THIS has been a transformative year for the European cannabis industry, with growing liberalisation across the continent opening the floodgates for patients and investors alike.
The dawn of what has been dubbed ‘Cannabis 3.0’, was sparked by a landmark change in regulation at the tail-end of 2020 which saw the Financial Conduct Authority allow cannabis companies to list on the London Stock Exchange (LSE) for the first time in its 320-year history.
By the end of May, MGC Pharmaceuticals, Kanabo, Cellular Goods and Oxford Cannabinoid Technologies (OCT) had all launched successful IPOs on the LSE securing a collective market capitalization of over £350m.
Each listing was heavily oversubscribed leading stock prices to jump as high as 400% over the following days.
A ‘Cannabis Bubble‘
Since these heady gains LSE cannabis stock prices have plummeted, seeing a collective £193m wiped off the value of these four companies alone by December 7.
Until last week OCT’s shares were trading at less than half its listing price of 5p, reaching lows of 1.81p in mid-November.
MGC Pharmaceuticals’, which hit highs of 7.43p in February after becoming the first cannabis company to list on the LSE, is now trading at around 2.18p marking a 70% fall in value.
Meanwhile Kanabo, which also enjoyed huge gains amid the ‘first wave’ of cannabis listings in February this year seeing stock prices top 40p, has also endured a decline of around 70% with shares now trading at around 12p.
Cellular Goods’ stock also fell from highs of 19p in February to lows of 5.4p in late September. While its stock has managed to largely recover to around 8p since then thanks to the launch of its inaugural product range, continued swings in its value show the market remains extremely cautious.
Are we witnessing the fallout of the ‘Cannabis 3.0’ bubble bursting? Or are there more deep rooted issues which need to be tackled before cannabis companies can rely on investment from public markets?
Speaking to the panel during last month’s Cannabis Europa 2021, London law firm Memery Crystal’s Senior Partner Nick Davis said he believed there was no bubble at all, but rather the dramatic spike in newly-listed cannabis stocks was simply a result of pent-up demand from investors.
“The ‘boom’ wasn’t a boom. There were just a number of companies who spent two years stuck with regulators. After MGC Pharma… what followed were four or five companies who had been trying to get access to the market for a while listing all at once.”
One financial market advisor told BusinessCann that this demand had been building since the tail-end of summer 2020 when ‘blue sky news’ was beginning to emerge from the US market.
“There were some good noises coming out of the US and obviously the cannabis market is very US centric in terms of M&As and stock market activity. So prices started ticking up, we started to hear good news as opposed to bad.
“There was consolidation as opposed to companies going bust, which had been the fear throughout 2020. The blue sky news around autumn was well received, and it filtered through over here.”
Early January also saw a spike in US cannabis stocks following the Georgia primary run-of which confirmed the Presidency of Joe Biden which was viewed by the markets as a positive signal for the cannabis industry.
As the burgeoning markets in the US and Canada continued to provide evidence of the opportunity of cannabis stocks for investors, news that the LSE would soon be opening its doors to medicinal cannabis companies sparked a frenzy of hype and speculation regarding the potential of the European market.
‘An Extraordinary Time’
Others believe that a flurry of major events during the first third of 2021 indeed led to a bubble, resulting in Europe’s largest players finding it ‘difficult to build any kind of sustained momentum’.
In February GW Pharmaceuticals, which has remained Europe’s largest cannabis player for some 20 years, was purchased by Irish firm Jazz Pharmaceuticals for $7.2bn in what represented the world’s largest cannabis deal.
According to the same advisor, this ‘put the only institutionally held cannabis stock in the limelight’, and signalled growing interest from companies such as Jazz Pharma with a foot firmly in the lucrative US healthcare market.
A month later, this was bolstered by $8bn US cannabis giant Curaleaf, which moved to acquire Europe’s largest cannabis independent EMMAC Life Sciences for nearly $300m.
“It all came together in that first third of the year. You had Jazz Pharma coming in and buying GW Pharmaceuticals. You had Curaleaf coming in and buying EMACC. That coupled with the timing of cannabis stocks being allowed onto the LSE. It all happened in a really short space of time.
“It was an extraordinary time. Money was being pumped into markets globally, and we were seeing huge, huge price rises.
“So when the stocks come to the market, there was very good early liquidity, generally oversubscribed. And that inevitably fizzled out.”
Another market analyst said: “There’s lots and lots of people who want to raise money. And I think all four of those companies charged ahead and raised money from you know, slightly thin markets. And the result has been, with very limited institutional holding and retail dominated registers, it’s been very difficult to build any kind of sustained momentum in ownership.”
Hype Working Against the Market
Though the excitement which built up around the industry at the start of the year was helpful in bringing welcome attention and investment to the sector, its longer term legacy has been less favourable.
OCT’s CEO Dr John Lucas, who previously told BusinessCann he has been left ‘shaking his head’ at his company’s stock performance, believes that this hype attracted investors who came to the market to make short term gains, rather than investing in individual businesses.
“The investors that I speak to, they say they’re in it for the long run, they bought into the programme,” he said.
“Initially, I think some of the early investors saw it as maybe the cannabis kind of hype that was ongoing for a while in the UK. Maybe they expected that, rather than really looking closely at the story and buying into that.”
Another financial market expert echoed this, explaining that such hype can often lead to investments which aren’t based on business or market performance.
“Cannabis stocks, in particular, are subject to quite a bit of hype. And you will see that if a company has some high profile backers, you tend to get a blip. But actually, that’s driven by hype, rather than what the business is doing. So there is a bit of that that distorts pricing.”
Kanabo’s CEO Avihu Tamir, said that not only did this hype raise expectations to unrealistic levels, with investors expecting stocks ‘to go up and up like it’s Bitcoin’, but it meant cannabis companies were all lumped together.
“I think that probably affected the share price of all the all the bunch together. For investors, they’re not really differentiating between one cannabis company to the other, because the market is very small.”
Lack of Institutional Investment
The size of the European cannabis market also means that companies are often ‘bucketed together’ and branded as ‘cannabis exposed’.
This perceived risk has meant many traditional institutional investors have been deterred from exposing themselves to the market, in turn leaving the door open for retail investors to flood the market and make it yet more volatile.
As one investor explained: “I think it would be fair to say that the regulatory support for companies which have any kind of cannabis exposure is extremely weak.
“You need only look at the institutional interest in these companies, essentially the only two institutional buyers have been Premier Miton and Chelverton Asset Management.”
They added that companies of this size in any ‘normal’ industry would typically have interest from around a dozen major institutions, and such an investment would ‘underpin a more stable valuation’.
The lack of institutional cash in LSE-listed cannabis stocks also means they are trading less, leading to less liquidity and much more sensitive valuations.
According to a separate market analyst these stocks are currently ‘for day traders, not really for long term holders, at least that’s certainly not their intention’.
“I think because these stocks are predominantly retail-led, the heroes can go to zeros and back to heroes very, very quickly just because the flow of money that goes through them isn’t in traditional long term money in terms of hedge funds, pension funds, that sort of thing.
“They’re very price sensitive because of the nature of who’s trading the stock.”