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With 2021 coming to a close, we want to highlight 7 of the most important themes of the cannabis industry.
We expect these themes to have an important impact on the future of the cannabis industry and believe our readers should be aware of the potential impacts that are associated with these trends.
Canopy Growth – Executing on a Strategic M&A Growth Strategy
2021 has been a volatile year for Canopy Growth Corporation (TSX: WEED) (Nasdaq: CGC) and has been highlighted by a series of acquisitions and divestitures. When looking at the transactions completed by the company in 2021, we are most excited about the agreement it entered into with Wana Brands, a leading cannabis edible brand in the US.
Earlier this month, the Canadian LP entered into an agreement to divest C³ Cannabinoid Compound Company GmbH to Dermapharm Holding SE. C³ develops and manufactures pharmaceutical products and comprises Spectrum Therapeutics GmbH, THC Pharm GmbH The Health Concept, and Spectrum Therapeutics Austria GmbH.
By divesting C³ , Canopy Growth has reduced its exposure to the European Union (EU) and will monitor how the story evolves in 2022. As a result of the divestiture, the Canadian LP is expected to avoid future operational complexities associated with C³ and is significantly reducing short-term capital investment requirements.
In return, Canopy Growth is receiving an upfront payment of approx. C$115.5 million, subject to customary cash and debt adjustments. Once the transaction closes, the company will receive an earnout payment of up to approx. C$61.4 million (subject to the achievement of select milestones). We are favorable on how the transaction will strengthen Canopy Growth’s balance sheet and this is a company we will be closely following in 2022.
GW Pharmaceuticals – Acquired for More Than $7 Billion
One of the most significant developments of the year was Jazz Pharmaceuticals’ (Nasdaq: JAZZ) acquisition of GW Pharmaceuticals in a transaction that was valued at more than $7 billion. The transaction diversifies Jazz’s commercial portfolio pipeline with therapies that are complementary to its existing business and we are favorable to the transaction for a variety of reasons.
The acquisition was a landmark transaction for the cannabis industry and increases the credibility that is associated with it. The transaction is the largest in the history of the sector (from a $ standpoint) and we find this to be significant. GW is a proven cannabis biotech firm and has successfully commercialized US Food and Drug Administration (FDA) approved cannabinoid-based prescription medicines.
Since closing the acquisition, Jazz has been under pressure and this is a trend that we have been closely following. In the first full calendar year of combined operations, Jazz’s acquisition of GW is expected to accelerate growth and prove to be immediately accretive. We consider the combination of Jazz and GW is a more attractive business than each company as a standalone entity and will monitor how it performs in 2022.
US Cannabis – Number of States With a $1+ Billion Cannabis Market Spikes
2021 has been a banner year for the US cannabis industry and several states have reported more than $1 billion of sales so far this year. We consider this level of revenue to be an important milestone for any cannabis market and expect even more states to accomplish this feat in 2022.
We believe the states a US MSO is levered to will play an important role in the growth of the company. Some of the states that we are most bullish on include: Arizona, California, Colorado, Florida, Illinois, Massachusetts, Michigan, Nevada, New York, and Pennsylvania.
A common characteristic of the US states we are bullish on is related to recreational cannabis being legal. Over the next few years, we expect to see a substantial increase in the number of states with a legal recreational cannabis market and believe this will prove to be a major catalyst for the entire sector.
Shift in M&A Strategies – Bolt On Acquisitions Are In
A few years ago, Canadian LPs were primarily focused on making large acquisitions of operators with substantial production capacity. Aurora Cannabis was highly impacted by this and acquired two Canadian LPs for approx. C$7 billion combined. The company ended up closing most of the facilities that we acquired through these transactions and writing off billions worth of assets.
The acquisitions that were completed in 2021 were smaller from a price standpoint and we considered them to be bolt-on transactions. When compared to prior years, the strategy associated with acquisitions in 2021 was different. Several of the transactions that were completed this year were strategic in nature and we will monitor how the M&A trend changes in 2022.
Leadership Changes – Industry Leaders Makes Changes to Management Teams
During the last few years, the landscape of the legal cannabis industry in North America has changed. A key theme from this time period is related to changes in management teams that have received a large investment (more than $1 billion), merged with a company of a similar size, or partnered with a brand with significant brand awareness.
Canopy Growth Corporation has been impacted by the trend and the initial leadership team was replaced by executives from Constellation Brands (Nasdaq: STZ). Several other Canadian Licensed Producers (LPs) have been impacted by this trend and we will monitor the trend in 2022 and beyond.
International Cannabis Market – A Burgeoning Opportunity
Last year, we noticed an increase in the number of US cannabis operators that are focused on expanding into Europe, Latin America, and Africa. Between these three regions, we are the most bullish on the long-term opportunity in Europe and expect to see a spike in the number of US companies which are levered to the EU in 2022.
According to the European Cannabis Report (6th Edition) by Prohibition Partners, the cannabis market in the EU is forecasted to be a $3.75 billion market by 2025. The region could quickly prove to be an attractive growth avenue for US operators and we are bullish on the long-term potential value that is associated with the region.
When it comes to the hemp and CBD opportunity in Southeast Asia, we are highly focused on Thailand. Earlier this year, Thailand’s government passed a bill that legalized the production and use of hemp in products. The types of products that are allowed to contain hemp range from cosmetics to medical supplements. According to the law, products must contain less than 1% of THC. A key reason for our bullish view on Thailand is related to how the government issued a limited number of licenses to capitalize on it.
Canadian LPs – The Pace of Acquisitions of US Cannabis Assets Speeds Up
A major theme in 2021 has been Canadian LPs acquiring US hemp and CBD companies for a fraction of what they were valued at in 2018-2019. During the last year, several high-profile and large-scale CBD brands were acquired by mid to small-tier Canadian LPs to have leverage to the US when the regulatory environment improves.
A few larger-scale Canadian LPs have entered into definitive agreements to acquire leading US brands when cannabis is legal at the federal level. These operators trade on a big board US stock exchange (Nasdaq or NYSE) which prevents them from being able to own assets that sell tetrahydrocannabinol (THC) products. The price tag on some of these type of agreements is several hundred million dollars and we expect to see more transactions like this in 2022.
If you are interested in learning more about important trends in the cannabis industry, please send an email to support@technical420.com with the subject “Cannabis Trends For 2022” to be added to our distribution list.
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