What Europe Can Learn From Canadian Cannabis Companies

Although recreational cannabis has been legal for over a year in Canada, the country is still facing a number of regulatory hurdles. For firms in Europe, it’s critical that they keep a close eye on how businesses like Aphria, Canopy Growth and Tilray react under such conditions. 

Related: The Most Profitable Business Sectors Within the European Cannabis Industry

 

Greener grass and higher expectations

The European reception of both recreational and medical cannabis has been positive over the past several years.

To meet the positive sentiment, regulators have been slowly, but surely, implementing favourable regulations. The shift to medical cannabis has since revealed several interesting points about the European market. The most notable of which being forecasts of the continent becoming the largest market by 2024.

And, as the sector matures within the EU, a handful of companies are already rising to the top. Bedrocan, a Holland-based cannabis organisation, has done well to cement itself as an industry leader in producing standardised, highly-regulated medical cannabis for patients throughout Europe.

Experts like Nikolaas Faes, a senior analyst at Bryan, Garnier & Co., even forecast that ‘there will be 4 or 5 companies quoted in twelve month’s time.’ This all without the regulatory favorability of Canada.

But as much as cannabis entrepreneurs in Europe hope for the same legal environment as their North American neighbours, Aphria’s CFO Carl Merton told Strain Insider that the grass isn’t always greener on the other side.

First off, Merton explained that the cannabis industry is far from conventional.

It relies heavily on future forecasts and, at least in places like Canada, moves at breakneck speeds. ‘That was my first experience seeing rapid growth’, said Merton. ‘You not only look at the number of employees you have but you also look at the revenue that you’re producing. Then you compare that to your market cap and you realise that this is not traditional.’

Canadian cannabis stocks spiked as soon as the government legalised recreational marijuana use in 2017. This included Aphria, but also Tilray, Aurora, Canopy Growth ltd., and a handful of others. This has been described as a ‘green gold rush’.

Aphria’s stock began picking up steam at the end of 2017 before peaking at ~$19 [~€17] per share at the beginning of 2018. The second peak resulted from full legalisation. At the time of press, APHA trades at ~$4.68 [~€4.22].

(Source: Yahoo Finance)

These fast and steep fluctuations in price, while appealing upon first glance, pose unique challenges to companies like Aphria. Merton said,

‘It becomes a fantastic tool to motivate employees by having them share in the growth of the company. But it also sets a very large expectation that you have to live up to.’

Shareholders’ interest hinges on future expectations, and executives like Merton are constantly attempting to predict upcoming strategies before they happen. Being accountable to such a narrative is, thus, the biggest obstacle for cannabis companies.

And, as the sector is still so nascent, even the smallest announcements can dramatically affect the market capitalisation of a company.

 

Coming back to medical

Aphria’s transformation into one of the biggest players in the cannabis space is no secret either.

In 2014, Health Canada, the government agency responsible for public health and safety, granted Aphria a licence to grow and cultivate medical cannabis. At that time, co-founder Cole Cacciavillani said, ‘the problem with this whole industry is it’s been mostly underground…We have to make it legitimate.’

Aphria’s primary production facility in Leamington, Ontario, is teaming with state-of-the-art security surveillance and motion sensors to prevent any diversion via theft or otherwise.

It is these two components, high-grade medical reliability and a premium on security, that allow the Canadian government to trust companies like Aphria. Bruce Linton, a founder of Canopy Growth Ltd., iterated similar sentiments in an exclusive interview with Strain Insider.

He said that Canadian bureaucrats ‘were more interested in questions like, “Did you lose any cannabis, did you send it to the wrong place or did anybody in the business steal any cannabis?” They were mostly worried about diversion, theft, and general incompetence.’

With a strong foundation in medical cannabis, Canadian companies have a much easier route into European markets, too. Merton said that ‘as we go and talk to foreign governments, everybody wants to know about your medical background and the success that you’ve had in that field.’

In Germany, this credibility has already been put to the test.

Related: How Far is Germany from Legalising Marijuana?

In May 2019, the German Federal Institute for Drugs and Medical Devices (BfARM) awarded Aphria Germany, a subsidiary of Aphria, five lots to grow cannabis via the institution’s tender process. Further, Aphria International, another branch of the company created after the acquisition of Nuuvera Inc. in January 2018, holds one of seven Italian import licences to help supply the medical community in Italy.

Canadian firms have enjoyed a hefty first-mover advantage. The simple fact that medical cannabis had been legalised long before the rest of the world has solidified credibility for a select few. And, as the medical movement is just getting going in Europe, these select few are, again, enjoying a head start.

In Italy, demand has been so high for medical cannabis that the country was forced to open a tender process to allow experienced cultivators to supply its markets. In July 2019, the Italian Ministry of Defence asked relevant companies, upon applying, to furnish a yield of 400 kg of medical cannabis over the next two years.

Of the four companies that applied, three were Canadian.

The same occurred in Germany, where 13 lots were up for grabs in a tender process. BfARM granted Aurora five, Aphria five and the Berlin-based outfit Demecan the final three lots. Reports indicated that these three were selected based on ‘a points system focused on infrastructure, quality standard, security plans and price.’

With so much experience under their belts already, what can European cannabis companies do to compete with Canadian heavyweights entering the continent’s cannabis markets?

Well, not much, unless one already has access to massive amounts of capital. Merton said,

‘In Germany, you can’t be a small player. There are some serious challenges for how a German company would enter the medical space today. The real challenge for anyone who wants to be a cannabis company today is access to capital.’

Specifically, companies would need to raise enough funds to build large operations that lower the overall cost of the product. That being said, fulfilling Aphria’s criteria for investment may be the next best option to enter the space.

 

Sowing the seeds of investment

In January 2019, Aphria acquired the German company CC Pharma GmbH, a leading distributor of cannabis products to Germany and the EU. Even earlier, back in 2018, the Canadian company partnered with Schroll Medical, a Danish flower producer, to grow EU GMP-certified medical cannabis.

The overall thesis behind these and other acquisitions is relatively straightforward.

Merton explained that Aphria is looking to work with companies that will deliver profits from day one. ‘We are no longer looking to have a three- or four-year window of losses while waiting for a market to develop’, he said. After that, Merton and his team are looking for markets with favourable regulations.

Related: The Biggest Cannabis Investments in Europe in 2019

Favourable regulations don’t simply mean open, free-for-all markets either. ‘There were a few markets that we looked at across the world where there wasn’t going to be a lot of government regulations. We had significant concerns that people weren’t going to be comfortable with the safety of the product because of that’, said Merton.

With that, one also gets a better grasp of how top cannabis companies have made their name: credibility.

No matter where one is located, establishing credibility through one’s product, a high-standard of regulations and verifications, coupled with backing from the medical community all appear to be the green thumb of success in the world of cannabis.

 

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