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Analysis: Aussie cannabis firms go capital light as they roll into Europe

Stock MarketsFeb 23, 2021 06:15PM ET
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© Reuters. FILE PHOTO: Cannabidiol (CBD) oil bottles of Swedish DeHolk AB company are pictured during the Cannabis Business Europe 2018 congress in Frankfurt

By Shruti Sonal

(Reuters) - A handful of small, young Australian firms are taking a chance on Europe in spite of the region's diverse markets, hopeful that a capital-light investment strategy will diminish their risks.

Europe could be a hard market to crack as regulations vary by country, but favourable rulings for medical marijuana and potential demand are promising factors. The companies reckon that establishing an early base there and working with European partners will help them better negotiate different markets and steal a march on larger North American rivals.

Cann Group and MGC Pharmaceuticals are among many firms that have pushed into Europe, recently signing partnerships to distribute medical marijuana products and also exploring a dual-listing in the region.

Europe is much smaller than North America, already battling oversupply, but the market is a draw for Australian companies that contend with an even smaller home base.

"With prospects still limited largely to just the prescription market (in Australia), exports remain key to marijuana firms," said Jo Paterson, founder and CEO of BOD Australia.

New South Wales-based BOD, valued at just $37 million, entered into distribution partnerships in the United Kingdom, Italy and Netherlands last year. Its stock surged two thirds in the period.

There are indications that regulations around cannabis will continue loosening in Europe.

A ruling https://curia.europa.eu/jcms/upload/docs/application/pdf/2020-11/cp200141en.pdf in November by the European Union's highest court that cannabidiol - the main ingredient in medical marijuana products - is not a narcotic, is crucial for their success in Europe, the companies said.

The United Nations drug agency voting weeks later to remove cannabis from the most tightly-controlled category of narcotics will also help, they said.

Medical marijuana sales in Europe are expected to surge 52% by 2025, hitting $3.1 billion, according to a report by market researcher Brightfield Group and consultant Hanway Associates.

Graphic: European medical marijuana sales set to rise - https://graphics.reuters.com/CANNABIS-EUROPE/jbyprdrjgpe/chart.png

A recent short-lived Reddit-fuelled rally in cannabis stocks notwithstanding, many investors see them as long-term bets. The cannabis index has risen 30% in the past 12 months, outstripping 16% growth in the S&P 500.

Graphic: Cannabis stocks rally as more catalysts emerge - https://graphics.reuters.com/AUSTRALIA-CANNABIS/oakperndavr/chart.png

CAPITAL LIGHT

Analysts have warned, however, that Europe's regulatory landscape is complex and could be hard to navigate.

Even bigger firms such as Canopy Growth (NASDAQ:CGC) and Aurora Cannabis (NYSE:ACB) have found it difficult to make profits in the continent and are now scaling back investments, though they say that Europe remains a big opportunity.

"Policymakers and businesses are tackling issues including cross-border supply chains, standardising manufacturing and laboratory practice, and prescription requirements," said Ibrahim Said Abdeldayem, a risk consultant at Arriello.

Some countries, including Germany and the Netherlands have well-established medical cannabis legislation. In others such as Sweden and Belgium, cannabis is strictly prohibited.

Graphic: Framework of cannabis legalization in Europe - https://graphics.reuters.com/CANNABIS-EUROPE/xklvyomwbvg/chart.png

Australian companies are tackling the diverse markets with a capital-light approach: sticking to partnerships with firms that are better-equipped to handle distribution and rules locally, rather than trying to build processing plants.

Cann Group, the first in Australia to receive a licence to cultivate medicinal cannabis in 2017, said it will focus on Germany and Britain because those markets are expected to grow quickly.

Cann, worth roughly $150 million, is partnering with a London-based company to ensure it is well positioned when the market takes off, its chief operating officer Shane Duncan said.

"Hopefully (Australian investments) will be more thoughtful and more strategic, with a better understanding of the limits of the market, and that it will take time," said Jamie Schau, analyst at Brightfield.

"The important part is to get it right in each market and not treat it as a bloc."

Analysis: Aussie cannabis firms go capital light as they roll into Europe
 

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