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A Q&A with Matt Hawkins, Co-Founder & Managing Partner at Entourage Effect Capital

By Aaron Green
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The cannabis industry saw close to $15.5B in deals across VC, private equity, M&A and IPOs in 2020 according to PitchBook data. Early and growth stage capital has been a key enabler in deal activity as companies seek to innovate and scale, taking advantage of trends towards national legalization and consolidation. Entourage Effect Capital is one of the largest VC firms in cannabis with over $150MM deployed since its inception in 2014. Some of their notable investments include GTI, CANN, Harborside (CNQ: HBOR), Acreage Holdings, Ebbu, TerrAscend and Sunderstorm.

We spoke with Matt Hawkins, co-founder and managing partner at Entourage Effect Capital. Matt started Entourage in 2014 after exiting his previous company. He has 20+ years of private equity experience and serves on the Boards of numerous cannabis companies. Matt’s thought leadership has been on Fox Business in the past and he has also recently featured on CNBC, Bloomberg, Yahoo! Finance, Cheddar and more.

Aaron Green: How did you get involved in the cannabis industry?

Matt Hawkins: We’ve been making investments in the cannabis industry since 2014. We’ve made 65 investments to date. We have a full team of investment professionals, and we invest up and down the value chain of the industry.

I had been in private equity for 25 years and I kind of just fell into the industry after I’d had an exit. I started lending to warehouse owners in Denver that were looking to refinance their mortgages out of commercial debt into private debt, which would then give them the ability to lease their facilities to growers. I realized there would be a significant opportunity to place capital in the private equity side of the cannabis business. So, I just started raising money for that project and I haven’t looked back. It’s been a great run and we’ve built a fantastic portfolio. We look forward to continuing to deploy capital up to and through legalization.

Green: Do you consider Entourage Effect Capital a VC fund or private equity firm? How do you talk about yourself?

Hawkins: In the early stages of the industry, we were more purely venture capital because there was hardly any revenue. We’re probably still considered a venture capital firm, by definition, just because of the risk factors. As the industry has matured, the investments we make are going to be larger. The reality is that the checks we write now will go to companies that have a track record of not only 12 months of revenue, but EBITDA as well. We can calculate a multiple on those, and that makes it more like lower/middle-market private equity investing.

Green: What’s your investment mandate?

Matt Hawkins, Co-Founder and Managing Partner at Entourage Effect Capital

Hawkins: From here forward our mandate is to build scale in as many verticals as we can ahead of legalization. In the early days, we were focused on giving high net worth individuals and family offices access to the industry using a very diversified approach, meaning we invested up and down the value chain. We’ll continue to do that, but now we’re going to be really laser focused on combining companies and building scale within companies to where they’re going to be more attractive for exit partners upon legalization.

Green: Are there any particular segments of the industry that you focus on whether it’s cultivation, extraction or MSOs?

Hawkins: We tend to focus on everything above cultivation. We feel like cultivation by itself is a commodity, but when vertically integrated, for example with a single-state operator or multi-state operator, that makes it intrinsically more valuable. When you look at the value chain, right after cultivation is where we start to get involved.

Green: Are you also doing investments in tech and e-commerce?

Hawkins: We’ve made some investments in supply chain, management software, ERP solutions, things like that. We’re not really focused on e-commerce with the exception of the only CBD company we are invested in.

Green: How does Entourage’s investment philosophy differ from other VC and private equity firms in cannabis?

Hawkins: We really don’t pay attention to other people’s philosophies. We have co-invested with others in the past and will continue to do so. There’s not a lot of us in the industry, so it’s good that we all work together. Until legalization occurs, or institutional capital comes into play, we’re really the only game in town. So, it behooves us all to have good working relationships.

Green: Across the states, there’s a variety of markets in various stages of development. Do you tend to prefer investing in more sophisticated markets? Say California or Colorado where they’ve been legalized for longer, or are you looking more at new growth opportunities like New York and New Jersey?

Hawkins: Historically, we’ve focused on the most populous states. California is obviously where we’ve placed a lot of bets going forward. We’ll continue to build out our portfolio in California, but we will also exploit the other large population states like New Jersey, New York, Arizona, Massachusetts, Michigan, Ohio and Illinois. All of those are big targets for us. 

Green: Do you think legalization will happen this Congress?

Hawkins: My personal opinion is that it will not happen this year. It could be the latter part of next year or the year after. I think there’s just too much wood to chop. I was encouraged to see the SAFE Banking Act reappear. I think that will hopefully encourage institutional capital to take another look at the game, especially with the NASDAQ and the New York Stock Exchange open up. So that’s a positive.

I think with the election of President Biden and with the Senate runoffs in Georgia going Democrat, the timeline to legalization has sped up, but I don’t think it’s an overnight situation. I certainly don’t think it’ll be easy to start crossing state lines immediately, either.

Green: Can you explain more about your thoughts on interstate commerce?

Hawkins: I think it’s pretty simple. The states don’t want to give up all the tax revenue that they get from their cultivation companies that are in the state. For example, if you allow Mexico and Colombia to start importing product, we can’t compete with that cost structure. States that are neighbors to California, but need to grow indoors which is more expensive, are not going to want to lose their tax revenues either. So, I just think there’s going to be a lot of butting heads at the state level.

The federal government is going to have to outline what the tax implications will be, because at the end of the day the industry is currently taxed as high as it ever will be or should be. Anything North of current tax levels will prohibit businesses from thriving further, effectively meaning not being able to tamp down the illicit market. One of the biggest goals of legalization in my opinion should be reducing the tax burden on the companies and thereby allowing them to be able to compete more directly with the illicit market, which obviously has all the benefits of reduced crime, etc.

Green: Do you foresee 280E changes coming in the future?

Hawkins: For sure. If the federal illegality veil is removed – which means there’ll be some type of rescheduling – cannabis would be removed from the 280E category. I think 280E by definition is about just illegal drugs and manufacturing and selling of that. As long as cannabis isn’t part of that, then it won’t be subject to it.

Green: What have been some of the winners in your portfolio in terms of successful exits?

Hawkins: When the CSC started allowing companies in Canada to own U.S. assets, the whole landscape changed. We were fortunate to be early investors in Acreage and companies that sold to Curaleaf and GTI before they were public. We are big investors in TerrAscend. We were early investors in Ebbu which sold to Canopy Growth. Those were huge wins for us in Fund I. We also have some interesting plays in Fund II that are on the precipice of having similar-type exits.

You read about the big ones, but at the end of the day, the ones that kind of fall under the radar – the private deals – actually have even greater multiples than what we see on some of the public M&A activity.

Green: Governor Cuomo has been hinting recently at being “very close” on a deal for opening up the cannabis market in New York. What do you think are the biggest opportunities in New York right now?

Hawkins: If it can get done, that’s great. I’m just concerned that distractions in the state house right now in New York may get in the way of progress there. But if it doesn’t, and it is able to come to fruition, then there isn’t a sector that doesn’t have a chance to thrive and thrive extremely well in the state of New York.

Green: Looking at other markets, Curaleaf recently announced a big investment in Europe. How do you look at Europe in general as an investment opportunity?

Hawkins: We have a pretty interesting play in Europe right now through a company called Relief Europe. It’s poised to be one of the first entrants to Germany. We think it could be a big win for us. But let’s face it, Europe is still a little behind, in fact, a lot behind the United States in terms of where they are as an industry. Most of the capital that we’re going to be deploying is going to be done domestically in advance of legalization.

Green: What industry trends are you seeing in the year ahead?“We’re constantly learning from other industries that are steps ahead of us to figure out how to use those lessons as we continue to invest in cannabis.”

Hawkins: Well, I think you’ll see a lot of consolidation and a lot of ramping up in advance of legalization. I think that’s going to apply in all sectors. I just don’t see a scenario wherein mom and pops or smaller players are going to be successful exit partners with some of the new capital that’s coming in. They’re going to have to get to a point where they’re either selling to somebody bigger than them right now or joining forces with companies around the same size as them and creating mass. That’s the only way you’re going to compete with companies coming in with billions of dollars to deploy.

Green: How do you see this shaking out?

Hawkins: That’s where you start to look into the crystal ball. It’s really difficult to say because I think until we get to where we truly have a national footprint of brands, which would require crossing state lines, it’s going be really difficult to tell where things go. I do know that liquor, tobacco, beer, the distribution companies, they all are standing in line. Big Pharma, big CPG, nutraceuticals, they all want access to this, too.

In some form or fashion, these bigger players will dictate how they want to go about attacking the market on their own. So, that part remains to be seen. We’ll just have to wait and see where this goes and how quickly it goes there.

Green: Are you looking at other geographies to deploy capital such as APAC or Latin America regions?

Hawkins: Not at this point. It’s not a focus at all. What recently transpired here in the elections just really makes us want to focus here and generate positive returns for investors.

Green: As cannabis goes more and more mainstream, federal legalization is maybe more likely. How do you think the institutional investor scene is evolving around that? And is it a good thing to bring in new capital to the cannabis market?

Hawkins: I don’t see a downside to it. Some people are saying that it could damage the collegial and cottage-like nature of the industry. At the end of the day, if you’ve got tens of billions of dollars that are waiting to pour into companies listed on the CSC and up-listing to the NASDAQ or New York Stock Exchange, that’s only going to increase their market caps and give them more cash to acquire other companies. The trickle-down effect of that will be so great to the industry that I just don’t know how you can look the other way and say we don’t want it. 

Green: Last question: What’s got your attention these days? What’s the thing you’re most interested in learning about?

Hawkins: We’re constantly learning about just where this industry is headed. We’re constantly learning from other industries that are steps ahead of us to figure out how to use those lessons as we continue to invest in cannabis. We all saw the correlation between cannabis and alcohol prohibition. The reality is that the industry is mature enough now where you can see similarities to industries that have gone from infancy to their adolescent years. That’s kind of where we are now and so we spend a lot of time studying industries that have been down this path before and see what lessons we can apply here.

Green: Okay, great. So that concludes the interview!

Hawkins: Thanks, Aaron.

The Cannabis Industry Sees Record Growth Despite Continuous Obstacles

By Jay Virdi
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Worth an estimated $54 to $67 billion, the bourgeoning U.S cannabis industry continues to grow at record pace despite conflicting state and federal laws that cause obstacles at every turn.

This conflict remains a source of uncertainty for retailers, cultivators and the general public. And, unfortunately, the palpable tug of war between the states and the federal government will only increase when legalization is introduced at the federal level, putting tax dollars up for grabs.

A tug-of-war between the states and the federal government makes it difficult for cannabis businesses to obtain bank accounts, insurance and investors. It also means additional security and compliance challenges. It is the reason that the cannabis industry is an unsupportive environment for start-ups and employees who face primitive or even dangerous R&D conditions in order to advance the extraction process.

As cannabis companies fight to grow their market share, many lag behind when instituting a proper risk management structure from R&D to daily operations. Cannabis businesses that haven’t incorporated risk management will need to in 2021, especially when seeking to secure funding from PE firms.

As the 8th fastest growing industry in the U.S., maturing at more than 25% annually, adult use and medical cannabis sales are unlikely to decrease anytime soon. Rather, experts predict continued growing pains – and gains – to shape the U.S. cannabis industry in 2021.

The COVID-19 pandemic will continue to increase the growth of the cannabis industry— with a few roadblocks

Deemed “essential businesses,” many retail outlets and dispensaries stayed open throughout the pandemic and adopted new ways of serving customers, from curbside pick-up to drive-through windows and deliveries. At the same time, the pandemic hindered growth for some cannabis operations on the cusp of obtaining a license, as many applications were put on hold when state offices closed their doors for months. In some cases that meant raised capital was pulled and funding ceased. For start-ups who are seeking to apply again in 2021, it’ll be an uphill climb.

As a result of routine COVID-19 inspections in 2020, state officials uncovered a host of other issues at cannabis operations, including improper labeling, poor health and safety practices, lack of PPE compliance by staff and customers, incorrect counting of cash and more. In extreme cases, these visits resulted in regulatory fines and shutdowns. This led to the need to use seed money for something other than the organization’s original mission. In 2021, these scenarios are likely to turn into lawsuits from shareholders and activate directors & officers (D&O) and employment practices liability (EPL) claims from laid-off workers. These accusations dovetail with another major charge often levied against cannabis businesses —lightning speed growth without the business operations and risk management protocols necessary to support it.

Many cannabis businesses have not procured the necessary liability insurance coverage for the great risk that come with rapid growth. Whether it’s D&O and EPL policies as in the case above, or cyber, property or general liability (GL) policies, it’s critical to think more holistically about insurance coverage. Cannabis operations need to work with an insurance broker who specializes in the cannabis industry and understands different operations and business location, as exposures vary greatly.

R&D extraction dangers lead to unique risks

extraction equipmentIn 2021, extraction will be a major focus for cannabis organizations. Operations will continue searching for a competitive advantage to increase yield and develop superior products. Cannabis extractors will experiment with new ways to apply existing laboratory methods utilizing ethanol and CO2 as well as innovative cultivation methods adopted from the agriculture industry, using water and light exposure and different nutrients. R&D becomes a potential liability when cannabis extractors modify the use of existing equipment for a different type of extraction. Flammable products are often required, and explosions can occur.

If you are considering experimenting with R&D, engage your insurance broker to ensure the risk is covered within your existing policies and to explore best practices for experimentation and varying equipment use.

Desire for more security both inside and outside the operation

A cannabis operation’s security risk is two-fold. In light of the looting and civil unrest across the U.S. this year, heightened security measures were necessary for cannabis businesses to secure their goods. Additionally, a common risk— employee theft —increased as well.

Cannabis retail operations maintain a large supply of cash and product. As looting occurred, it was impossible to relocate cannabis product away from retail storefronts as a majority of state regulations prohibit cannabis to be removed from retail facilities. Owners and operators who did so risked being fined for non-compliance or losing their license.

The majority of cannabis theft — as high as 90% by some estimates — is employee related. In many cases, employees in cannabis grow facilities and retail storefronts scheme to cheat employers. Part of the challenge is that state regulations require plant and production facility blueprints to be publicly available. Thieves are using these layouts to plot their infiltration. In other scenarios, cannabis operators are recording walk-throughs of their facilities and publishing online documentaries. These also leave operators vulnerable.

Employers can increase security by restricting access exclusively to employee areas, while also investing in better internal access controls. Conduct an audit of your work areas with your cannabis insurance broker who can provide you with a list of best practices and do’s and don’ts for reducing theft.

Complications continue in compliance, banking and financial services 

Even though cannabis is legal for medicinal or recreational use in 43 states, businesses still struggle to secure bank accounts, business loans and insurance coverage. Small local banks and savings and loan businesses may be more willing to engage with cannabis businesses in 2021, while large institutions will keep shying away.

At every stop of the supply chain, cannabis business operators need to be proactive when developing strategies to manage risk. That means implementing risk management protocols to protect their business, their workforce as well as securing the proper insurance coverage.

This also includes growing the cannabis business’ safety net by engaging necessary insurance policies, appropriate to the business’ size and exposure, including cyber, environmental liability and crime policies, or applying for emerging loan programs in an effort to secure additional capital.

Evolution of the industry into 2021 and beyond

While the cannabis industry is evolving and changing, much will ultimately remain the same in 2021. Even if the U.S. government takes steps to federally legalize cannabis, a bill would not go into effect until later in the year at best, more likely in 2022 or beyond. Until a bill is passed, cannabis businesses will look to remain viable beyond the state level. For all cannabis businesses, 2021 will be about building on what they’re already doing and preparing for what will hopefully come next.

Will Australia’s Cannabis Program Follow Canada’s Lead?

By Marguerite Arnold
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The news is intriguing in a world overwhelmed with pandemic news. THC Global, a Canadian-Aussie company now raising money and signing global deals, has just bought a “clinic network” of 30 prescribing physicians that will be able to supply up to 6,000 Australian patients this year.

In doing so, this entity is clearly beginning to establish a pattern of expansion in a new medical market not seen so far outside of Canada. Namely being able to obtain the all-important prescription for one’s brand at the doctor or prescriber’s office which is affiliated with a certain producer. Pharmacies and dispensaries downstream have no discretion for any other product to sell if the brand is written right on the prescription itself.

And this marks a new step in an industry frustrated with the high prices and high levels of red tape in other international environments where more widespread medical cannabis reform has come.

The Situation in Germany
Germany represents, so far at least, the destination market of choice for Canadian cannabis firms (for the last several years at least). This is for several very sound business reasons (at least in theory).

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Photo: Ian McWilliams, Flickr

The German medical market is the largest in Europe. Health reforms which swept the country at the time of reunification also created a system that is in its own way a hybrid of the more European (and British) NHS and American healthcare. Namely, 90% of the German population is on the system, but it is tied to employment and income. Freelancers, even of the German kind, must use private healthcare as must all non-passport foreigners. If you make over a certain amount of money (about $65,000), you must also pay for private healthcare. As the cannabis revolution rolls forward, many cannabis patients are caught in changing rules and a great reluctance by public health insurers to allow fast entry of any new drug, including this one. This is based on “science” but also cost.

Bottom line? Yes, the market is lucrative and growing, and yes, cannabis is covered under public health insurance, but the ability of any producers to be able to maintain a reliable, steady market of “prescribers” is highly limited. Furthermore, unlike anywhere else in the world, pharmacists play an outsized role in the process – namely because there are no chains (more than four brick and mortar outlets are verboten). Prices and availability vary widely across the country.

There are also no “online” drug stores where patients can send prescriptions in the sense that this vertical has developed in other countries.

Hospital dispensation is, for all the obvious reasons, highly expensive and generally prohibitive for the long term, if not serving much larger numbers of patients.

The Problem in the UK
Like Germany, the UK decided to launch medical “cannabis” – or at least cannabinoid-related drugs under the purview of the NHS, but there are several issues with this.

Epidiolex-GWThe problems start with the fact that the system remains a monopoly for one British company, GW Pharmaceuticals. The medication produced by them, including Sativex and Epidiolex is expensive and does not work for many patients that it is produced “on label” for (such as MS or childhood epilepsy).

And then of course, the largest group of cannabis patients anywhere (chronic pain) have been explicitly excluded from the list of conditions cannabis can be prescribed for under public health guidelines in the UK. This, like Germany, has created a highly expensive system where those patients who obtain the drug on a regular (and legal basis) have to have both private healthcare and obtain help through private clinics. While there are several chain clinics now forming in the UK, this is not the same thing as “buying” patients in the thousands – the model seen in Canada from the beginning of 2014.

The market has a lot of potential, in other words, but like Germany, via very different paths to market than seen in Canada, in particular.

Why Is Canada Different?
The development of the medical market came through federal change in the law around the turn of the century. Namely, after patients won the right to grow for themselves, via Supreme Court legal challenge, patient collectives gradually formed to grow and sell cannabis that was more “professionally” cultivated. This, in turn, became the right of private companies and indeed household names in the Canadian market saw buying patient pools as their path to financing on the equity markets as of 2014.

This is not widely popular within the industry. Indeed, the last legal challenge mounted by the industry to ban non-profit patient collectives fell apart in 2016 – the year that the larger Canadian companies began to look abroad to Europe.

It is also undoubtedly why, beyond the red tape they face in Germany and the UK if not across Europe, Canadian firms are looking to hybridize a model which worked well for them at least in the early days of capitalization of the private industry. And maybe Australia will be “it.” Stay tuned.

european union states

International Cooperation: The Next Generation of Cannabis Development?

By Marguerite Arnold
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european union states

The Canadian-German market connection has been a “thing” ever since the middle of the last decade. But this is not the only international cannabis connection. Indeed, firms in multiple countries have been developing international partnerships for quite some time – and not just deals involving the plant or its extracts, but on the cannabis technology front.

This year and going forward expect these to bear fruit, and in interesting ways.

What are the trends? And who is doing what?

Europe
The entire European cannabis market has slowly been developing momentum since 2017 when Germany kicked off its first attempt at a domestic cultivation bid. The first German-grown cannabis is expected to hit pharmacies this fall, and further at a price that will keep everyone else hopping (€3.20 a gram from BfArM to distributors). However, because domestic cultivation was never expected to keep up with patient demand, Germany has become one of the hottest destination markets on the planet.

While there is clearly product still coming in from Canada, the big importer into Germany is actually from Holland (Bedrocan), right across a common border.

european union statesBut Holland is not the only game in town anymore. Europe has long had promise as one of the most international cannabis markets in the world, simply because of relatively open, cross-border trade. Cannabis from Denmark, Portugal and Spain as well as Australia and South Africa have already made it into the German market. Greece, Italy and Poland are all moving into position as major sources of at minimum, floss if not extracts, along with growing interest in Eastern European entries (and not only the Czech Republic).

The intra-European market for cannabis is well underway, in other words, and this is likely to be an increasing trend, particularly as cannabis continues to make waves on the medical front as well as continually mounting evidence that the drug treats difficult to treat conditions including neurological disorders, cancer and the ever-present chronic pain.

Then of course, there is Israel, which is expected to be a big contender now that the country is finally in the export game.

Beyond the direct imports, however, there are also multiple country hops in play (such as Uruguay to Portugal to Germany). Malta is also increasingly shaping up to be an intriguing pass through port, if nothing else.

But of course, Europe is not the only international game in town.

The UK
Despite all of the problems that British patients face in obtaining high quality medical cannabis at a price that is affordable, the UK has actually led the world in cannabis exports (benefitting so far only GW Pharmaceuticals). However many firms have also been cooperating to bring cannabis into the country (from Canada and Holland in particular so far). The biotech partnerships set up by firms like Canopy Growth are also expected to bear fruit as cannabinoid research begins to truly come into its own in the coming decade.

The Americas
Despite the fact that exporting from the U.S. is still difficult (although some firms have managed to export hemp to Europe), there is a lot of cross border cooperation going on throughout the hemisphere (including investment and all kinds of creative partnerships). Canada of course, got its export game going early. Yet one of the more intriguing cross border stories of the last 18-24 months is the amount of South American cultivated cannabis ending up “north of the border.” Changing laws in the region make Latin America a major export location as well as a source for product bound elsewhere including Europe (see Columbia, Uruguay and Jamaica in particular). Mexico is expected to be a power player globally going forward too.

There are also many American firms who have developed strategic partnerships globally beyond the actual plant (including in Israel).

Israel
israel flagThe country is absolutely in the export market, but that is not the whole story. Earlier in the year, the country received its first import from Uganda. There are also multiple U.S. companies in partnership with Israeli firms, and this will increasingly play out in terms of both product and cannabis technology as the market continues to open internationally. American firms, in other words, are still largely prohibited from shipping from the U.S., but they can now do so from Israel, and further, anywhere in the world.

South Africa
Another newcomer, South African firms are partnering internationally (including with American firms) to develop not only product but extraction technology. Cannabis firms here have also already shipped product to Canada and Europe.

Australia
Agricultural exports generally are a major part of the Aussie economy, and cannabis is shaping up to be no exception. Domestic firms are increasingly exporting to Europe (in particular), but partnerships here will be intriguing to watch, particularly as the Chinese market comes into its own. And there are already plenty of firms with partnerships now established or in the last phases of inking out deals with Israeli firms. Canada has been the largest source of imports into the country since 2017.

Poland Pushes Forward On Reform

By Marguerite Arnold
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Given all the fuss about newly opened markets in Europe of late (see all the hullabaloo recently in the UK), it would be remiss for anyone in the industry to forget about Poland.

The Eastern European country that shares a large part of its border (if not recent history and long cultural influence) with Deutschland has been proceeding slowly into the cannabis space for the last couple of years.

There are a couple of similarities (and differences too) about the market development in the country to its Teutonic sister to the West as well as the emerging fight over access that is sparking patient revolutions all over the continent now.

A Brief History Of Polish Cannabis Reform

Like other culturally conservative places (see state reform in the United States in places like Georgia), Poland has moved towards reform in a way that may make political sense, but has left patients in much the same boat as British ones. Reform began happening without access as of late 2017.

Polish Flags Image: włodi, Flickr

Poland, or so the joke goes in Germany, is Deutschland’s “trailing sister,” on most things, and cannabis reform in some ways, is absolutely following that pattern. But it is not exactly analogous, starting with patient access. In fact, the first opening of the market did not touch import much less cultivation. It only authorized patients to cross borders in search of their medication. No matter the high cost involved. And of course, the still dodgy proposition of returning across a border with a highly stigmatized narcotic product.

Fast forward a year? Many of the major Canadian cannabis companies had achieved some sort of import (mostly of small amounts of the drug and mostly to single hospitals). See the announcement of Aurora last October on the same day that the Polish government announced a change in the law that they had imported in bulk to a hospital.

But what is going on now, particularly with a growth in acceptance of the medicinal impact of the drug across Europe? And will the Poles, like the Germans, launch a domestic cultivation bid anytime in the near future? Not to mention learn the lessons that so far have continued to stymie German domestic cultivation as well as frustrate a smooth supply chain if not operations on the ground?

The Market Is Coalescing

According to Andrew Makatrewicz de Roy, managing director of Bearstone Global, a market research and investigative firm moving into the cannabis space, Poland has one of the more progressive laws in Europe, but still is lagging behind other countries in terms of organisation and a political lobbying movement.

“There is a lot of vibrancy in the market, but we want to make sure that there is an initial forum where the market can meet and discuss the industry here”.There are also a few (low volume) transactions taking place.

However, as in other places (see the UK in particular), there is a lot of heat if no fire yet behind the scenes. Both individuals and companies are starting to appear who will help build a wider ecosystem in the cannabis space.

As in other countries in Europe, despite the market potential, there is still a general political lag in further development of the industry. Perhaps because of complications in the German market. And almost certainly because of complications with German reform and its own cultivation bid. There have been rumours of a Polish bid circulating for at least a year. Licensed cultivation is beginning to take place.

In response, Makatrewicz de Roy is moving to establish one of the first industry conferences in the country in October. In late July, he also held the first precursor to the same – an online streamed event that attracted 70 major thought leaders from the industry including many members of the political class, producers and distributors (including some of the biggest Canadian ones), doctors and patients.

“We want to build an ecosystem,” de Roy said. “There is a lot of vibrancy in the market, but we want to make sure that there is an initial forum where the market can meet and discuss the industry here”.

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Has Cannabis Reform Landed In The UK?

By Marguerite Arnold
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The British have finally decided that cannabis reform is overdue. In London at least, 63% of the population believe that recreational reform is a good idea.  According to a poll by The Evening Standard, the rest of England too, is getting close to a majority when the idea of recreational reform is in the room.

It is, as usual, recreational reform that is the icing on a medical cake that has yet to be baked. But that spice brownie is well on its way to the oven too. According to the British Medical Journal as of the beginning of July, the idea of broader access to regulated medical supplies for patients is mandatory.

And in the ranks of the conservative party, Crispin Blunt founded the Conservative Drug Policy Reform Group last September to lead Parliament in a long overdue discussion about the use of both medicinal and recreational cannabis use in the UK that formally “launched” during the last week of June.

But how the industry will develop here is also a big question in the room right now, especially with a country poised on the edge of one of the biggest constitutional questions in the country’s history – to Brexit or not, and how.

Justice Minister Crispin Blunt (right)
Photo courtesy of The UK Ministry of Justice, Flickr

The North American Influence Is Controversial

While Blunt, for example, sees no issue with injecting North American capital into the debate, there are others who are not so sanguine. And while the idea of Canadian reform is popular here, including the freedom of patients (and others) to grow small amounts themselves, the idea of Canadian companies influencing national policy is not. From The Daily Mail to The Guardian, there have been front page headlines about the coming financial influence of “The North Americans.”

That this discussion is also going on at a time when the UK is considering a completely new trade agreement with the world, including on pharmaceuticals, is not insignificant. Where the country’s drugs come from, far from cannabis, is absolutely on the table. Not to mention how much they cost.

Questions of basic access are likely, in other words, to be in the room for a long time here. The barriers to obtaining and filling a prescription start at its expense – which is ₤1,100 (about $1,400) per prescription. There are few people, let alone those who are chronically ill, who can afford the same. This is far from a “normalized” drug- even of last resort- at the NHS.So far, the number of actual cannabis patients in the UK (ones who go to a doctor for a prescription and fill it) is still under 100 people.

That said, it is a start. And for the first time, as of this summer, those with the money can in fact, obtain cannabis by prescription.

But what happens to those (the vast majority) who cannot? 

Patients Are Feeling Side-lined

Just as in national legalizing conversations in the United States and Canada so far, patients are being pushed aside for “the business” to take the conversation forward. But where does this business fall on matters of price and access?

So far, the number of actual cannabis patients in the UK (ones who go to a doctor for a prescription and fill it) is still under 100 people.

While patient groups are organizing, and the earliest ones to gain national attention, usually families whose children have been directly in the line of fire, are getting commercial ambitions themselves, the fact remains that patient voices are not the loudest ones in the room. Although as Blunt announced last week, he does not see recreational reform happening in the UK for the next five years.

That also means that every Canadian company entering the market (in particular) will have to continue to sing the same medical song they have been humming across Europe- at least in public.

The UK is NOT Germany – But It’s Not Canada Or The US Either…

No matter how much more “liberal” supposedly, the English people are on the whole CBD question (there is already far more CBD for sale in the UK than just about anywhere else), the UK market is still far behind Germany. Why? Since March 2017, insurance companies auf Deutschland have been required to cover the drug – from sprays and pills to floss when prescribed by a doctor.

There are, by latest calculations about 50,000 German patients.

That said, it is clear that the British do not seem to give a fig about the entire “novel food” discussion and are literally, in some cases, daring the police to raid stores and shut down establishments. The idea of rebellion against EU rules seems very obvious on the CBD front.

Beyond this, however, it is also clear that “Canadian” much less “American” cannabis reform is not necessarily the only model in town.

As the British, in other words, do finally embrace the cannabis question, it is very likely that the face of the same will be of a unique Limey strain all of its own.

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German Cultivation Bid Appears To Have Three Finalists

By Marguerite Arnold
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The Frankfurt-based newspaper Handelsblatt Zeitung is reporting that three Canadian firms (actually two Canadians and a German start-up cofounded by another Canadian company) have now been selected as the first cannabis cultivation bid finalists, however insiders on the ground say that this is not necessarily a final decision.

A Berlin-based subsidiary of Wayland in Germany called Demecan, along with Aphria and Aurora have all been named as bid finalists pending a normal review period.

However, there are other complications still looming. This is far from over.

The first issuance of the bid in 2017 went down in court over a technical fault on the part of the issuing agency. The current iteration was posted last summer and saw its application moved several times because of further legal challenges.

As Peter Homburg, partner and head of the European Cannabis Group at Dentons said when contacted by Cannabis Industry Journal, “This is of course not an official announcement. I have a tendency to believe that others involved in the tender process historically may well challenge this decision.”

BfArM, the federal German agency in charge of the cannabis cultivation tender process, did not respond to a request for a comment as of press time.

The Decision Is Far From Over

Here are the basic challenges still ahead:

There is a lawsuit pending against the bid itself from applicants that has yet to be decided. The Klage (formal hearing in court) is due next week. If that does not derail the process, here are the next considerations.

While all three firms named in the bid have international reputations, there are some pending questions.

Wayland is far ahead of the other two firms in terms of production capability in the country. Their facility in eastern Germany has just been certified GMP standard – which means they are qualified to produce the quality of flower required for medical consumption. This news is also far from a surprise.

As Ben Ward, CEO of Wayland Group, commented when contacted by CIJ for a response via email: “At Wayland, we believe in meaningful partnerships, investing in Germany from day one, demonstrating a long-term commitment to the market,” says Ward. “Wayland GmbH is a German company, operated by Germans, existing in Dresden and Munich and is committed to this market. The companies awarded lots received the allocation based on a rigorous application process, not media sensation.”

Of all the Canadian firms, in fact, despite its lack of high-flying stock price, Wayland has made the most concerted effort to show its commitment to producing in Germany by a large investment of capital and expertise. Further, the firm has shown itself to be the most culturally sensitive to German culture, including hiring a female member to the board (a hot topic far from the cannabis industry). However, there are other issues looming. On the same day that Wayland issued a press release announcing its position in the bid, it also issued one announcing the merger talks with ICC had failed.

The second is that Aphria’s main cultivation center in Canada is not EU-GMP certified although they have applied for the same and now also own one of Germany’s largest distributors (with approximately a 6% market share).

Other firms not only kicked off the entire cannabis discussion in Germany, but have established GMP-compliant facilities both in Canada and across Europe, namely Canopy Growth, which was widely believed to have also applied to the second tender. However prevailing rumours about a Canadian “crop failure” in British Columbia (described by the company as a deliberate destruction of plants created by delays in the licensing process) last fall may have also played a role in the German decision.

Canopy_Growth_Corporation_logoAurora is also in interesting waters. Having distinguished itself as Canopy’s closest rival across Europe, winning significant kudos in Denmark, Italy, Poland and Luxembourg last year, the company is also clearly not “just” a medical cannabis company and apparently was refused an opportunity to go public on the Deutsche Börse last fall. The selection of the firm by BfArm for the bid in a situation where the company is on a watch list created by the stock market regulatory agency in Frankfurt is also an intriguing one. Especially given the company’s announcement of its Polish success on the same day as the decision to import was announced, and the fact that so far it is the only Canadian cannabis company to successfully import to Luxembourg.

And The Import Game Is Just Getting Hot…

The unsurprising news that the bid appears to be moving forward is actually not the hottest news in Europe right now. The reality on the ground is already shifting. Several weeks ago, a Frankfurt-based distribution start-up announced that they had successfully imported cannabis into the country from Macedonian-based Nysk Holdings via Poland.

At the International Cannabis Business Conference (ICBC) in Berlin last weekend, Australian producers (for one) were also reporting a German demand for their product that was greater than they could fill. And there were many Israelis present for what is expected to be an official opening of their import ability by the third quarter of this year.

Price Wars Are Looming

The bid itself is going to have a powerful impact on pricing in both the German and European market beyond that. It represents the first time in any country that a government has attempted to pre-negotiate prices for the drug as a narcotic beyond Israel and in this case, it will have at least regional implications.

aurora logoAt the same time, it is also clear that producers like Nysk and beyond them, Israeli and Australian firms (in particular) are actively finding ways to have their product enter the country- and further at prices that are catching the Canadians on the hop. Indeed Aurora is reporting that it actually lowered its “usual” prices to win European contracts which have been reported as being 3.2 euros a gram in Italy and 2.5 euros a gram in Luxembourg.

To put this in perspective, this is a range of about CA$3-5 a gram of flower which is also well below what Canopy (for one) has reported selling its product even to recreational users in Canada and significantly below medical export prices as reported by recent company corporate reports.

Wayland in contrast, is reporting that its production price in Germany will be at least a euro-per-gram cheaper than this. Or in other words, more in line with prices expected to be generated from both the bid itself and the cannabis now entering the country from other sources.

And of course, this is only the first of what is expected to be a series of new tenders. The original amount, itself increased in the two years the issue has been pending, is clearly not enough to even begin to meet demand as proved by the levels of competitively priced imports now entering the country.

Beyond questions about whether this time the tender will actually stand, are those now pending about new ones potentially in the offing – and not just in Germany but across Europe as cannabis continues to see a very green spring.

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Here Comes The Start-Up Nation Of Cannabis: Israel

By Marguerite Arnold
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For those who have been watching (if not in the thick of) the drama over Israeli medical cannabis export rights, this latest development was not only inevitable but overdue. Israel’s parliament unanimously approved the legislation on Christmas Day (along with Thailand). Less than a month later, the cabinet concurred.

That means that export rights are now actionable law.

Beyond this final passage into reality, export rights have been at the forefront of a global drama on cannabis- most recently in this part of the world, as a specific chip in political dealmaking between U.S. President and Israel’s Prime Minister, Benjamin Netanyahu since the former entered office. This go around at least.

Tel Aviv, Israel

The political bargaining that even allowed Israel’s medical program to flourish and get funding from its earliest days (including of the U.S. federal government kind) of course, is nothing new.

Pioneers Of The Cannabis Industry

Hard as it is to believe, most of what is widely known and easily digitally shared (including on social media) about cannabis (as a plant, let alone distinctions between cannabinoids) is information created during this last four to eight-year period (certainly since 2010). This has been driven by reform, and a birth of wider education about medical and recreational cannabis plus the cannabis industry and broader lifestyle press. And most of what is credible out there, no matter who claims credit today, has an Israeli origin, and of the medical kind.

Add this history of scientific research and insight to the philosophy of a nation driven by entrepreneurial zest, and say no more.

Now that Israel can begin to export its cannabis, the interesting thing to see is whether cannatech will in the end, be more valuable than individual strains themselves. The pick axe in this particular “green gold rush?”

For now, of course, all bets are off, even on the cultivation front. Because, no matter what else it is, it is well timed, globally, to give even the Israeli medical production market a big green shot in the arm.

Germany and Europe Beckons

The change in the law in Israel also comes as those who made first qualifying round in the German cultivation bid are getting prequalification letters, although this time, no firms, anywhere, have issued press releases about their finalist round status.

And here is the other issue to consider: While the bid itself does not have anything to do with import capability, new Israeli game in town is, in itself, a big game changer for anyone whose hat was thrown into the coalitions who applied for the pending cultivation license. Why? Until they deliver their first crops grown auf Deutschland, firms have to deliver from somewhere. And this being Germany, the import destination has to be from a place where the plant is federally legal. Israel becomes another option in a market so far dominated by Dutch and Canadian firms.

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The Tikun Olam strain Avidekel being grown in Israel.

Can you smell new bid lawsuits also, if this scenario has not already been addressed by BfArM? The history of cannabinoids in Germany in general (historically as well as recently) is fraught already. This pending challenge, should it come, will be laden with symbology modern Germany will do everything to avoid provoking.

Beyond the soap opera that the bid has turned into in Germany (the ultimate test case for cultivation and insurance-backed medical and industry acceptance across the rest of the EU essentially), there are of course, other markets beckoning. This includes all of Eastern Europe and much of the EU. This includes France and the UK immediately.

In other words, no matter what the longer-term impacts will be, this well timed, politically astute Israeli decision is coming at the beginning of what is going to be, as everyone is clearly seeing at the end of January, a momentous and earth-shaking year not only for Europe, but globally.

And that is big business for a little country with an eye on the export game.

Aphria Fights Shortseller Allegations Of Insider Double Dealing

By Marguerite Arnold
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Two reports published by short selling stock firm Quintessential Capital Management and forensic investor research firm Hindenburg Research on December 3, charges that Canadian LP Aphria, has bought overinflated assets in Latin America and in Florida from shell companies owned by company insiders. Added to the lingering controversy is the purchase of the German Nuuvera this spring (a company also partly owned by Aphria brass), and the reports went over like a bombshell. Globally.

However, the story has already spread far beyond one company. And the response in the market has rocked the industry for most of December.

Aphria’s shares tanked, and dragged everyone down with them. Several class action law firms in the United States began promptly looking for aggrieved shareholders.

The response by the firm? A promise of an immediate line-by-line rebuttal, due out in the second week of December. So far, however, despite news of an additional Aphria purchase in Paraguay, the rebuttal report has not been issued.

Why Is This So Damaging? Or Is It?

Aphria’s stocks promptly took a dive that halved their value although they began to recover after Aphria management appointed an independent third party firm to review the claims.

Worse, however, the entire industry saw a hit too. This report affected investor confidence across the industry. And although the hit appears to be temporary, the unfolding scenario is a perfect example of why volatility in the market is scaring away not only more conservative female retail investors but larger institutional ones that the industry is now courting assiduously as medical cannabis begins to be integrated into health systems particularly in Europe.

Why?

Bottom line? As the big cannabis companies are listing on the larger, foreign exchanges, including the NYSE and Deutsche Börse, the scrutiny is getting more direct and granular.Despite the stratospheric market caps of all the major Canadian LPs in particular, not to mention enormous expenditures for the last several years (on property and other acquisitions), the revenue picture, as other stock analysts and publications such as the normally neutral Motley Fool recently pointed out, at least so far does not justify the same. Bulk sales to a hospital, establishing a cultivation or processing facility or even getting import licenses may set one up to do business however, but it is not an automatic route to ongoing and expanding sales. And that is the key to high valuations that are rock solid and beyond the scope of such allegations.

For the moment, that pressure, particularly in global medical markets, is falling first on patients if not doctors. Not the industry.

That said, this has been a major building year. Recreational cannabis has just become legal in Canada. And in Europe, reform is still in the process of happening.

It is also a charge if not frustration that has been growing, however, against all the public cannabis companies as valuations shoot into the stratosphere. Forensic and investigative firms, particularly in Europe and the United States have been focusing on the industry for close to a year now. As a result even when firms successfully rebut charges of fraud, they are looking at different valuations from analysts at least in the short term.

Bottom line? As the big cannabis companies are listing on the larger, foreign exchanges, including the NYSE and Deutsche Börse, the scrutiny is getting more direct and granular.

Are “Short Seller” Reports Unbiased?

For all of the focus on short seller reports in this industry, however, no matter the accuracy of some of their claims, here is the next issue:

Short sellers make money by betting against not only individual firms but the industry itself. They benefit financially in other words, from volatility in the market and arbitraging even small changes in price. Even if their reports cause the same.

Such reports as a result are also not “unbiased” as industry coverage in the press is supposed to be, no matter how much more time sometimes goes into the reporting and preparation of the same.

And no matter that this industry is now going into its fifth year, there is still lingering scepticism that, in the case of Aphria, has so far not only fallen on the individual firm in question, but then rebounds across the industry, unfairly hurting all firms in this space.

Luxembourg’s New Ruling Coalition To Legalize Recreational Cannabis

By Marguerite Arnold
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Stand aside Canada! Events are moving in a strategically interesting way in Europe. And for once it is not news of the German bid.

In this case, implementation of the decision in Luxembourg would actually have two immediate effects.What, where, when? Luxembourg’s new center-left coalition of the Greens, Socialists and more traditional Democrats have put recreational cannabis on their ruling mandate and five-year agenda as of November 29, 2018.

In the comments of the same at the press conference held last week, the sentiments were pretty much of one tenor: “It’s way overdue.”

What does that mean, however, for the rest of the conversation across the continent?

Luxembourg: The First Recreational “State” Market In Europe?

While local advocates are quick to say that their ambition will make them the first EU country to completely legalize recreational cannabis, this is mostly true, but not entirely.

As much as it is fashionable these days to diss Holland, the fact of the matter is that the Dutch pioneered just about everything about the modern movement except clear cut regulation. Coffeeshop envy being what it is, however, it is true that the historical marker of the Dutch market was grey areas. That, however, has been in shifting territory for the last four to five years however. Hard as it is to believe that in just 2014 the Cannabis Cup held its last expo in Amsterdam. How the world has changed since then!

There is also this fact: Switzerland (true not an EU country but just next door geographically), is also poised to use this excuse to make its next move to fully leaded THC. The country has seen a sharp uptick in the consumer, OTC CBD market over the last two years. So much so that foreign (read American and Canadian in particular) enterprises are now looking to Switzerland as one of the more interesting “semi-EU” entry strategies at present. Taxes on a highly profitable industry are also in the public discussion. Adding a bit of THC to the mix, in other words, is likely to come fast in other places too.

Will This Move The Needle In Other Places?

The answer to that question is also, undeniably, yes. How fast that will happen in individual countries across Europe is another discussion. See France, which is now the largest member of the EU to have so far successfully ducked the cannabis question except for some basic decrim ideas that the now embattled French President Emmanuel Macron might, finally, put some enthusiasm into backing.

This could also certainly galvanize the UK. One way or the other, to stay or leave the EU itself. Full recreational won’t be in the cards, however, for quite some time.

Sound incredible? See Brexit so far.it will create the first deliberately regulated recreational market in Europe.

Many other EU countries have also been chafing at the slow pace of reform. Even after basic medical use has occurred. See German advocates who long to follow both the U.S. and Canada, and at present are for the most part shut out of the medical cultivation process. They are simply being outbid by the large Canadians.

But how fast such reforms will come even in Luxembourg, not to mention have a knock on effect elsewhere, no matter how momentous, is still an undecided question.

What Is The Biggest Immediate Impact Going To Be?

As is usually the case in Europe, things are rarely as straightforward as one country deciding to do (or not do) something. In this case, implementation of the decision in Luxembourg would actually have two immediate effects.

One, it will create the first deliberately regulated recreational market in Europe. How fast that could actually roll out is up for debate, considering that the country only legalized medical use as of this summer. As Colorado, California and certainly Canada have proven in spades so far, recreational reform always need some kind of medical base to start with. And implementation of both kinds of markets always seems, at least so far, to carry litigation. Especially in young, untested markets. See the German bid, most recently, just across the border.

However here is the second, and far more intriguing reality that really may be key to the entire enchilada. The legality of cannabis in Luxembourg also has everything to do with the German public cannabis market. Namely, the German stock exchange will only allow Germans to clear stock purchases of publicly listed cannabis companies on the Deutsche Börse if they are in line with not only German cannabis law but also that in Luxembourg, where they actually clear. That was a big issue this summer, only rectified when Luxembourg first changed its medical law.

It also meant, as of this fall, that Aurora went public in New York, not Frankfurt.

In the future, however, after Luxembourg goes full recreational Monty, this will no longer be the case. This will already be tested next spring as another company hopes to go public here. And when that happens, although certainly not for the next several years, the entire discussion of recreational reform will fully and finally be in the European room.