Proactive Investors - The $7.2bn takeover of GW Pharma has defined what success looks like for cannabis companies on this side of the Atlantic.
GW’s Home Office licence award, allowing it to grow commercial quantities of high-THC cannabis, coupled with a scientific breakthrough created a blockbuster drug for epilepsy, which ultimately resulted in significant returns for long-term investors.
That a UK company can sensibly, methodically and profitably carve out a niche in medicinal cannabis provides inspiration for the next generation of entrepreneurs looking to build new medical or pharmaceutical businesses.
Two things have happened to change the landscape for would-be growers, retailers and the end-user here in Britain. They are legislation and financial regulation.
The drug was finally legalised for medical purposes in 2018, and specialist doctors are learning to become more familiar in writing cannabis prescriptions for some of the 1.4 million people in the UK that consume cannabis on a weekly basis to help alleviate a wide range of ailments.
FCA green light
However, it took until September last year for the Financial Conduct Authority to catch up with the change in sentiment.
The City watchdog decreed that UK-based medicinal cannabis companies could list their shares publicly – partially clearing up a grey area around the Proceeds of Crime Act.
As a result, the logjam of businesses waiting to float on the London Stock Exchange has begun to break.
Northern Leaf is one of those companies that now have a clear path to the market and is on a pre-IPO fundraising round from which it hopes to bring in £5mln.
The cash will be used for continued capital investment in facility expansion as well as ongoing working capital costs. The intention is to float the business on the LSE later this year.
READ ABOUT.., Northern Leaf, the European cannabis first-mover now has a clear line of sight to a London Stock Exchange listing
Analysts see the European market developing in a more regimented and organised way than North America, which is complicated in extremis by the addition of recreational use of cannabis to the mix.
Not helping this already dysfunctional market is federal illegality of the drug in the US (despite the almost wholesale legalisation at the state level).
And adding to the sense of confusion is the role of the Canadian equity markets in funding growers and retailers.
Of course, the wild west-style green gold rush has gone from boom to bust on the other side of the Atlantic.
Europe is the focus
Luckily, Northern Leaf’s target markets are on this side of the Pond. It wants to plant its flag in the UK, Germany (the continent’s most advanced medical cannabis market), Italy, Spain, Portugal and Denmark.
It currently has 75,000 square feet of growing capacity under glass on the island of Jersey with the ability to expand to 636,000 square-feet across its two sites.
The plan is to develop as a low-cost grower, wholesaler and distributor of traditional flower before building a vertically integrated operation.
Northern Leaf’s strategy is then to move into extraction, formulation, manufacturing and branded products.
It has overcome a significant barrier to entry by landing only the second ever Home Office-sanctioned THC licence (the first was granted to GW 22 years ago).
Meanwhile, the award of EU good manufacturing practice (GMP) accreditation by the medicines regulator will provide another competitive advantage.
The location, Jersey, where it has the island’s only commercial cannabis licence, has a number of commercial upsides.
Among them are the existing agriculture industry, proximity to the UK and European markets and the climate.
Low-cost operator
Northern Leaf expects to be one of the lowest-cost operators in the world because of the Goldilocks weather conditions of the British Crown Dependency, which receives over 2,400 hours of sunshine a year.
It should be noted the company has carried out several dry runs for cultivation through 2020 by growing hemp from which CBD can be extracted.
The half-cousin of weed, hemp lacks the psychoactive chemical THC that makes users feel high, but in most other respects is identical to farm.
The plan going forward is to switch to THC production and ramp-up to full phase-one capacity by this time next year, which would see it producing 6,500kg of flower annually.
The first shipment, meanwhile, could be ready within three months of planting.
A potential US100bn market
Chrystal Capital Cannabis Advisory, an investor and adviser of early-stage cannabis companies, believes the global industry could grow to over US$100bn of annual revenues in the next three to four years from US$20bn currently.
Helping drive that expansion will be the rise of the European producers, distributors and retailers.
Ultimately, Chrystal reckons cannabis could become as big as the drink and tobacco sectors.
What that means at a more granular level is today’s start-ups could very quickly become tomorrow’s multinationals.
You only have to look at the rise of likes of Canopy Growth and Tilray to realise this can happen – even if the business model is likely to differ between Europe and North America.
First mover advantage
There are multiple, multi-billion-dollar valued cannabis companies in Canada and the US.
On that basis, first movers in Europe, which has twice the population of North America, have the potential to do very well as do the shareholders, insiders at Northern Leaf point out.
The early signs are promising for the business, which has a clear path to significant revenue generation and early profitability, and it sits in a strong position to become a leading cannabis player in Europe.
Clear blue water has been put between it and potential competition by securing that all-important Home Office-sanctioned licence, with GMP accreditation for its greenhouse facilities also in the works.
All this, and the sunshine climate of Jersey, underlines Northern Leaf’s potential ahead of its listing on the LSE where recent the listing of MGC Pharma (LON:MXC) and Kanabo (LON:KNB) have has impressive public market debuts.