The discussion on the legal status of cannabis is one that has been thrown back and forth for decades but has only really started to become a credible debate in recent years. In 2013, Uruguay became the first country to fully legalize recreational cannabis, followed by Canada in 2018. Eleven US states have also legalized recreational cannabis, but it is the medicinal market making the most headway globally, presenting major opportunities for well-established cannabis companies in legal territories to capitalize on nascent markets in Asia, Europe, and beyond.
The largest medical market in Europe, and the one that presents the greatest opportunity, is Germany, where medicinal cannabis was legalized in 2017. In the first year of legalization, 1,200 kilograms of cannabis were imported, which soared to 3,000 kilograms the following year, and in the first half of 2019, it stood at approximately 2,500 kilograms. Prohibition Partners, a market intelligence company, published a report on the expected growth of the German market, where it expects the number of medicinal cannabis patients to surpass one million by 2024.
The Canadian cannabis market is about to face a massive oversupply of product due to the fact that many firms have spent huge amounts of capital in order to expand their production capacity and get ahead of the market. This has led some investors to ponder what these companies plan to do with their abundant supply, and part of the answer for some of them is the rapidly growing German medical pot market. Here, we’ve picked out three Canadian companies looking across the Atlantic for the next big opportunity.
MediPharm Labs (TSX:LABS) (OTCQX:MEDIF)
MediPharm Labs is one of two leading cannabis extraction firms in Canada, along with The Valens Company (TSXV:VLNS) (OTCQX:VLNCF). Cannabis extraction is a vital service in the production of derivative products, such as oils, vapes, and topicals, all of which are in-demand product types in both the medicinal and recreational markets. While MediPharm may be focused on the rollout of the cannabis 2.0 market in its homeland, this has not stopped it from harboring ambitions in Germany.
MediPharm Labs officially entered the German market last September after agreeing to a distribution deal with German medicinal firm ADREXpharma, making it the first extraction-only company with a supply agreement for export to Germany. Under the terms of the deal, the company will supply German patients with a range of high-quality cannabis concentrate derivative products, including THC and CBD oil, which will go on sale across 20,000 pharmacies in Germany.
Aphria Inc (TSX:APHA) (NYSE:APHA)
Aphria is in a curious position in the Canadian market. Despite having a market cap a fraction of the size of industry leaders Canopy Growth (TSX:WEED) (NYSE:CGC) and Aurora Cannabis (TSX:ACB) (NYSE:ACB), it is still the third-largest producer of cannabis in the world and stands in somewhat of a no man’s land between those two industry heavyweights and a litany of small- to mid-cap firms below it. While the Canadian market may have floundered in 2019, Aphria actually outperformed most of its peers and posted a surprise Q1 profit back in October.
Aphria has clearly recognized the potential of the German market as it was recently awarded a contract there, which will see the company produce one ton of cannabis per annum, beginning in the second half of 2020. Aphria estimates demand in Germany is already five times the total production capacity awarded to it and other initial German producers, which could likely drive up the selling price per gram.
In January, Aphria’s subsidiary ARA-Avanti Rx Analytics was awarded an EU Good Manufacturing Practices (EU GMP) certification, which will allow it to ship bulk and finished products for medicinal use in permitted jurisdictions throughout the European Union. Aphria also has an established distribution network in Germany through its CC Pharma subsidiary, meaning there are next to no barriers to trade.
Canopy Growth (TSX:WEED) (NYSE:CGC)
Surprisingly, the world’s largest cannabis company was actually refused a production license by German regulators after a judge halted the tender process, arguing that the timeline given to companies was too short. This led Canopy to seek out an alternative way to enter the German market, which it did with the acquisition of Europe’s largest cannabinoid-based pharmaceuticals company C3 Cannabinoid Compound Company. When the deal was announced, C3 served about 19,500 patients and generated revenue of C$41.5 million in 2018.
In over 20 years of research, C3 has developed a wealth of knowledge of synthetic and natural cannabis medical products and currently holds several patents relating to extraction technology and the synthetic production process. Speaking on that takeover, former CEO Bruce Linton said that it will “offer more options to physicians across Europe, accelerate our commercial sales and increase our economic footprint on the continent, and drive forward new innovations.” The only question now is to whether Canopy’s new CEO will carry on Linton’s European ambitions.
While complete recreational legalization may still be a pipe dream in Europe, there is no doubt that attitudes are shifting on the continent, and Germany’s status as an EU leader clearly show that it is leading the way. Medical sales are already on the rise, and with Luxembourg having become the first European state to legalize recreational use, many of its neighbors may not be far behind. There are plenty more companies making moves in the continent other than the three above; let us know if any others have caught your eye!
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