Thursday 18 February 2021 1:16 pm

Will London’s budding cannabis market turn the EU green with envy?

One after the other, medical cannabis companies are listing on the London Stock Exchange (LSE), and investors are piling in cash, keen to be early investors in what they hope will become a major industry in the UK.

It is an exciting time for the medicinal cannabis industry. In September, City regulator the Financial Conduct Authority (FCA) allowed medicinal cannabis companies to list on the LSE, opening up the UK market to a growing sector already popular in North America.

The regulator’s green light led to a flurry of activity.

Just this month two medical cannabis companies made their UK stock market debut; MGC Pharmaceuticals and Kanabo Group. Each have enjoyed profitable market opens, with stock prices soaring 232 and 506 per cent respectively since listing on the exchange.

While London opens up to a buzzing new sector, across the pond the new Biden administration is pro-cannabis, and wants to make the use of medical cannabis legal at a federal level, rather than at individual state level, in a move that would open the market to millions more consumers.  

For Avihu Tamir, the CEO of Israel-based Kanabo Group, it was the perceived prestige of London’s market that pulled Kanabo to the UK – and the buzz that inevitably came from being one of the first in a sector to list in a new market.

He believes London has the potential to become Europe’s leading player in the industry.

“[The listing] has proved that the investor community is interested in medical cannabis,” said Tamir, “and that means that there is a place for more companies, and bigger picture, there’s an chance for government and decision makers to take advantage. To them I would say ‘don’t waste the opportunity’.”

Tamir said Europe had no obvious leader in medical cannabis, and taking up such a position would provide a “huge opportunity” to the UK.

Post-Brexit, Britain is seeking a new identity away from the European Union, and cannabis could be key.

With the UK saddled with debt from Covid-19, compounded still by challenges brought about by Brexit, Tamir thinks the timing could help get the UK back on its feet.

“The benefit of Brexit means you’re not tied to EU decision making, so the UK can move faster, and lead, and could see massive growth as a result,” he added.

“Canada had a golden age because of cannabis. It created thousands of jobs, and at the same time it helped to solve problems like opioid addition. Across the board there’s huge potential here.”

‘Not if, but when’

The UK legalised medical cannabis in 2018, in a move that meant specialist doctors could prescribe cannabis-based products for medical use. The products can contain cannabidiol, known as CBD, as long as they only contain trace amounts of THC (tetrahydrocannabinol), the main psychoactive compound in cannabis.

The drug is often used to treat pain relief, epilepsy, insomnia, anxiety and PTSD, among other medical conditions. There is also research underway to look at how medicinal marijuana could be used to treat Parkinson’s disease.

Despite the sector’s legalisation, the NHS is reluctant to prescribe medical cannabis, stunting the sector’s reach in the UK. According to Health Europa, by October 2020, two years after its legalisation, the NHS had prescribed just a handful of cannabis prescriptions.

As a result, those in need of the drug have, on occasion, been forced to go private.

Tamir thinks getting the NHS properly on board is a necessary step to medical cannabis becoming a major UK industry.

“It’s not a discussion of if the cannabis industry is going to be big,” he continued, “now the question is, when is it going to happen?

“If you’re conservative, you think we could be looking at five to 10 years until we see a really massive cannabis market. If you’re more optimistic, you understand that in two to three years we’re going to be at the tipping point.

“We’re close, but we’re not there yet. Having cannabis companies on the LSE is a milestone, and the discussion is changing… We need cannabis to be prescribed by the NHS… I think that’s one of the limitations.”

Despite the fever surrounding the burgeoning sector, investors are still limited on how they can take a slice of the pie.

David Barfoot, director at Rize ETF, a company that offers investors access to a medical cannabis-focused fund, said compliance teams at large asset managers are still wary of the sector, as mistakenly investing in a medical cannabis company that also works with recreational cannabis elsewhere in the world would be a breach of law.

“Due diligence on medical cannabis companies is capital and labour intensive,” he said.

As a result, it was unlikely big name asset managers would be keen to start offering exposure to the sector through their funds in the short-term, forcing investors to invest via one of a small number of ETFs, or risk putting money into single cannabis stocks.

“It’s early stage, it’s difficult to pick the winners and losers, because there’s not much competition yet, if you’re investing at an individual level, there’s a huge risk,” Barfoot added.

For Kanabo’s Avihu Tamir, the problem for asset managers is that the market cap of recently listed medical marijuana companies in the UK is too small for them to take notice: “Almost all the big institutions were interested enough to take our call, but the issue wasn’t the cannabis, it was the size of our market cap, which was the time was around £23m, when institutional investors tend to need a market cap of £100m,” he said.

“We had a few cases where managers invested in us personally, and I think that’s a statement as well, because obviously if a manager is interested enough in this personally, the fund will come at a later stage. Mentally [the cannabis] is no barrier anymore.”

‘The funds will follow’

Venture capitalist Ed McDermott invested in Kanabo. He is the co-founder of Emmac Life Sciences, the largest independent medicinal cannabis company in Europe, and CEO of Fast Forward, a Guernsey-based venture capital fund.

He too is excited about the sector, and the prospect of London becoming something of a cannabis hub in the coming years. However McDermott cautioned against believing all cannabis companies would go on to be successful.

“We have to be somewhat mindful here. [UK-listed medical cannabis companies] are trading at many hundreds of times their revenue, which is fundamentally not usual,” he said.

“There has been a massive burst of excitement, and it’s warranted, but not all companies are created equal, and because they carry a cannabis title one should not immediately think they’re a good company.”

He said investors should be paying attention to the fundamentals of a company, like scale and the number of core investors.

The venture capitalist predicted that by the end of the year anywhere between 15 and 20 listed companies would have a cannabis theme to them in the UK, but their market caps would vary wildly, with anything from single digit millions to potentially over one billion on the table.

“It’s going to be an interesting year ahead,” he continued. “I hope London becomes a destination for the cannabis market, but the key is making sure good companies come to the market, and we back those that are going to be the best operators.”