Saturday, September 30th 2023

Investing in the UK’s Small Cap Medicinal Cannabis Stocks

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Time to invest in the UK’s Small Cap Medicinal Cannabis Stocks?


“…But institutional recognition may not be far away. Backed by a growing consumer base, increasing recognition from financial regulators and governments – medicinal cannabis is now legal in more than 40 countries – the sector is on a strong upwards trajectory…”


Global marijuana markets and interest are growing like a weed. Today, cannabis presents itself as an established industry where expectations have become realistic and achievable. As rampant growth becomes secondary to profitability and positive balance sheets, many companies still present huge opportunities for investors of every kind. With this type of impressive growth, it’s no wonder that many investors are interested in the sector.

So, what’s the best approach to investing in marijuana? Below, we look at how to consider investing into this exciting sector.

Companies covered include : #APOL #CBX #FFWD #KNB #LIFE 

During a tough year of lockdowns, home schooling, and job insecurity, many have turned to alternative medicines to help relieve anxiety, insomnia, depression, and other conditions.

Medicinal cannabis products have sold in unprecedented numbers in Europe and the US as consumers increasingly recognise their therapeutic value. Growing sales, a change in UK regulations allowing medicinal cannabis producers to list on the London Stock Exchange, and the prospect of further liberalisation in the US have made cannabis stocks one of this year’s most fashionable trades.

But there remains much confusion about the implications of the new regulations for investors, and, indeed, what what medicinal cannabis actually is.

On cannabis and cannabinoids


So let’s start with a few definitions. Cannabis is a plant that has been farmed for thousands of years for its medicinal and recreational properties. Medicinal cannabis products use cannabinoids, a group of compounds found in hemp, a strain of the cannabis plant. There are more than 100 known cannabinoids. But the CBD compound has the widest medical application, engaging positively with the body’s receptors to provide pain relief and treat conditions such as insomnia, anxiety, epilepsy, skin irritations, and stress disorders. Other strands including CBN, CBG, CBL and CBC, might have the potential to treat Parkinson’s disease and other serious ailments.

Crucially, from a legal perspective, cannabinoids do not produce the psychoactive states with which cannabis is popularly associated, which are stimulated by another of the plant’s chemicals, tetrahydrocannabinol (THC). Medicinal cannabis can only contain trace amounts of THC.

Hemp’s remarkable properties make it useful beyond medicine. More than 25,000 emissions-reducing products can be made from the substance, including natural fibre composite automotive parts and even carbon-neutral concrete.

The new UK regulations for cannabis producers


The financial regulations governing the medicinal cannabis sector might seem even more complex than the plant’s chemistry. The UK legalised medicinal cannabis in 2018, allowing doctors to prescribe it for medical use. But the Financial Conduct Authority (FCA) only gave the green light for UK-based medicinal cannabis companies – with the right Home Office licences – to list on the LSE last autumn. The ruling led to a surge in companies applying to list, and, of course, investor interest: retail investors have poured more than £300m into cannabis stocks since companies began to list in February.

The new UK rules will further strengthen a flourishing European cannabis market. Despite popular belief recreational cannabis use remains illegal across Europe, including the Netherlands and Portugal, where personal possession is only permitted up to a certain limit. But some forecasts estimate the European CBD market will be worth more than €13.6bn by 2025.

Significantly, the new FCA regulations allow overseas companies to list on the LSE as long as they can prove that their operations in their country of origin would be legal if carried out in the UK. So, for example, a Dutch company selling recreational marijuana can’t join the exchange. With the line between recreational and medicinal cannabis use blurred in several jurisdictions, it looks like that will be a tough condition to monitor. But, even so, the new rules open the LSE as a possible home for a growing international ecosystem of cannabis producers.

The US market, where legal cannabis sales reached $17.5bn last year, 46pc up from 2019, is expected to grow rapidly in the wake of the Presidential election. The Biden administration has promised to legalise medicinal cannabis at federal level; indeed Vice President Kamala Harris was the lead sponsor of a 2019 bill that sought to end federal prohibition of marijuana.

That matters, because although medicinal cannabis is already legal in 15 states, the current federal rule prevents US companies from listing on US exchanges. Somewhat confusingly, Canadian cannabis producers are able to list on US exchanges because they operate legally in Canada, which became the largest economy to legalise cannabis consumption for any purpose – whether medical or recreational – three years ago.

Discerning investment opportunities


As demand for medicinal cannabis continues to rise, and financial and legal regulations are gradually loosened, investors seeking a new growth market have flocked to the sector. But the investment opportunities the market offers are still rather hazy.

Funds don’t yet provide an option. Compliance teams at large asset managers are still wary of the sector: investing in a medical cannabis company that also works with recreational cannabis elsewhere in the world would be a breach of UK law, and due diligence on medical cannabis companies is currently capital and labour intensive. And, moreover, the market cap of recently listed medical marijuana companies in the UK is too small for them to take notice.

As things stand investors are obliged to put money into single cannabis stocks or invest through a small number of ETFs. Money has flowed into international cannabis-tracking ETFs this year, reaching an all-time high of $1.9bn, with January flows of $527m tripling December figures that were themselves a record. Europe’s two leading ETFs so far this year both track cannabis stocks. The $44.1m Rize Medical Cannabis and Life Sciences UCITS ETF (LSE:FLWR) and $54.3m HANetf Medical Cannabis and Wellness UCITS ETF (LSE:CBDX), rose 45.2pc and 43.2pc respectively by 12 February, continuing strong performances from the previous year, during which CBDX returned 99pc in the year to 12 February and FLWR 87pc.

But cannabis ETFs are not necessarily all that they seem. There are still so few investment-grade cannabis companies in the sector that cannabis ETF holdings have significant overlaps, and their indices are diluted by the inclusion of a large percentage of companies specialising in sectors such as property or fertiliser.

A Financial Times analysis of the 59 companies included in eight major cannabis ETFs found that 43 made a loss over their last reported 12-month period, 27 made net losses larger than their total revenue, and six – with a combined market capitalisation of $794m – had no sales at all. Indeed, of the 16 indexed companies that were profitable, 14 were not primarily cannabis companies at all, only tangentially associated with the industry.

Prospective investors should also note that fledging cannabis stocks are extremely volatile. Almost as soon as they listed UK cannabis companies faced huge short positions taken by both institutional and retail investors. In the US, three of the top five most firms discussed last month on the colourful Reddit r/WallStreetBets forum were cannabis companies. After their strong performance through 2020 and early this year leading US cannabis stocks plummeted between 20 and 40pc. In Europe, Tilray, for a time the most traded stock on the German platform Lang & Schwarz, with more than $2.7m turnover, was pushed down by more than 40pc.

The Kanabo Group


The Kanabo Group, the first medicinal cannabis company to list on the main market of the LSE on 16 February enjoyed a spectacular start, soaring by 506pc before falling back – down from more than 40p just after listing to around 25p today. But as the smoke clears, Kanabo (LSE:KNB) remains a stock worth considering.

The Tel Aviv-based company, which raised £6m on listing, is part of Israel’s thriving medicinal cannabis sector. Israeli scientists were the first to isolate and identify the active compounds of cannabis in the 1960s, and their work identified the cannabinoid system in the 1990s. The Israeli state recognised the therapeutic use of cannabis 10 years ago.

Kanabo is currently developing a range of retail CBD products, including proprietary formulas for sleep disorders and treatments organised into ‘Reload’, ‘Relax’, and ‘Repair’ categories. The company’s flagship product, the VapePod, is the first medically certified vaporiser for the delivery of cannabis based formulas. By ensuring patients get the same metered dose each time the device promises to solve the inefficiencies inherit in the traditional practice of simply smoking prescribed cannabis flowers, which delivers unwanted carcinogens, soot and tar to the lungs, significantly reducing the plant’s therapeutic efficiency. Kanabo says inhalation through vaporisation dramatically improves the degree and rate of absorption of all the beneficial medical compounds in cannabis. The company is developing a plush iteration of the device, the VapePod MD, whose design ‘includes wireless charging, haptic and visual indicators, and a mouthpiece with large channels for easy inhalation’.

Last month Kanabo signed its first UK medicinal cannabis distribution framework agreement with the LYPHE Group, which has built ‘a patient-access ecosystem providing clinics, dispensing, import infrastructure and educational services to patients, doctors and the industry in the UK’. The framework aims to create the UK’s largest body of evidence for the effectiveness and tolerability of medicinal cannabis.

Cellular Goods


Shortly after Kanabo joined the main market Cellular Goods (AIM:CBX), a UK-based provider of consumer products based on biosynthetic cannabinoids, listed on AIM, raising £13m. The company’s profile was boosted by news David Beckham’s DB Ventures investment fund had taken a stake in the company. One report suggested that Beckham’s interest signals the possibility of a licensing agreement with Cellular.

The company makes its products in labs, developing biosynthetic cannabinoids that do not involve the cultivation or processing of the plant. Cellular will launch a range of premium skincare and topical athletic recovery products this autumn, which will be available through partnerships with online and physical retailers, and direct to consumers through the company’s website.

Like Kanabo, Cellular’s shares fell back from an immediate high of 20p, stabilising at around 10p today.

Love Hemp


Love Hemp (AQSE:LIFE), previously known as World High Life, is another significant early mover in the UK market. World High Life acquired Love Hemp, probably the UK’s most recognisable CBD product, in January, and promptly renamed itself after the brand.

Love Hemp produces and supplies more than 40 product lines, including oils, sprays, cosmetics, sweets, capsules and tinctures and a variety of edible and water-based CBD products. The company has relationships with more than 2,000 stores across the UK and Europe, including leading high street names such as Sainsbury’s, Boots, Ocado and Holland & Barrett. In December it launched a new Love Hemp product line across 880 Holland & Barrett stores throughout the UK and Ireland, and took the Love Hemp brand across 200 Boots stores.

A February corporate update indicated the pace at which the medicinal cannabis market is growing. World High Life, achieved 2nd quarter unaudited sales (October 1 to December 31), of £1,562,000 ($2,175,000), a 97% increase from Q1 sales of £793,500 ($1,105,000) Tony Calamita, CEO of World High Life and Founder and CEO of Love Hemp, commented “Continuing to aggressively increase our sales across all of the platforms is a testament to the dedication and hard work our teams have put into the Company. We have seen huge growth potential during the pandemic and are pleased to have been able to consistently provide our consumers with high level products and service.”

Love Hemp Group also announced that it has secured an exclusive five year, multi-million-dollar global partnership Agreement with UFC (Ultimate Fighting Championship), the world’s premier mixed martial arts organisation and the largest Pay-Per-View event provider in the world.

This Agreement will commence on 1 June 2021 and includes a number of marketing activations and sponsorship opportunities. The sponsorship agreement will allow Love Hemp to access UFC’s physical and digital assets, as well as the marketing opportunities, which includes usage of UFC trademarks, logos and brand. The Directors believe that this will create and enhance visibility of Love Hemp’s brand and products globally and act as a platform to gain global recognition for the Company.

The company’s share price spiked at 8p after the takeover, before settling to around 6p.

Fast Forward


Fast Forward (AIM:FFWD), a capital market company focused innovations in the wellness and life sciences sectors, is another with keen interest in this year’s developments in the medicinal cannabis space.

Fast Forward’s wide ranging portfolio includes a stake taken last month in Little Green Pharma (ASX:LGP), the first medical cannabis company in Australia to produce locally-grown medical-grade cannabis products. Little Green Pharma produces its own branded range of medicinal cannabis products through an indoor cultivation facility and manufacturing facility in Western Australia.

Fast Forward, which offers exposure to investment opportunities often reserved for the private market of venture capital firms, was highly active in this year’s LSE cannabis listings. Earlier this month it sold stakes in Kanabo and Cellular Goods, and a considerable holding in EMMAC worth more than £5m, following EMMAC’s takeover by leading Canadian cannabis retailer Curaleaf Holdings (CNSX).

EMMAC, a European leader in the production and supply of medical cannabis, hemp and other derivative products, has a network of supply and distribution partnerships throughout Europe and the UK. Its acquisition by Curaleaf, which operates more than 100 cannabis shops in 23 US states earlier this month, indicates the growing North American interest in the possibilities of the European market.

Apollon Formularies


Another intriguing name to look out for is Apollon Formularies, a medical cannabis company based in Jamaica preparing for listing on the Aquis Exchange.

Interviewed by Sarah Lowther for TMS earlier this month, Apollon’s Head of Business Development Stene Jacobs said that the “book” is already closed after a substantially oversubscribed fundraise.

Apollon uses machine learning AI technology to offer personalised clinical treatment, analysing data to identify the best combinations of cannabinoids to target and optimise prescriptions for each customer, producing tailored solutions for nausea, pain, sleep, anti-inflammatory, seizures, and appetite disorders. The company holds a suite of licences and is fully regulated, allowing the company to work with products that include elements of THC in addition to CBD: there is evidence that THC also has highly effective medicinal properties. The company’s technologies are overseen by CEO Dr Stephen Barnhill, an early pioneer in the use of AI techniques in medicine, primarily in the field of cancer diagnostics.

Apollon runs an in-patient medical cannabis treatment facility in Jamaica, where more than 400 patients have been treated in the past year, and which the company plans to expand to 130-person capacity. Another Apollon innovation is a patent pending 3D pharmaceutical printer, designed to overcome import and export regulations on cannabinoids and THC. Purchasing companies – if fully licensed – can order specific formulation ‘recipes’ to be emailed over to a printer, allowing Apollon formulations to be printed ‘in house’ using bio ink.

Gathering momentum


The medicinal cannabis sector presents an exciting but voluble new investment opportunity. These are very early days for cannabis stocks on UK markets. Despite formal FCA approval, they have yet to gain full institutional acceptance. Just now the market consists of a few small caps trading at many hundreds of times their revenue. Getting the NHS properly on board is a necessary step to medical cannabis becoming a major UK industry: the NHS is still cautious about prescribing medicinal cannabis as a regular treatment.

But institutional recognition may not be far away. Backed by a growing consumer base, increasing recognition from financial regulators and governments – medicinal cannabis is now legal in more than 40 countries – the sector is on a strong upwards trajectory. We have tried to pick out some of the companies worth following that provide a decent index to the fortunes of a space that is definitely worth watching.