A look At Cannabis Industry

Developing landscape for the Cannabis Industry is something that is gaining a lot of traction from investors these days, and those who are in the hope to capitalise on the potential growth and high returns of what they assume from untapped market or products that can gain popularity in future, have even started punting on certain stocks in the domain.

The cannabis sector has snowballed in recent years as several countries including Canada and certain U.S states have explored and set new regulations for the sale and use of cannabis for specific purposes like recreational activities. On 17th October ’18, Canada became the second country after Uruguay to legalise uses of cannabis products for recreational activities. Canada legalised medical marijuana in 2001.

A look at Businesses taking part in this growing Cannabis Industry

Businesses can take part into this fast growing industry not only through the typical brick and mortar cultivation and/ or sale of cannabis, but they can also develop new products made out of cannabis, new technologies for farming and other ancillary services. Businesses that can be established under Cannabis umbrella can be developing agriculture related technology (for cultivation of cannabis), biotechnological aspects to target certain diseases, or industrial hemp as intermediate products, etc.

Exemplary M&A cannabis deals of 2018

• Canopy acquired Mettrum Health
• Aurora acquired CanniMed Therapeutics, MedReleaf and ICC labs
• Beer maker Constellation acquired Canopy - deal cost entailed a significant figure, US$4bn
• MedMen Enterprises acquired PharmaCann

Overall, a consolidation through M&A deals that took place last year into this growing market, has also seen many diverse group of companies coming together. For instance, beverage companies, particularly Corona beer maker Constellation brands, have been enthusiastically working in the area.

The size of the cannabis industry under legal parlance in North America was $5bn as at 2015 and now this is expected to surpass $20bn by 2020. It is worth noting that US and Canada significantly contribute to global legal cannabis revenue.

The UK scenario – Some Key Company Updates

Cannabis deal between Associated British Food (ABF.L) and GW Pharmaceuticals (OIT7.L)

In 2016, British Food, a wholly owned subsidiary of Associated British Food announced that they would start growing cannabis for the pharmaceuticals industry. The reason British Food made this decision to grow cannabis is that they aimed at supplying a unique variety of cannabis under the signed deal with GW Pharmaceuticals, for a new epilepsy medicine called Epidiolex.

Is Premium Whiskey Manufacturer, Diageo about to foray in the Cannabis arena?

In August 2018, Diageo (DGE.L) expressed its interest of foraying into cannabis space. This news did not come as a surprise because another beer maker is also foraying into this space - Heineken and Molson Coors Brewing Co was also identified to add marijuana-infused beverages to their product portfolio. As per Diageo’s FY18 earnings call, its management did say that they are closely looking for opportunities in this space, but no development was reported. However, as per some latest media reports, Diageo has been in talks with about three marijuana producers. In fact, multiple sources reported that the world’s alcohol giant, Diageo Plc was negotiating a deal with a Canadian cannabis firm.

The beer market is shrinking in the United States, and beer manufacturers are looking to square-off this drag on their top line by adding drinks made out of cannabis. Similar scenario is seen across the globe.

AB InBev (0RJI.L) and Tilray (TLRY.NSQ) to research in the Cannabis Drinks’ Space

In December 2018, AB InBev (0RJI.L), world’s biggest alcoholic drink maker teamed up with Tilray (TLRY.NSQ), a Canadian pot company to conduct research on cannabis-infused drinks or to research on how recreational marijuana drinks might be brought to market. AB InBev will work on this with Tilray in London, Ontario. Both of them will be investing $50 million to research recreational uses of cannabis.

On 22nd January, Andre Calantzopoulos, CEO at Philip Morris International has said investment in the cannabis sector remains risky, and there is a lack of scientific data on the long-term impact of cannabis.

Meanwhile, Coca-Cola which did some research on whether to invest in the cannabis sector is still deciding on staying in the pot business or not.

Benefits and Investment Risks

While early investment in selective and fundamentally strong business can be fruitful, investment in Cannabis stocks still exposes investors to a variety of risks that encircle around government intervention, legal problems and sector’s valuation which might look to be on a higher side to some market analysts. Nonetheless, a balance portfolio can manage the risks to some extent and certain small companies might still be trading in an undervalued zone.