SINGAPORE (June 11): Canada will legalise recreational cannabis (also known as weed, ganja or marijuana) on July 1. The cannabis market was given a shot in the arm when California legalised the drug for recreational use on Jan 1 this year. California is the largest state in the US by GDP and the world’s fifth-largest economy after the US, China, Japan and Germany.

Prior to that, though, pharmaceutical products made from cannabis had been legalised and available for use. Last year, Germany allowed medicinal cannabis to be sold. Around 15 European countries, including Germany, have legalised cannabis for medical purposes. Australia legalised cannabis for medical usage and export in 2016.

In February this year, Arcview Market Research, which studies growth companies, released a report that projected legal cannabis to be one of the fastest-growing sectors in the next 10 years. Spending on legal cannabis worldwide is expected to hit US$57 billion ($76.3 billion) by 2027. The adult-use (recreational) market will cover 67% of the spending; medicinal marijuana will take up the remainder, the report said. Arcview estimates that the largest group of cannabis buyers will be in North America. Sales stood at US$9.2 billion in 2017 and could rise to US$47.3 billion by 2027 for a compound annual growth rate of 18%. Rest-of-the-world growth is likely to rise to US$2.5 billion by 2027, from US$52 million in 2017, representing a CAGR of 47%.

Recreational marijuana is likely to dominate the North American market, with demand from the rest of the world likely to be for medicinal purposes for the next several years. The medical market will have advantages in Europe and other developed markets, owing to government subsidised healthcare systems covering cost for patients, the report notes. Europe, which has a population of more than 700 million and healthcare spending of US$1.5 trillion a year, is likely to be the largest medicinal cannabis market in the world.

“Outside the US and Canada, it will be almost wholly a medical-only business until the United Nations revamps the 1961 Single Convention on Narcotic Drugs, which will likely only come after the US’ federal government ends prohibition, which we don’t expect until 2021,” Troy Dayton, CEO of The Arcview Group, says  in a statement.

“California gets the media attention and Canada gets the investment dollars, as both allow adult use, but Germany’s move to make the cannabis flower available for medical use in pharmacies was really the big news of 2017 from a worldwide perspective,” says Tom Adams, editor-in-chief at Arcview Market Research and principal analyst at BDS Analytics. He is referring to the medicinal cannabis producers that are listed on the Toronto Stock Exchange (TSX) when he talks about investment dollars. “The tables have turned in favour of legalisation across the world and we predict that the trend will spread as research continues to support cannabis’ effectiveness as a medication.”

Weed proxies mainly loss-making

According to Arcview, Canada’s willingness to legalise recreational use of cannabis has prompted a new wave of laws liberalising access to medicinal cannabis. Canada is one of the few countries where investors have been confident enough in the legality of the industry to pour billions of dollars into public equity investments, helping companies grow rapidly.

For value investors, though, pickings are likely to be few and far between, as nearly all the cannabis-related companies are loss-making. At present, Australia and Canada remain the key markets to gain exposure to the sector via cannabis-listed stocks.

The largest Canadian cannabis company by market cap is Canopy Growth. Its subsidiaries, Tweed and Bedrocan Canada, produce medicinal cannabis. Last year, US-listed brewery company Constellation Brands took a 9.9% stake in Canopy. Despite its size, Canopy remains loss-making.

Toronto-listed Aphria is profitable. However, it made some missteps by acquiring US cannabis assets, which it subsequently sold. It also paid US$826 million for Nuuvera, which produces medicinal cannabis products. Nuuvera has since been delisted.

Nasdaq-listed UK-based GW Pharmaceuticals is viewed as the leading cannabidiol producer in Europe. It developed the world’s first prescription medicine, Savitex, made from the cannabis plant. The drug is now approved in many countries outside of the US for the treatment of spasticity due to multiple sclerosis. The company is also developing Epidiolex, a cannabidiol used to treat rare and severe early-onset, drug-resistant epilepsy syndromes.

Although GW’s revenues for the six months of its FY2018 ended March 31 rose 120% y-o-y to £8.1 million ($14.4 million), the company reported a loss of £109.6 million, double the loss in the year-ago period.

Investing is not without risk, and the weed sector is young, unknown and loss-making. Alvin Loh, head of capital markets at Alverpine Capital, lists the numerous risks in a recent report on cannabis.

First off, cannabis is not legal, including for medicinal purposes, in Asia. Large parts of the industry and many countries globally still consider cannabis as an illegal substance. As a result, cannabis-related companies are often not allowed to work with banks or use traditional commerce channels. Even in the US, cannabis is a cash-only business in many states.

Volatility in cannabis companies’ share prices is to be expected, given that this is a growth industry. There are few stocks to invest in and investor interest is high. Other risks include slower-than-expected acceptance of cannabis in medical usage or adverse laws and regulations that hinder industry growth rates.

Eventually, the cannabis companies in the table could be viewed in the manner of start-ups. As the product gains wider acceptance, traditional pharmaceutical companies may buy stakes in these companies.

On a positive note, medicinal cannabis products are gaining wide acceptance in South America. “Legal” spending (for medicinal cannabis) is projected to grow from US$125 million in 2018 to US$776 million in 2027, led by Brazil, Argentina, Uruguay and Peru, Arcview says. Elsewhere, legal cannabis spending in Australia is forecast to grow from US$52 million in 2018 to US$1.2 billion in 2027, a CAGR of 53%. Israel is known to be way ahead of the curve in developing cannabis pharmaceutical applications.

On May 31, the first campaign advertising medicinal cannabis oil in Japan went live. The product is hemp oil, produced by ASX-listed Elixinol Global, representing a first in Asia.

About medicinal cannabis

Cannabis is the Latin or scientific name for the entire hemp plant, also known as marijuana or marihuana in some jurisdictions. Cannabinoids are the chemicals that give the cannabis plant its medical and recreational properties. Cannabis proponents claim that the plant has ingredients with significant medicinal properties. Here are 10 of them.

•    THC is the abbreviation for Delta(9)-tetrahydrocannabinol. THC is the primary psychoactive compound in marijuana. It creates the high feeling weed is famous for. Medical benefits are mainly pain relief from neuropathic pain, cancer, multiple sclerosis and Parkinson’s disease. It also helps prevent plaque build-up in the brain, a major cause of Alzheimer’s.

•    CBD, short for cannabidiol, is legal in a number of US states, including California. CBD has medicinal value and is used to treat epilepsy, chronic pain, cancer, depression, anxiety and diabetes.

•    CBC, or cannabichromene, is an anti-inflammatory, anti-fungal drug that is being used in trials to treat tumours.

•    Cannabinol, which is produced when the dried cannabis flower has gone stale, is a pain reliever and anti-inflammatory, anti-asthmatic and sedative drug. Trials are being conducted on its effectiveness in treating glaucoma.

•    CBG is short for cannabigerol, an antibiotic and pain reliever. CBG is being trialled to treat psoriasis.

•    THCv, or tetrahydrocannabivarin, is a cannabinoid that works in tandem with THC. THCv has the potential to be a bestseller because it promotes weight loss. Unfortunately, cannabis is not legal in Singapore for medicinal use. However, several EU countries, including Belgium, the Netherlands, Germany and Luxembourg, allow cannabis drugs to be used for medicinal purposes.

•    CBDv is short for cannabidivarin. UK’s GW Pharmaceuticals announced a patent for CBDv last year. The patent will allow the company to create a CBDv-based anti-epileptic drug. The company is currently carrying out phase 2 trials for the drug. This patent comes after a wave of research published in 2012 and 2013. Two separate studies isolated CBDv as a strong anticonvulsant. CBDv may also prove useful for patients with stomach or gastrointestinal diseases.

•    Delta(8)-THCdelta(8) is an appetite stimulant. Studies show it increases the appetite significantly more than THC. It has also been used to treat nausea that results from chemotherapy.

•    THCa and CBDa are the compounds found in raw cannabis and are eaten as a nutritional supplement or applied topically. They are anti-inflammatory, antioxidant and improve intestinal and neural function.

Cannabis comes in from the cold ahead of Canadian legalisation

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