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

Bod Science

23/02/2021 23:00

By Shruti Sonal
    Feb 24 (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  CAN.AX  and MGC Pharmaceuticals  MXC.AX  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.  urn:newsml:reuters.com:*:nL4N2JG07D
 urn:newsml:reuters.com:*:nL4N2IA0QF  urn:newsml:reuters.com:*:nL4N2KI0RR
    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  BDA.AX .  
    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.  urn:newsml:reuters.com:*:nL8N2II573
    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. 

    A recent short-lived Reddit-fuelled rally in cannabis stocks
notwithstanding, many investors see them as long-term bets. The
cannabis index  .POTX  has risen 30% in the past 12 months,
outstripping 16% growth in the S&P 500  .SPX .  urn:newsml:reuters.com:*:nL4N2KG340
 urn:newsml:reuters.com:*:nL8N2KH3LD 
    

    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  WEED.TO  and Aurora
Cannabis  ACB.TO  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.  urn:newsml:reuters.com:*:nL4N2IH4AN
    "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. 

    
    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."
    

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
European medical marijuana sales set to rise     https://tmsnrt.rs/3tPyGaV
Cannabis stocks rally as more catalysts emerge    https://tmsnrt.rs/3dBuQMY
Framework of cannabis legalization in Europe    https://tmsnrt.rs/3kd8cvK
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 (Reporting by Shruti Sonal in Bengaluru; Editing by Sayantani
Ghosh and Jacqueline Wong)
 ((Shruti.Sonal@thomsonreuters.com; Twitter: @shrutisonal26;))