Green Giants of the Future? Who Will Win Canada’s Cannabis Race

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.

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.

While the potential for growth is huge, the legal cannabis industry is still in its infancy. At the moment, legal growers supply only 31,000 kilograms of Canada’s weed, or 5 percent of anticipated total medical and recreational demand. Canada’s pot-growing business must take off, and fast.

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. The amount invested globally into cannabis ventures remains relatively small, only $220 million in 2016. Yet that’s a significant increase from investment in 2013, which was a scant $13 million.

This presents some unique opportunities to get in on the ground floor, especially when you look at new and specialized growers and the likelihood that larger firms, particularly those in the tobacco trade, will get in on the action as well.

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

1) Philip Morris (NYSE:PM)

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.

As Tobacco markets have grown more mature, the company has been exploring reduced-risk smoking products, with its heated-tobacco iQOS system currently under consideration by the US Food and Drug Administration as a “modified risk tobacco product.” Market watchers therefore think that the company will seriously consider a major entry in (medical) marijuana markets soon.

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 (TSX-V:CBW; OTC: 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 (NYSE: MO)

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.

The company has been quite successful marketing these products, and looks set to invest some of its significant cash flow (it had $236.7 million in-hand at the end of 2016) into new research and development of cannabis-related drugs.

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.

With several products currently in the pipeline, Insys could be a strong performer in the field of medical cannabis-based products and a good earner for those investors able to get in at rock bottom prices.

5) GW Pharmaceuticals (Nasdaq: GWPH)

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.

GW Pharma’s biggest advantage is that it has a strong presence in the United Kingdom. The company plans to invest £50 million and hire 70 new staff for its Britain-based facilities. The company is well-positioned to take advantage of greater interest in medical-marijuana and cannabis-based products on both sides of the Atlantic.

Other companies to watch:

CanniMed Therapeutics (TSX:CMED): CanniMed Therapeutics has been cultivating pharmaceutical cannabis for 15 years, and with this experience is it sure to be near the front of the pack when Canada’s cannabis boom comes into force. On top of this, CanniMed has exposure to Australian markets and has recently signed a supply deal in South Africa, evidence of not only the company’s ambition, but also the quality of its contacts and product.

Harvest One Cannabis (TSXV:HVST), formerly Harvest One Capital Inc, is a Canadian company focused on servicing both recreational and medicinal markets. Harvest One recently raised $25 million in equity financing and $9 million will be used to finance Phase 1 production capacity expansion at United Greeneries’ Duncan Facility.

Beleave (CSE:BE): 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.

Beleave became Cannabis Wheaton’s fifth production partner in May and the parties will work cooperatively to identify an appropriate second site to be acquired and developed by a newly formed special purpose subsidiary of Beleave ("NewCo"). The proposed second site is expected to be located in Ontario and will be designed to accommodate an estimated 200,000 square feet of cultivation space.

MedReleaf Corp (TSX:LEAF): 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 Cooperation as many analysts expect the ‘legal weed’ industry to grow 25% on an annual basis over the next 10 years.

Aphria (TSX:APH) 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.

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FORWARD-LOOKING STATEMENT. Statements in this communication which are not purely historical are forward-looking statements and include statements regarding beliefs, plans, intent, predictions or other statements of future tense. Forward looking statements in this article include that new cannabis legalizing legislation will create an $8-billion-dollar industry; that there will likely be a supply shortage; that this industry will be $25 billion annually in the US; that Cannabis Wheaton’s business model reduces risk for investors; the ability to generate revenue or take production through the streaming agreements. Forward-looking information is based on the opinions and estimates of Cannabis Wheaton at the date the information is made, and is subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking information. Forward looking statements involve known and unknown risks and uncertainties which may not prove to be accurate. Actual results and outcomes may differ materially from what is expressed or forecasted in these forward-looking statements. Matters that may affect the outcome of these forward looking statements include that markets may not materialize as expected; marijuana may not turn out to have as large a market as thought or be as lucrative as thought as a result of competition or other factors; Cannabis Wheaton may not be able to diversify or scale up as thought because of potential lack of capital, lack of facilities, regulatory compliance requirements in Canada or outside of Canada or lack of suitable employees or contacts; partners of Cannabis Wheaton may not be granted licenses or additional capacity under existing licenses for them to grow for the cannabis market; and other risks affecting Cannabis Wheaton in particular and the cannabis industry generally. The forward-looking statements in this document are made as of the date hereof and the Company disclaims any intent or obligation to update such forward-looking statements except as required by applicable securities laws.

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