EDITORIAL Dec 8, 2020 • 7:22 AM EST BY MICHAEL BERGER
Leading global economies have been devastated by the COVID pandemic and many economists expect these markets to bounce back and possibly eclipse pre-pandemic growth levels in 2021.
Following the pandemic, we expect these economies to execute on growth strategies that will support the economy by generating additional tax revenue. The cannabis industry is expected to be one of the greatest beneficiaries of the COVID pandemic and expect to see economies loosen regulations on the industry in order to support the economy.
Although the US cannabis legalization trend is expected to make significant advancements under a Biden administration, we believe the international cannabis industry is reaching an inflection point and this is a facet of the sector that we are bullish on.
During the last decade, the landscape of the legal cannabis industry has changed. From South America to the European Union (EU), we are seeing increasing demand for legal cannabis and we are favorable on the economics that are associated with these markets. When compared to Canada and the US, the cannabis industry in markets like the EU or South America is much less saturated and we find this to be significant.
Another reason we are favorable on the lack of saturation in these markets is related to the pricing of cannabis. When compared to Canada and the US, the cost of cannabis is significantly higher at the consumer level in markets in the EU and we are favorable on the profitability metrics that are associated with these regions.
We expect 2021 to be a banner year for the international cannabis industry and expect it to benefit from an improving regulatory environment. Today, we have highlighted 5 cannabis markets that we expect to have the most significant impact on the international cannabis industry in 2021 as well as some of the operators that could benefit from this.
Germany
In the EU, we are the most excited about the German cannabis market. With a population that is greater than 80 million, the country is more than twice the size of Canada and we are favorable on how the cannabis industry has advanced since early 2019.
According to Chicago-based research firm Brightfield Group and London-based consultancy Hanway Associates, the EU cannabis market could be generating more than $3 billion of sales per month by 2025. The amount of cannabis revenue that is being generated in the EU is highly dependent on the pace of legalization and we expect Germany to play an important role in the growth of the industry.
Several leading Canadian Licensed Producer (LPs) are levered to the German cannabis market and this is an opportunity that we are highly focused on. Currently, there is no clear leader in Germany’s cannabis market and we expect to see these LPs go to battle to try and increase the amount of market share and this is a trend that we will continue to closely follow.
Israel
For more than 50 year, Israel has been focused on the medical cannabis industry and is a market that we are bullish on. A few months ago, Marijuana Business Dailey reported that Israel surpassed Germany as the largest importer of medical cannabis flower in the world and this was a development that caught our attention.
From an economics standpoint, the Israeli cannabis cultivating market represents a high-margin growth opportunity and benefits from having the perfect climate for growing cannabis. In Canada, the all-in cost that is associated with each gram of cannabis is more than $1.00 (on average). In Israel, the all-in cost per gram of cannabis is less than $0.40 (on average) and we find the difference to be significant from a profitability standpoint.
HEXO Corporation (HEXO: NYSE) (HEXO: TSX) is a large-scale Canadian cannabis producer that is levered to the Israeli cannabis market through a strategic supply agreement with Breath of Life (BOL). We are favorable on the partnership and believe that it will prove to be a significant growth driver for both operators. BOL has established a vast distribution network through relationships with leading pharmacies and is considered to be a leader in the Israeli market.
During the last quarter, HEXO has announced substantial developments on the cannabis beverage side of the business and we are favorable on its leverage to the international side of the industry through its relationship with BOL. We expect these two facets of the business to play a key role in the success of HEXO over the long-term and will monitor how the story advances in 2021.
Colombia
So far this year, we have seen a decrease in activity at the company level in the Latin American cannabis market. This represents a major trend shift from prior years where Canadian LPs were acquiring Latin American cannabis companies for massive premiums.
Similar to Israel, the economics that are associated with cultivating cannabis in Latin America is much more attractive than Canada. Colombia is a high-profile Latin American cannabis market and is a region that we have been highly focused on.
Last month, we had the opportunity to speak with the CEO of Khiron Life Sciences Corp. (KHRN.V) (KHRNF) and left the meeting feeling excited about the operation. The company has been capitalizing on the cannabis market in Colombia and the EU. Khiron also recently announced a planned expansion in Peru and this is a market that we are excited about.
In 2021, we expect Khiron to capture additional market share in Colombia and Peru. In the EU, the company is capitalizing on the opportunity in Germany and the United Kingdom (UK). We are favorable on these markets and expect the business to benefit from having a first mover advantage in the UK.
Mexico
Mexico is one of the most exciting emerging cannabis markets in the world and we believe that the market is nearing an inflection point. Recently, we came across studies that highlighted the potential of the Mexican cannabis market and this is an opportunity that we are excited about over the long-term.
In 2017, after a separate Supreme Court mandate, then-President Enrique Peña Nieto signed a decree legalizing cannabis for medical use. The government has stalled in implementing necessary regulations, and the drug remains out of reach for many patients. Almost two years ago, Mexico’s Supreme Court ruled that a cannabis ban was unconstitutional and we are favorable on how the topic has been gaining support.
2020 has been a year of progress for the Mexican cannabis industry and many analysts expect the market to serve as a major growth driver. Recreational cannabis is a real possibility in Mexico and we expect the industry to record substantial advancements in 2021. The future of Mexico’s cannabis industry is important for the entire cannabis industry and we believe that a positive outcome could ramp up the legalization trend in Latin America.
During the last two years, we have noticed a substantial increase in the number of companies that are focused on the Mexican cannabis market. A few years ago, Aurora Cannabis Inc. (ACB.TO) (ACB) announced plans to enter the Mexican cannabis market and this aspect of the business seems to have stalled. We will monitor how the company’s strategy evolves as cannabis legalization becomes a real possibility in Mexico and are favorable on how Aurora Cannabis is positioned to benefit from this.
Many analysts expect Mexico to have a large recreational cannabis market and we are favorable on the potential value that can be created for companies that are levered to it. Over the next year, we expect to see large-scale US and Canadian cannabis operators expand into Mexico and this is a trend that our readers need to be aware of.
Portugal
Portugal is another market in the EU that we expect to record substantial improvements in 2021. Portugal represents an emerging cannabis market in the EU and we believe that it is in the early innings of a major growth cycle. There are only a few companies that are levered to this emerging market and we have been highly focused on this opportunity.
Tilray Inc. (TLRY) is a Canadian cannabis producer that has been executing on an international growth strategy and has established a distribution hub in Portugal to capitalize on the opportunity in the EU. Since inception, Tilray has been highly focused on the international cannabis opportunity and has been recording strong growth on this side of the industry.
Tilray also owns a distribution facility in Denmark and we believe that it will find substantial synergies between its portfolio of EU cannabis assets. In 2021, we expect the company to generate more revenues on the international side of the industry and will monitor how the sales strategy shifts from Canada to the EU on a going forward basis.
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