Can Hellenic Dynamics be dynamic in the cultivation and supply of medical cannabis products?
“…The company’s initial target is the relatively developed German market, where all of the flowers to be produced in the first phase of the company’s operations have been pre-sold to licensed distributors…”
Hellenic Dynamics (LON: HELD), a licensed cultivator and supplier of finished pharmaceutical standard medical cannabis products, went public on Monday (5 December) through a reverse takeover worth just over £31m, raising gross proceeds of £1.125m through an oversubscribed fundraising.
HELD’s market update on the company’s first day of dealings set out its ‘ambition to be the dominant supplier of high quality and competitively priced dried medical cannabis flowers to patients across all 25 European counties that allow medical cannabis by prescription.’ Founded in 2018, the company has a 195,506 square metre facility near Thessaloniki, Greece’s second largest city, equipped for the cultivation, production and export of tetrahydrocannabinol (THC) dominant strains of cannabis flowers and their extracts. HELD’s licence sets no limitations on the THC content of the cultivars grown, and how much can be produced or exported. The facility has the capacity to produce some 54,000 kg of THS dried flowers each year.
HELD’s longer term ambition is to build a proprietary IP protected library of THC dominant genetics. The company has forged several research partnerships to identify strains suitable for registration with European regulators, including an agreement with the American Farm School, a well established southern European agricultural institution that works closely with the EU to establish best practices for emerging life sciences. HELD is led by Non-Executive Chairman Sir Anthony Jolliffe, a Vice President of the European League for Economic Co-operation who has held many directorships of private and public companies in the UK, USA, China, Japan, Canada and South America, and CEO Davinder Rai, a technology and natural resources veteran who has held senior board positions on a number of private and public companies in the UK and North America.
A fractured but developing market
HELD is targeting a tantalising but fractured European medical cannabis market. Cannabis has been legal for medical use in much of Europe for several years now, approved for use in the UK, Germany and 24 other European countries for treating conditions, as HELD puts it, ‘including but not limited to chronic pain, Spinal cord treatment, Anxiety, HIV/AIDS Appitite loss, Multiple Sclerosis, Crohn’s disease, PTSD, Chemotherapy side effects, Glaucoma, Anorexia, Lennox-Gastaut syndrome, Alzheimer’s, Dravet syndrome, Tourette’s syndrome, Intractable spasticity and Cachexia.’ Indeed, it is no longer a criminal offence to possess cannabis for personal use in several European countries, including Austria, Italy, the Netherlands and Spain. HELD says the continent’s growing medical cannabis market is worth more than €4bn and its value is ‘expected to reach €43.3bn by 2027, growing at a CAGR of 29.6pc’.
The company’s initial target is the relatively developed German market, where all of the flowers to be produced in the first phase of the company’s operations have been pre-sold to licensed distributors. Germany legalised the use of medical cannabis five years ago, and just a few weeks ago Berlin’s left-leaning government published an ambitious programme for the decriminalisation of THC products that would that make the country the world’s largest regulated national market for the drug. The proposals would allow the limited sale, possession and consumption of cannabis, permitting the purchase of between 20 and 30 grams of cannabis for ‘personal enjoyment’ from licensed specialist retailers and pharmacies. The German Hemp Association, an industry lobby group, suggests the legislation would open a market of 400 tonnes a year for marijuana and hashish, generating sales of €4bn. The Berlin-based cannabis company Sanity Group has already raised more than $100m in anticipation of deregulation.
But the proposals will have to clear an extensive legal consultation with Germany’s European neighbours. As a member of Europe’s open border Schengen Zone German legislators will have to allay concerns that legalisation will open the floodgates for the smuggling of THC into countries with stricter narcotics policies. Although the wider European CBD market is gradually opening up – more than a dozen countries allow or are currently discussing liberalisation – regulations and attitudes differ sharply from country to country. Some jurisdictions allow the use of medicinal products containing cannabinoids, and others the medical use of unauthorised products or preparations. Some permit the manufacture of cannabis, some its import, and still others both.
The UK, another developing market on HELD’s radar, legalised medicinal cannabis in 2018, allowing doctors to prescribe it for medical use, and the Financial Conduct Authority (FCA) gave the green light for licensed UK-based CBD companies to list on markets last autumn. The ruling led to a surge in companies applying to go public, and, of course, in investor interest: retail investors poured more than £300m into cannabis stocks in 2021 after several high profile IPOs. But such unbridled excitement was premature. It is still illegal to grow cannabis in the UK, even British-based CBD companies having to import cannabis extract. And health specialists were only recently authorised to prescribe CBD for medicinal purposes: NHS general practitioners still cannot prescribe medicinal cannabis as an everyday treatment. UK authorities are taking tentative steps towards clarifying Britain’s complex regulatory environment by enforcing stricter regulations for CBD edibles. Thousands of products and brands linked to unsuccessful applications have been removed from sale, but the clampdown has been welcomed by established CBD producers as an ‘incredibly positive step for the industry’ protecting consumers from ‘cowboy products’.
The picture is similarly cloudy in North America, another huge potential market. The first US states legalised cannabis for recreational use in 2012, and Canada followed in 2018. But state-by-state deregulation in the US has created a patchwork market that makes it difficult for companies to scale. Financial services companies are wary of providing lending and payment processing services in the absence of consistent regulations at federal level, a patchwork system that deters institutional investors with the financial firepower to commit long-term patient capital to the sector.
High hopes that the liberal Biden administration would be able to push through federal legalisation have so far been disappointed, proposals introduced by Democrat lawmakers failing to gain sufficient support on a grid-locked Capitol Hill. But hope has been kindled by the Democrats’ better than expected performance in the November elections, and the President’s decision in October to issue a mass pardon for all people with convictions for ‘simple possession’ of marijuana under federal law. The White House urged governors to do the same for state offences, saying convictions had led to people unfairly being denied employment, housing and educational opportunities. The President also said he was asking the US Department of Health and Human Services and the attorney-general to review how marijuana is classified under federal law: marijuana is still classed as a ‘schedule-1 drug’, in the same category as heroin. A Gallup poll conducted last year found more than two-thirds of Americans supported legalising marijuana.
Investors who got entangled in – or even merely observed – the cannabis bull market that ran through early 2021 will need no reminder to approach CBD stocks with caution. European and North American markets attracted too much early stage investment, encouraging oversupply sharply followed by the current painful cycle of consolidation. As the Financial Times’ Lex column puts it, ‘pot stocks have been a crushing disappointment to the retail investors who jumped into the market when they listed in the mid to late 2010s.’ But lessons have been learned and the long term outlook for the CBD industry is undoubtedly promising. As social attitudes evolve liberalisation is following, slowly, maybe, but surely. To put progress is context, the US market grew to $100bn in 2020 from just $20bn in 2014.
These are very, very early days for HELD, but the company seems well positioned to benefit from the trend towards liberalisation, and a shift in sentiment back towards nascent industries oriented to the future when the stock market’s current malaise finally lifts. Right now HELD is valued around 0.2p, down a third on the company’s IPO price. Prospective investors should look out for news regarding the company’s efforts to enter the German market, and the progress of the country’s nascent CBD legislation. There are still concerns that the cannabis industry is too small to allow for ETFs that can trace its progress effectively, so this is one sector that investors seeking to avoid expensive active funds might do better to follow through a set of direct holdings. At its current low price HELD may be one that could fit into a self-selected portfolio.