National Post (National Edition)
Cannabis stocks maybe a deal— really, says BMO.
FOR CANADA MARKET, YES, BMO SAYS, BUT IF U.S., EU LEGALIZE ...
The potential of the global cannabis industry is so vast that it could eventually make the sky-high valuations of some Canadian licensed producers look like bargains, according to a new report from Bank of Montreal.
The bank’s cannabis sector analysts, Tamy Chen and Peter Sklar, sought to determine how big the total addressable market Canadian producers will be competing for in the coming years.
Assuming a blue-sky scenario in which the U.S. and all 28 countries in the EU legalize marijuana for both recreational and medical use — and in which Latin America allows the medical use of cannabis — they project that in seven years the market could reach $194 billion, significantly dwarfing the $5.9 billion in potential revenue they anticipate for the Canadian medical and recreational markets.
Currently, the biggest three licensed producers in Canada — Canopy Growth Corp., Tilray Inc. and Aurora Cannabis Inc. — have a combined market capitalization of more than $30 billion.
Cannabis stocks have taken a hit in the weeks since Canada legalized recreational weed, as investors have seemingly reassessed the sector given serious product shortages, supply chain hiccups and a sense that it will take longer than expected to reach full capacity.
The Horizons Marijuana Life Sciences ETF, for instance — which holds a basket of the biggest marijuana stocks — has lost a third of its value since legalization, wiping out approximately $500 million.
But if there’s hope for the sagging stock prices, it lies in the opportunities abroad, the BMO report suggests.
“We believe current valuations for Canadian LPS are elevated when only the Canadian cannabis opportunity is considered,” the analysts wrote.
They believe, however, that if investors start factoring in the potential of U.S. legalization on a federal level and legalization in the EU, the Canadian cannabis sector, as firstmovers globally, could easily justify those high valuations.
Chen and Sklar forecast that in Germany alone — with 82 million people and which Canadian producers such as Aurora Cannabis and Canopy Growth Corp. are already exporting to — the medical marijuana market could produce more than $5 billion in revenue for global producers.
There are 30,000 medical users in Germany and an annual legal consumption of 7,200 kilograms. The BMO report arrives at the $5 billion figure primarily based on an assumption that in seven years, 7.5 per cent of sleep, anxiety and pain prescriptions in Germany will be replaced with medical cannabis, opening the medical pot market to roughly 26 per cent of the population.
The report also predicts the total addressable market if all 28 countries in the European Union legalize cannabis for medical use would be $30 billion in seven years, with another $68 billion if they also legalize recreational cannabis.
That is a best-case scenario given that only a few European nations including Germany, Italy, Portugal, Denmark, Switzerland, Croatia and the Netherlands have legalized medical cannabis, to varying degrees. The drug still remains illegal, albeit decriminalized, in most of the EU.
With regards to the U.S., Chen and Sklar assumed that five per cent of sleep, anxiety and pain prescriptions will be replaced with medical cannabis over seven years. Despite intense expected competition from Big Pharma, the BMO analysts projected cannabis producers would see $19 billion in total potential revenue from the medical market in the U.S. and $49 billion from the recreational side.
While BMO’S estimates of “total addressable market” and “total potential revenue” are essentially the overall market Canadian LPS could have access to in seven years, there is no way of knowing, at this point, how big their slice of those pies will be.
Most of the top 10 licensed producers have already begun staking claims abroad, particularly in the EU. Canopy has operations in 11 countries under its medical entity, Spectrum Cannabis. Cannabis sales in Germany, according to the company’s first quarter fiscal 2019 report, accounted for 14 per cent of product revenue, or roughly $3.65 million.