Weeding out opportunities in the cannabis sector

Pot isn’t as taboo as it used to be. The UK legalised medicinal cannabis in 2018. In doing so, it joined a raft of other countries – including Canada and several US states – that have allowed the once-stigmatised product to be used to treat pain and specific illnesses.

The Financial Conduct Authority (FCA) legitimised the industry further when it cleared the way last September for medicinal cannabis companies to list on the London Stock Exchange. A number of initial public offerings (IPOs) ensued, offering retail investors the chance to buy into what is, on the face of it, a burgeoning movement.

Yet there remain concerns that tough rules will limit the commercial activities of cannabis-related businesses and the enthusiasm of potential shareholders.

A report published in April noted that “the regulatory landscape for medicinal cannabis is currently fraught with problems”. The paper, from Maple Tree Consultants and Mackrell Solicitors, observed that “the recognition of the medical properties of cannabis has come relatively late in the day to the UK". This, along with a “restrictive and cautious approach”, means that “the UK is at risk of missing out on the commercial and industrial benefits of this rapidly developing sector”.

One key difficulty is that cannabis producers with non-UK operations could fall foul of the Proceeds of Crime Act. Recreational cannabis remains a criminal offence in the UK despite being legalised in other countries. The FCA says it must be satisfied that the activities of medicinal cannabis and cannabis oil companies with overseas operations would be legal if carried out in the UK.

Business growth requires regulatory easing

Maple Tree believes that medicinal cannabis has “the potential to revolutionise patient care and turbocharge the UK economy” after the Covid-19 pandemic – pointing to estimates that the domestic market could be worth over £2.4bn by 2024.

As things stand, the UK is reliant on shipments from overseas and imports 100 per cent of its cannabis-based medicines prescribed to patients, despite producing significant amounts of medicinal cannabis itself.

Developing a home-grown sector would theoretically secure supply chains for patients in need, while also encouraging cannabis users to take official routes to access the product for medical reasons. Prohibition Partners, a cannabis-focused market intelligence firm, found that 1.4m people in the UK were using cannabis to treat chronic health conditions as of 2019, while just 153 prescriptions had been issued for cannabis-based medicines.

Overall, Prohibition Partners reckons that the global medicinal cannabis market could be valued at £48.3bn in three years’ time. But that growth ostensibly depends on the further loosening of regulatory frameworks. It will also rely on data demonstrating the effectiveness of cannabis as a serious therapeutic.

To that end, ‘Project Twenty21’ launched last year with a view to creating the UK’s largest body of evidence for the effectiveness of medical cannabis. Drug Science, the organisation behind the project, hopes that its findings “will provide evidence for NHS funding where the benefits of treatment with medicinal cannabis is proven to outweigh the potential risks”.

A trial update last month suggested that legally-prescribed cannabis provided clinically significant improvements in the quality of life of people with conditions such as multiple sclerosis and epilepsy.

Pharma investments are still nascent

But can a grassroots UK cannabis industry truly make it into the mainstream arena, or has hype overtaken reality? Significant transactional activity this year suggests that many are predicting big things for the sector.

For starters, in February, Jazz Pharmaceuticals (US:JAZZ) agreed to acquire GW Pharmaceuticals – a UK-based, Nasdaq quoted company – for $7.2bn. GW’s lead product, Epidiolex, a cannabidiol oral solution, is used to treat patients with rare diseases characterised by severe early-onset epilepsy. Epidiolex was the first plant-derived cannabinoid medicine ever approved by the US medicines regulator. Before turning to the US, the company was one of Aim's storming successes – by the time it de-listed to trade exclusively on the Nasdaq in 2016, its share price had risen more than fourfold. 

Others are now hoping to walk in the company’s footprints, including Oxford Cannabinoid Technologies (OCTP), which listed on London’s main market in May. “We think of ourselves as the next GW Pharmaceuticals,” says Neil Mahapatra, OCT executive chairman.

“GW, like us, are one of the few firms in the cannabis space that actually requires no real progression of cannabis law in order for its business model to succeed,” he adds. “That is because [we] are using these already pre-existing channels of drug development, clinical trials and regulatory approval […] to develop our products.”

OCT aims to develop cannabinoid pharmaceuticals “for the safe, effective and non-addictive treatment of pain conditions”. It intends to use the £16.5m it raised at its IPO to take its lead four drug programmes further into development and its two lead programmes into clinical trials.

Its lead compound is in-licensed from a spin-out of Pfizer (US:PFE) in Japan. The compound “has real blockbuster potential targeting a range of indications within neuropathic and visceral pain”, explains Mahapatra. It can be prescribed as a potential medication for a range of pain indications without having the psychoactive effect of getting high.

OCT says its focus is the total addressable pain market, valued at $42.5bn. But that is not the immediate target market for its products, which will initially go after a market worth roughly £1.55bn. “That will expand as our pipeline grows to cover other indications”, estimates Mahapatra, to about £19bn.

As things stand, the company – whose shares have slipped 16 per cent since flotation to give it a market cap of £42m – does not expect to commercialise its first drug until 2027.

Newer entrants and tobacco incumbents

Other cannabis-connected companies listed in London include MGC Pharmaceuticals (MXC) and Israel-based Kanabo (KNB).

Clinical research at MGC, which floated in February, focuses on CannEpil for epilepsy and CogniCann for Alzheimer’s disease as well as early-stage development of other formulations. The company is also conducting trials for a product called CimetrA in hospitalised Covid-19 patients.

Kanabo also floated in February via the reverse takeover of special purpose acquisition company (Spac) Spinnaker Opportunities. As a research and development firm, it sells a range of non-THC (non-psychoactive) cannabidiol (or CBD) products and is developing various medicinal cannabis products.

It’s not only new kids on the cannabis block. Long-established tobacco companies have thrown their hats into the ring too, granting their existing shareholders exposure to the industry. FTSE-100-listed British American Tobacco (BAT) announced a £126m investment and strategic collaboration with Canada-based Organigram (CA:OGI) in March, giving it a 19.9 per stake in the company. Organigram develops and sells recreational and medical cannabis products in Canada, where the drug was legalised in 2018.

Peer Imperial Brands (IMB) signed a £75m R&D partnership with Canada-based Auxly Cannabis in 2019, while Marlboro producer Altria (US:MO) bought a stake in Canada’s cannabinoid company Cronos (CA:CRON) for $1.8bn that same year.

All of this dealmaking activity might add shine to the investment case for cannabis-related companies, but this is an arena that is still highly speculative. And that’s before mentioning the fact that the relaxation of regulations could lower the barriers to entry and allow more companies to step into the fray, intensifying competitive pressures.

But with the direction of travel in Europe clearly towards gradual decriminalisation, this could be one of the big investment growth stories of the next decade. Just don’t expect the space to light up immediately. HC