Out of nowhere, signs of life are appearing in the cannabis sector following a near total collapse in share prices over the last three years. Unlike prior booms and busts, of which there have been many over the last six years, this latest flourish appears to have legs.
The Financial Times reported (15 July) several European start-ups are looking to go public to take advantage of potentially significant rule changes in Germany and the US.
Notice of changes to US cannabis regulation first appeared in May and gave a boost to quoted names in the sector including Nasdaq-listed Tilray Brands (TLRY:NASDAQ), a leading global cannabis-lifestyle company whose shares rallied 40% from $1.77 to $2.47 on the news.
The performance of Tilray shares have reflected the ups-and-downs of the wider sector, trading as high as $150 in 2018 and as low as $1.65 in July 2024.
THE TIMES THEY ARE A-CHANGIN…
The US started the process of legalising recreational cannabis in 2012 with Washington State and Colorado leading the way. Twenty-two states have since followed suit, but cannabis has so far been a state-by-state affair which means cannabis cannot be transported across the state line.
In May 2024 the US DEA (Drug Enforcement Administration) published a notice signalling its intention to remove cannabis from its list of most dangerous drugs.
This is significant because it lays the ground for a reduction in the rate of taxes on state-legal businesses which can be as high as 70% or more. It seems fair to say some US states have done very well out of legalising cannabis.
In addition, medical research on marijuana is likely to become easier. A total of 38 US states allow the medical use of cannabis. At the federal level, medicinal cannabis products need FDA (Food and Drug Administration) approval.
While the manufacture, distribution and possession of recreational cannabis would remain illegal under federal law, applicable offenses would be reduced.
Importantly, if cannabis is moved to a lower-risk category it would allow businesses to deduct business expenses on federal tax filings, according to a report published by the Congressional Research Service.
Meanwhile changes are also afoot in Germany which is Europe’s largest market for medical cannabis. In April the authorities decriminalised possession and small-scale home cultivation and removed it from the country’s narcotics list.
In summary, the backdrop for operators in the sector appears more favourable from both a financing and investor appetite perspective.
FLURRY OF NEW LISTINGS ON THE CARDS
Joshua Roberts, co-founder of Wellford Medical, a medicinal cannabis manufacturer and distributor in the UK and Germany summed-up the mood music well: ‘If the US reclassifies, coupled with the legislative change in Germany, it could be the perfect time for us and investors to catch that sentiment.’
The company said it is considering an IPO (initial public offering) on Nasdaq in due course.
London-based medicinal cannabis distributer Grow Group told the Financial Times it is planning an IPO on Nasdaq in the spring of 2025, targeting a valuation of more than £100 million.
Created in 2017 the company says it is focused on enabling global access to quality medicinal cannabis. It grows its own cannabinoid extracts from facilities in Andalusia, Spain and claims to be the UK’s and Ireland’s largest supplier of quality prescribed cannabis medicines.
CEO and co-founder Benjamin Langley told the Financial Times that after a period relative drought for funding he is seeing more money in the space again, particularly from venture capital investors.
Another London-based group Somai Pharmaceuticals, involved in the extraction, development and distribution of medicinal cannabis is also seeking an IPO on Nasdaq and hoping for a ‘reasonable’ valuation of $250 million.
The company will look at secondary listings in London and Toronto according to its founder and CEO Michael Sassano. The business is a large-scale EU-GMP (good manufacturing practice) manufacturer of cannabis products focused on the highest quality medical grade pharmacological applications.
EU-GMP designation and oversight is provided by the European Medicines Agency.
Somai recently (12 May) signed a two-year distribution deal with Grow Group to expand its global presence to the UK.
Under the deal Somai will create access to its ‘differentiated’ cannabinoid-containing product portfolio for all the UK-based medical cannabis-prescribing clinics and doctors, utilising Grow Pharma’s extensive distribution network.
The company expects to generate €750,000 of revenue in the first year of the contract. Sassano says: ‘We are excited to partner with Grow Pharma to expand our reach to the UK clinics equally and introduce them to SOMAÍ innovative cannabis-based medical products with different tastes and terpene mixes.
‘By navigating the intricate regulatory landscape, SOMAÍ aims to provide innovative solutions for patients grappling with conditions such as chronic pain, epilepsy, and multiple sclerosis.’
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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