Despite COVID induced headwinds, the cannabis industry has thrived in 2020 while many other industries have struggled. Financial, structural and regulatory drivers have continued to thrust the sector forward. As we enter 2021, the listed cannabis stocks have now delivered nine months of positive share price growth and, driven by a number of positive tail winds in 2020, the sector is primed for further growth this year. The medical cannabis sector is already a viable alternative asset class that investors should be seeking exposure to via Verdite Capital. Underpinned by our $75m cornerstone family office investor, we expect to hit our first close target of $100m by the end of Q1 2021 and to start deploying into a number of extremely exciting investment opportunities we have already identified shortly thereafter. For those interested in hearing more, please contact the investment team here.
2020 CANNABIS SECTOR HIGHLIGHTS
Multiple progressive regulatory advancements in North America and Europe
UN reclassification of cannabis given medical benefits
FCA clarifies the UK listing requirements for medical cannabis and CBD companies
EU Court of Justice declares that CBD should not be considered a narcotic
US House of Representatives passed the ‘MORE Act’ to legalise cannabis
5 US states voted to legalise cannabis in 2020; medical cannabis is now legal in 35 US states and available to over two thirds of the population
Capital raising has fallen 70% from 2018 peak
M&A activity starting to pick up again
Global legal cannabis industry grows 38% in 2020 reaching almost $20bn
Public cannabis stocks bottomed out in March and ETFs have risen 55-170% since
1. Progressive legislative and regulatory changes are rapidly transforming the global industry
Global demand for cannabis products is estimated at c.$344bn annually. The ability to convert existing sales from the illegal to legal channels is primarily being driven by regulatory changes which will accelerate that switch over the next decade. The last quarter of 2020 was a phenomenal period for progressive regulatory changes, providing greater freedom and access to cannabis and helping further position the global industry towards a fully legal framework. Below we review a few of the key legislative changes:
UN cannabis reclassification:
What happened? In December 2020 the UN Commission on Narcotic Drugs, on recommendation from the World Health Organisation, agreed to remove cannabis from Schedule IV, a categorisation reserved for drugs with no medical benefits.
What does it mean? For the first time the UN has publicly recognised the therapeutic and medical benefits of cannabis. The removal of this structural barrier will now provide countries around the world with greater freedom to implement regulatory reform in relation to cannabis, in particular when it comes to medical cannabis. The change is a substantial development and will be a significant boost to the rapidly growing industry. Every new country that implements a legal medical programme immediately opens up a multi-billion $ market opportunity that companies can now legally address for the first time in over 80 years.
UK Financial Conduct Authority (FCA) listing clarification:
What happened? In October 2020, the FCA provided long awaited clarification for the UK listing requirements for companies involved in the cannabis sector. In short, medical, pharmaceutical and wellness companies are now able to consider listing on the London Stock Exchange opening up yet another global financial market to the industry.
What does it mean? We now expect to see several healthcare focused cannabis companies listing on both the LSE Main Market and AIM in 2021. While the US and Canadian exchanges have been the primary locations for cannabis companies going public, we will now start to see such companies listing in London for both primary and secondary capital access. We also anticipate other exchanges around the world following suit in 2021.
EU CBD ruling
What happened? Following a case between a CBD vape manufacturer and the French state, in November 2020 the EU Court of Justice ruled that CBD should not be considered a narcotic.
What does it mean? The landmark case provides clarity around the legal status of CBD in the EU. The ruling applies to the whole customs union and effectively allows the cultivation, formulation and supply of CBD as wellness products to now develop in countries all across Europe boosting the cannabinoid industry and opening up new markets, new products and will help drive significant sector revenues.
Passing of the MORE Act in the US:
What happened? In November 2020 the US House of Representatives passed the Marijuana Opportunity Reinvestment and Expungement Act (MORE Act).
What does it mean? If passed into law at the Senate, the Act would remove cannabis from the US schedule of Controlled Substances bringing an end to the contradiction between current state and federal cannabis policy. This would be a major boost to the industry and would open up the capital markets to the sector. US companies would be able to list on the major US exchanges, and trigger a wave of institutional investment into the industry. The senate will vote on the bill in 2021. The MORE Act would be expected to generate substantial income for the US treasury, as well as reducing the pressures on the federal prison system. According to a non-partisan report by the Congressional Budget Office (CBO), the MORE Act would likely generate $13.7bn in taxes and cut nearly $1bn in federal prison spending over the next decade.
Passing of the SAFE Act in the US:
What happened? In May 2020 the US House of Representatives passed The Secure and Fair Enforcement Act (the ‘SAFE Act’).
What does it mean? If passed into law by the Senate, the SAFE Act would allow US cannabis companies to access banking services for the first time, removing one of the biggest hurdles for the growth of the industry in America. The industry would be able to move away from the predominantly existing cash-only system and be able to secure debt finance to grow.
Five US States passed legalisation:
What happened? During the November 2020 US elections, all 5 states in which cannabis regulations were on the ballot voted to legalise (New Jersey, Arizona, Mississippi, South Dakota and Montana).
What does it mean? This brings the total tally of states with legal medical cannabis to 35 and with legal adult-use cannabis to 15. This equates to over two thirds of the country’s population with access to medical cannabis and one third with access to adult-use. New Frontier Data estimate that these five states alone will add $9bn of incremental legal revenues between 2022-2025.
2. Growth capital remains scarce creating a unique opportunity
What happened? Following the ‘Green Rush’ of 2018, during which almost $14bn was invested into the sector, access to growth capital has reduced considerably. In 2019 $11.3bn was raised, a figure somewhat inflated by a handful of major raises that occurred in Q1 of that year. 2020 saw an even more substantive fall, with just under $4bn being raised. Simultaneously, the average size of capital raises has dropped from a peak of $23m per transaction in 2018 to $14m this year.
