first US state partially to legalise the medical use of cannabis in 1978. In 1990 Marinol (Dronabinol), a form of synthetic THC administered orally was approved by the US Federal Government for the treatment of nausea in cancer patients.

California was the first state fully to legalise “medical marijuana” in 1996. Since then the medical use of cannabis has been legalised in 33 states plus the District of Columbia. Elsewhere, medical cannabis has been legalised in at least 30 countries. In Europe, Germany, Italy, Denmark, the Netherlands, Poland and Switzerland permit the medical use of cannabis. Australia legalised the medical use of cannabis in 2016.

Further to the furore surrounding six year-old Alfie Dingley’s medication last year, the UK Home Secretary legalised the medical use of cannabis derivatives via secondary legislation (statutory instruments). But the UK legal framework is not as permissive as in other European countries. Cannabis-derived medications are available as unlicensed medicines prescribed by approved medical professionals in specific cases. Even CBD oils, although available at health food outlets such as Holland & Barrett (private) may not be labelled as medicinal products but rather as a “supplement”.

There is currently only one cannabis-derived drug available in the UK. That is Sativex, produced by GW Pharmaceuticals (NASDAQ:GWPH), used to alleviate the symptoms of multiple sclerosis. GW Pharmaceuticals has developed another CPD-based drug for epilepsy, Epidiolex. This was recently approved in the USA and is currently going through the regulatory approval process in the UK. Thanks to GW Pharmaceuticals, the UK has quietly become one of the world’s largest exporters of medical cannabis.

Recreational use

The use of cannabis for recreational use is much more controversial – but many governments have assumed a more relaxed posture on this issue in recent years. In many countries, such as the Netherlands, governments have adopted a don’t-ask-don’t-tell approach, avoiding prosecutions. The first state to legalise the recreational use of cannabis was Uruguay in 2005, although it is only available for purchase in a limited number of licensed pharmacies. Mexico is considering doing something similar. And next year New Zealand will hold a referendum on the issue. Opinion polls suggest that public opinion there is in favour of legalisation. The only European country to follow this lead so far is Luxembourg, a country of 400,000 people, which has declared the intention to legalise cannabis within five years.

One argument in favour of relaxing laws is that governments could generate revenues by taxing recreational cannabis – an argument that opponents reject as inimical to public health. Of the 10 US states that have legalised the recreational use of cannabis, seven of those tax and regulate stores selling cannabis – much the same as they tax and regulate liquor stores. In 2018 those seven states generated more than $1 billion of revenues from taxing cannabis. The state of Washington generated $319 million in taxes and license fees and Colorado $267 million. California is estimated to have raised $300 million last year. Interestingly, in the cases of Colorado and Nevada, tax revenues raised from cannabis now exceed those generated from alcohol.

Legal uncertainties

The use of cannabis for medicinal purposes is now legal in the UK, though subject to a convoluted mesh of restrictions. Last night Jonathan Deverill, Partner at top law firm DAC Beachcroft, explained that, in practise, medical cannabis can only be prescribed by a very small number of senior consultants as a last resort. There are no more than a few dozen people currently receiving CBD-based treatments on the NHS. The vast majority of users in the UK have obtained private prescriptions – and even they encounter difficulties with their medical insurers which regard cannabis-based medication as experimental: thus they normally have to pay from their own pocket. That compares with 40,000 people who are getting cannabis medication in Germany and a similar number in Israel.

The use of the substance for recreational use (i.e. allowing people to get high for the sheer hell of it) is still very much illegal. As things stand, it is actually illegal for a UK investor to buy shares in a Canadian cannabis company that makes money by selling cannabis for recreational use.

However, as the Daily Telegraph reported earlier this week, foreign cannabis companies are opening bases in the UK in the expectation that the drug will be legalised for recreational use in due course. Although the UK government has stated that it has no intention of legalising the non-medical use of cannabis, a number of leading firms think that the law will be relaxed here as it has been in Canada and numerous states of the USA.

In the USA the situation is complicated by the fact that while recreational cannabis is legal in ten states of the union it is still illegal at the level of the federal government. Indeed it is classed as a Schedule I drug along with heroin. Banks and institutional investors are wary of dealing with cannabis-related businesses as banking transactions are impeded by federal anti-money laundering regulations.

That said the US federal government recently removed hemp from the list of controlled substances. Hemp is a form of cannabis with no psychoactive properties which has been traditionally cultivated for its fibrous qualities – it is used in the manufacture of rope and textiles. But hemp seeds when pressed yield cannabidiol or CBD oil.

The EU is still working on a comprehensive regulatory regime for cannabis. Last night, however, Melissa Sturgess, CEO of investment boutique Ananda Developments (NEX:ANA), told us that her firm has already launched a cannabis dry-vaping product, developed in collaboration with some ex-BAT (LON:BATS) executives, in Italy, where local regulations favour this approach. Vaping is a potentially huge application since the distribution network (vaping shops seem to have sprung up everywhere) is already in place.

Ananda has also obtained permission from the UK authorities to grow cannabis in the UK for medical purposes. Apparently, it is not necessary to use greenhouses at these northerly latitudes – poly-tunnels suffice. The location of this operation is undisclosed – Melissa could only reveal that the land in question has previously been used by salad growers!

In South Africa, the small-scale cultivation of cannabis by local farmers for their own use has long been tolerated. But in 2018 the Constitutional Court ruled that the prohibition on large scale production was unconstitutional and the South African government is currently in the process of relaxing the law. Leon Giese, CEO of Biodelta, explained last night how his company’s track record of cultivating and distributing spirulina (used in the manufacture of numerous pharmaceutical products) gave it a head-start in the cultivation of high-grade CPD-based products. In Zimbabwe, land previously used to cultivate tobacco has already been given over to cannabis. The African market for medical cannabis is huge and growing, with South Africa at the forefront.

Canada’s key players

Canada boasts numerous listed entities which are manufacturing and distributing CBD-based products – more than anywhere else. The reason why Canada is ahead of the pack is first because the legal framework has been more permissive for longer than elsewhere; and secondly Canada has a vibrant pharmaceutical sector and is a centre of excellence in life sciences. These Canadian companies, having already gained pole position in the USA, are now rapidly expanding into Europe.

The largest cannabis company by market capitalisation on the Canadian market is Curaleaf Holdings (CNSX:CURA) which is worth about CAD4.5 billion. Another of the biggest by market cap is Canopy Growth Corporation (TSE:WEED & NYSE:CGC),the shares of which are currently trading at around the $40 mark. Constellation Brands (NYSE:STZ) has invested more than $4 billion in Canopy to finance its expansion. Canopy, which is one of the largest cannabis manufacturers, recently bought Wimbledon-based skincare and wellbeing brand This Works for more than £40 million and plans to use it as a vehicle to sell CBD-based skincare products in the UK. Canopy already owns an Oxford-based company that promotes the use of CBD products for specialist healthcare and has recently acquired an operation in Frankfurt.

The Belgian-American brewing giant AB InBev (ENX:ABI & NYSE:BUD) has set up a $100 million joint venture with Canadian cannabis producer Tilray (NASDAQ:TLRY) to develop CBD-infused non-alcoholic drinks. Similarly, Molson Coors Brewing Company (NYSE:TAP) has entered into a joint venture with Hexo Corp (TSE:HEXO), another Canadian producer, to make CBD-infused drinks. (I learnt yesterday that one can already buy CPD-infused water in Sainsbury’s (LON:SBRY)!).

Altria Group (NYSE:MO), the US tobacco company (owner of the Philip Morris brand), has purchased a 45 percent stake worth $1.8 billion in Canadian cannabis producer Cronos (TSE:CRON & NASDAQ:CRON). Wayland Group (OTCMKTS: MRRCF), another Canadian player, recently bought a small company in the UK. Aphria (TSE:APHA & NYSE:APHA), one of Canada’s largest producers, recently acquired CC Pharma in Frankfurt.

In February this year, Aurora Cannabis Inc. (TSE:ACB & NYSE:ACB), a Canadian company with a division that sells high-dose THC pre-rolled joints, exported its first shipment of medical cannabis to the UK under the new legal framework.

The concern for investors is that all of these companies have been bid up to extremely high valuations. Since listing in April 2014, Canopy Growth hit a peak value at 25 times its IPO price last September, only to lose half of its value in the following months. None of these companies is actually making money and none pay dividends.

There are also a number of exchange traded funds tracking the fortunes of the cannabis sector, of which the Horizons Marijuana Life Sciences Index ETF. As Phil Shum of the Canadian Securities Exchange admitted last night, these cannabis stocks have delivered stunning returns for early bird investors but have proven extremely volatile.

Ed McDermott, Executive Director of FastForward Innovations (LON:FFWD), has an unrivalled record of investing in the cannabis sector. His investment boutique was behind the investment in Nuuvera which yielded a stellar return for his investors. FastForward is now behind a number of life sciences companies internationally. Ed told us that you can evaluate a medical cannabis company in a similar way to evaluating a pharmaceutical company – but that there are additional imponderables, in particular additional legal and regulatory risk. As such, investments in the sector are high risk – but also, potentially, very high return.

Recent Developments

On Monday and Tuesday this week, executives from cannabis manufacturers across the world congregated in London for the first official European Cannabis Week. A panel discussion featuring the Liberal Democrat MP Sir Norman Lamb, who is an articulate advocate of the legalisation of cannabis, and Crispin Blunt MP was chaired by Andrew Neil.

The consulting firm Prohibition Partners estimates that the European legal cannabis market could be worth up to €123 billion by 2028, split between €58 billion for the medicinal market and €65 billion for the recreational market. The German market has particular potential. Germany has already legalised medicinal cannabis and is likely to be one of the first to legalise its recreational use.

Further Reading

Do download this month’s free edition of The Edge from our website. The latest quarterly supplement to our e-magazine is dedicated to investing in the European cannabis market and contains contributions from numerous of our expert panellists last night.

Companies on the panel