Progressive regulatory changes have been thrusting the sector forward. These changes account for much of the 45% growth in legal cannabis sales in the United States last year, rising from $13.2bn to $19.1bn. Canada’s cannabis industry has also continued to mature and develop, forecast to reach $2.5bn this year from $1.6bn in 2019. A lack of supply, access and variety of product had blighted the early phase of federal legalisation IN Canada but new regulations have allowed an increase in stores and form factors. Europe’s cannabis market is still a way behind its North American cousins but is growing fast. Growth of 25% was realised in 2020 but a massive CAGR of 52% is forecast over the next 5 years, reaching $3.1bn by 2025. Much of this growth is predicated on continued regulatory developments. Below we will discuss a few of the major regulatory changes that have occurred in just the last month at both national and international levels.
Earlier this month, the US House of Representatives passed the Marijuana Opportunity Reinvestment and Expungement Act (MORE Act). The vote passed with 228 votes to 164 and would remove cannabis from the US schedule of Controlled Substances if it came into law. The act would bring an end to the contradiction between current state and federal cannabis policy and would aim to provide restorative justice for the communities of colour that have been damaged by the US ‘War on Drugs’.
The More Act would be a major boost to the cannabis industry and would open up the capital markets to the sector. This would allow US companies to list on a major exchange, and trigger a wave of institutional investment into the industry. Anticipation of these changes is driving US cannabis markets higher, which is similar to what was seen in Canada prior to their cannabis legalisation in 2018. During that time we saw some Canadian cannabis indices increasing more than 10 times, and a similar effect in the US would not be surprising in the coming years.
Additionally, the MORE Act would be expected to generate substantial income for the US treasury, as well as reducing the pressures on the federal prison system. According to a non-partisan report by the Congressional Budget Office (CBO), the MORE Act would likely generate $13.7bn in taxes and cut nearly $1bn in federal prison spending over the next decade.
The recent vote is significant but may only be symbolic for the time being given the Senate, in its current incarnation, is unlikely to vote through the act. Even if the Democrats win both of the Georgia runoffs next month and manage to achieve a 50/50 share of the Senate, 10 Republican would be required to back the act for it to pass.
There is some hope though, pressure on Republican senators to vote in favour of cannabis legalisation is increasing. The number of Republican senators in states with medical cannabis is now 22, of which 6 are in states that have fully legalised. Many view their position to be hypocritical in blocking progressive federal legislation while their states benefit from the growth of the industry and this could force a shift in position if public sentiment is strong enough.
In mid-November, following a case between a CBD vape manufacturer and the French state, the EU Court of Justice ruled that CBD should not be considered a narcotic and therefore the trade of legally produced CBD products should not be restricted. The landmark case provides clarity around the legal status of CBD in the EU and will allow the industry to thrive.
Specifically the ruling will allow CBD, extracted from the hemp flower (as opposed to the seeds or fibre), to be sold without restriction across the customs union. This is especially significant in France, the biggest hemp grower in Europe, as farmers will now be able to switch their hemp cultivation from fibre to the potentially more lucrative cannabinoid production.
The ruling applies to the whole customs union and we expect to see its effects across the EU in the coming months. In Germany we have already seen politicians joining calls for easier CBD access and these voices are only growing.
Additionally, the decision discussed the validity of existing CBD marketing bans. It stated that countries may only ban the marketing of CBD products if the risk to public health is “sufficiently established”. The burden of evidence is certainly on the side of CBD businesses in this regard, given the safety data from licenced CBD based medicines, such as Epidiolex.
This decision will be a substantial boost to the cannabinoid industry in Europe and will open up new markets.
The global prohibition of cannabis and its derivatives was triggered by the signing of the 1961 UN Single Convention on Narcotic Drugs. Cannabis was placed in Schedule I and IV of this convention, a combination reserved for substances with extremely limited or no medical value, despite evidence to the contrary. However, this month the UN Commission on Narcotic Drugs agreed to remove cannabis from Schedule IV.
Although cannabis remains in Schedule I, the removal from Schedule IV will provide countries with greater freedom to implement regulatory reform in relation to cannabis, in particular when it comes to medical cannabis. The removal of this structural barrier is a substantial development and will be a significant boost to the rapidly growing industry across North America, Europe and beyond.
This decision to reschedule cannabis was made following the recommendation of the World Health Organisation (WHO) in January 2019 and, although this one was accepted, there were an additional 4 recommendations that were not agreed by the Commission. These included the deletion of extracts and tinctures from Schedule I, the removal of THC from all schedules and the rescheduling of THC and Dronabinol from Schedule II to I. We anticipate that these additional recommendations will be accepted in the coming years
Encouraging signs have been emanating from UK regulators as well. Earlier this year the FCA provided clarification for the listing requirements for medical cannabis and CBD companies, opening up yet another global financial market to the industry. In 2021, we expect to see several medical cannabis and CBD companies listing on both the LSE Main Market and AIM. They are likely to perform well as European institutional investors look for exposure to the sector.
The opening up of new regional and global stock exchanges is a positive development and provides additional viable exit routes for companies in the sector. The growing adoption of the sector and the progressive regulatory changes will re-assure banks, private equity funds and institutions that medical cannabis is now a viable asset class for investment.
Other upcoming changes to look out for
Looking into 2021 there are a number of other countries that should be on the radar of investors interested in the cannabis sector:
Mexico will vote on an adult-use cannabis legalisation in early 2021 and could become the biggest cannabis market in the world (120m people and c70% adult population)
Israel is expected to legalise recreational cannabis market Q2- or Q3-2021 and could have a domino effect on other Mediterranean countries
Luxembourg was due to legalise cannabis in 2020 but has delayed to 2021 due to the pandemic
Netherlands will begin a recreational cannabis trial with 11 cultivators in 2021 and is very much seen as the prelude to full legalisation in the next couple of years
China is opening up to the sector with domestic provinces having issued 15 licenses for CBD extraction and 60 for hemp farming (CBD exports were $964 million in 2019)
Thailand’s Ministry of Tourism and Sports has announced they will start to develop the medical cannabis tourism industry in early 2021
For those interested to hear more about Verdite’s investment strategy and how the team expect to generate >30% IRRs, please contact verdite@chrystalcapital.com.
