GMP Securities conference highlights key investment trends in the cannabis sector

The GMP Cannabis Conference 2019 took place on Tuesday at the Ritz Carlton Hotel in Toronto. Over 700 cannabis industry executives gathered at the third annual event to discuss the evolution of the sector post-Canadian legalization, while looking to the future and the potential of the biggest market south of the border, the United States.

There is continued interest in how Canadian cannabis companies will operate globally, according to Steve Ottaway, managing director, investment banking at GMP Securities. “If cannabis companies are looking at the US, they need to try to determine how they are going to participate in what is arguably the largest market in the world,” he said in a recent interview with Proactive.

Demand for information on the sector continues to increase. GMP Securities is not confined to only underwrite Canadian companies hence the variety of companies presenting, Ottaway said in his opening remarks.

‘Wild ride’ so far in the cannabis sector

Ottaway also commented on the “wild ride” so far in the cannabis sector. “This conference enforces our belief that investors need thoughtful guidance on how to invest in the sector,” he said.

Canopy Growth CEO Bruce Linton was a big draw in the morning’s session. Canopy just announced an acquisition in Spain this morning and will soon be included in the S&P TSX 60, the exchange’s top companies.

According to Linton, the sector is in a “weird spot” right now. Producers are currently selling the raw ingredient, but the real opportunity is breaking out compounds in the plant, putting them through Phase 2B trials to get clinical data, and generating real results that can be put into a consumer product with real claims of benefits.  

Some of these same compounds may warrant further trials for full FDA approval as a drug, he said.

Linton also sees compound growth for the cannabis producer in its research and development, patent and intellectual property, where they see huge opportunity to create shareholder returns.

Organigram also talked about its growth curve, which for the New Brunswick-based producer lies in the European market.

CEO Greg Engel spoke of the company’s “relentless commitment to improve yields” such as automated pre-rolls to get high quality product into the hands of consumers.

The Moncton-based company just released stellar Q2 2019 financial results showing nearly C$27 million in revenues, doubling its previous quarter, with the lowest cost of cultivation in the industry.  

The supply issue

Growing cannabis well at scale is very challenging and despite massive investment, there are supply shortages.

According to cannabis producer The Flowr Corp, the vast majority of product in the legal market is low quality and cannot compete with the black market. “There is built-in demand for quality from consumers who’ve been buying in the black or grey market for decades,” said the company’s co-CEO Vinay Tolia.

Scalability is an important issue for smaller producers. The Green Organic Dutchman CEO Brian Althaide talked about the company’s ability to reach nearly 220,000 kilograms in the next two years, with most coming online this year.

Next value opportunity

Outside of the flower itself, investors are increasingly seeing opportunity in synthetics, ancilliary technology and extracts.

Valens Groworks, the largest cannabis extraction company in Canada, believes that oil-based products could eventually represent over 75% of the total cannabis market.

The company’s next step is to go global, said CEO Tyler Robson.

The $50 billion question

With Canadian legalization six months from implementation, all eyes were on the next frontier south of the border.

The US cannabis industry is estimated to be worth around US$50 billion within the next ten years. Even so, full federal legalization is not a given, according to US-based companies who presented at the conference.

Green Thumb Industries CEO Ben Kovler said that, in his opinion, “federal legalization is not on the horizon.” He did say that he believed it will happen over time, so the cannabis producer is growing its business accordingly.

On a state-by-state basis, however, the tide seems to be turning to legalizing recreational cannabis in states that currently allow medicinal sales.

Curaleaf’s CEO Joseph Lusardi spoke about the company’s role in driving marijuana legislation forward at the federal and state level, expressing confidence that the current SAFE and Farm bills in the US House of Representatives will put pressure on the Senate to legalize cannabis.

In the meantime, US cannabis licenses will become even more valuable, said Harvest Health & Recreation CEO Steve White. The company is on an acquisition spree with the aim to pick up as many licenses as possible, he said.

Decriminalization does not mean less regulation, said Cresco Labs CEO Charlie Bachtell.

“Cannabis will never be less regulated than it is now,” he told the audience. “Navigating those regulations will be a challenge.”

Contact Angela at [email protected]

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Story by ProactiveInvestors