Companies to Watch as Marijuana Approaches Legalization in Canada

Friday, December 22, 2017 General News
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FN Media Group Presents News Commentary

LONDON, December 22, 2017 /PRNewswire/ --

There's a revolution coming. A green revolution. Next year, Canada

will become the first major industrialized nation to fully de-criminalize cannabis, legalizing it for recreational use. California, the world's biggest single market for cannabis products, will also be passing legalization legislation, though the United States is likely to keep its federal pot laws unchanged. Included in today's commentary: The Scotts Miracle-Gro Company (NYSE: SMG), Intec Pharma Ltd. (NASDAQ: NTEC), Canopy Growth Corporation (TSX: WEED) (OTC: TWMJF), Celgene Corporation (NASDAQ: CELG), Cronos Group Inc. (OTC: PRMCF).

This is huge news. The market for cannabis in Canada could be as large as $8 billion. The U.S. market could reach $25 billion by 2020, and even this figure could be an understatement if recreational use takes off - demand could drive investment as high as $50 billion by 2026.

These are impressive numbers, but one number that is often forgotten about is existing supply: in Canada, current production can meet only 5 percent of overall demand for a medical marijuana community of roughly 200,000 people. When legalization happens, the market could be in desperate need of new investment.

That means big opportunities for companies ready to get in on the action. Cannabis is still a very young industry, with few established firms and a lot of room for new growth.

Here are five companies poised to meet the demands of the new green revolution:

#1 Scotts Miracle-Gro (NYSE: SMG) 

To meet rapidly-rising demand, the cannabis industry is going to need strong support from 'pick and shovel' companies like Scotts Miracle-Gro (SMG). The company markets tons of useful products, ranging from grass seeds to pest deterrents, weed killers and other chemicals.

SMG is also building a strong line of hydroponic growing equipment, perfect for cannabis cultivation.

Hydroponics is the art of growing plants without soil. A subsidiary of SMG, Hawthorne Gardening Company, has a special division that focuses on hydroponics-for now, it makes up 10 percent of their total sales.

Year-on-year, the hydroponics market has grown 20 percent, as methods become more sophisticated and technology grows more available.

SMG is well-positioned to supply the tools, the know-how and the methods for cannabis growers to rapidly increase output. With a market cap of $5.52 billion, SMG benefits from strong name recognition, experience and customer loyalty.

You can be sure this firm will profit from the green revolution.

#2 Cannabis Wheaton (CBW; CBWTF)

What Silver Wheaton does for mining, or Netflix for videos, Cannabis Wheaton will do for pot: the company is poised to become the first 'streaming cannabis' firm out there.

The metrics driving Cannabis Wheaton's business model include the vast gulf between supply and demand that is about to hit the cannabis sector, particularly in Canada where full legalization for recreational use is about to send demand through the roof.

Cannabis Wheaton intends to connect distributors and producers through its unique 'streaming cannabis' platform, allowing firms access to capital and markets so they can grow their business, while Cannabis Wheaton collects royalties in money or pot, the latter of which it can distribute through its own licensed producer.

The model removes the risks of putting all your eggs in one basket, since Cannabis Wheaton invests in multiple producers and distributors: if one firm fails, or a crop goes bad, Cannabis Wheaton can shift its attentions elsewhere.

The company has strong political support and is better positioned than any other firm to meet the demands of a growing cannabis sector.

Cannabis Wheaton already has 15 partners with 17 production facilities totaling a potential 1.4 million effective square feet of growing space. In return for providing the capital to help producers build or expand their cannabis cultivation facilities and access to the Cannabis Wheaton platform, the company gets a minority equity interest and a royalty paid in pot.

Right now, the company has focused on capturing as much of the medical marijuana community as it can before recreational legalization next year. Cannabis Wheaton has partnered with 39 clinics, with access to 30,000 registered medical marijuana patients.

Through partnering with potential distributors and producers, Cannabis Wheaton can reduce its exposure to risk and capitalize on growing demand quickly. Furthermore, through its streaming services, Cannabis Wheaton can radically increase the capacity of pot growers to meet demand, thereby growing the market.

A series of recent catalysts illustrate the company's strategy. Cannabis Wheaton purchased a $15 million share in ABcann Global Corporation, which forms part of a larger investment into ABcann that when complete will allow ABcann to increase its growing acreage by 50,000 square feet. Another $15 million purchase of ABcann shares is scheduled for next year, with half of the production revenues of such 50,000 square foot expansion going to CBW.

In anticipation of next year's legalization, Cannabis Wheaton has formed partnerships with a convenience store chain and an independent pharmacy chain, putting it in a position to potentially supply pot directly to distributors well-suited to meet recreational demand.

In November, it acquired RockGarden, a licensed producer. This gives Cannabis Wheaton the ability to retain the cannabis it gets from its streaming deals and furthers the company's streaming platform strategy by providing additional resources and regulatory tools to help accelerate its current and future streaming partners.  

More pot will be coming in thanks to the company's novel debt financing arrangement with Beleave which the company has named a "Debt Obligation repayable in Product Equivalent", or DOPE Note, whereby Cannabis Wheaton will provide up to $10 million in debt financing and be repaid solely in pot.

So, with its unique business model and its superb position, Cannabis Wheaton should be taking the Canadian pot world by storm. This is definitely one to watch.

#3 Pfizer

This huge drug maker is offering big dividends to investors and looks set to grow in the next few quarters, a welcome change following a rough patch.

Pfizer's two divisions, innovative health and essential health, generated $52.8 billion in revenue last year. The company's net income is $7.2 billion, and operating cash flow nearly $16 billion.

It goes without saying that Pfizer, one of the largest companies in pharmaceuticals, has some big money behind it. Yet its standard products face declining sales. New products are looking a lot more promising, and growth from innovative cancer and auto-immune drugs will fuel future growth.

Debt-to-equity ratio wasn't great, but that's mostly due to Pfizer's buying spree: it's recently acquired Anacor Pharmaceuticals, Hospira and Medivation.

That's put it in the red, but the revenues generated from these new acquisitions should put Pfizer back on top.

What is sure to get investors' attention is a new company, Allergan, which has a brilliant new drug on the market: Restatis, a dry-eye disease drug, for which Allergan has exclusive marketing rights. The rumors now point to a forthcoming acquisition of Allergan by Pfizer, a deal which could further strengthen the company's bottom line

Pfizer tried to take on Allergan last year but dropped the merger in the face of federal objections. Now, the deal looks like it might be back on the table.

A merger between Pfizer and Allergan could be a further shot in the arm for the pharma firm.

#4 Canopy Growth Corp. (TSE: WEED) (OTC: TWMJF)

With a market cap of CAD$1.6 billion and a reputation as Canada's first 'cannabis unicorn', Canopy Growth Corp. looks set to lengthen its bull run.

The company is a diversified cannabis firm, with a number of brands, curated strains and half a million square feet of indoor and greenhouse production space. It has partnerships with the leading names in cannabis, including Tweed, Spectrum Cannabis and Bedrocan.

Canopy is getting set to meet the challenges of Canada's legalization next year. Shares in the firm jumped in March 2017 when the Canadian government signaled it was about to start pushing its bill for full legalization in 2018.

In the last year, Canopy's stock has grown by a jaw-dropping 386 percent, pushing it past $1 billion market cap into "unicorn" territory.

It's just announced new licensed facilities with expanded growing potential. It's going to be the first company to be brought on to the S&P/TSX Composite Index.

In December, Canopy won a retail supply agreement for Newfoundland and Labrador. The deal also has Canopy setting up a new production facility to supply 12,000 kg per year, bringing 145 jobs to the area.

Canopy's success has attracted the attention of investors like Constellation Brands, the company that owns the Corona beer brand. The firm plans to buy a 9.9 percent stake in Canopy, and Constellation's CEO has predicted that full legalization in the US is sure to follow the new law in Canada.

With such strong support, Canopy is sure to grow further in 2018 and beyond.

#5 Sanofi

Some firms in big pharma are playing the long game when it comes to cannabis-letting the small caps spend money on development and clinical trials, then swooping in to acquire them once they strike gold.

The legalization in Canada will create big opportunities, with demand set to exceed supply by an enormous margin. That means that companies with lots of money to burn will be well-positioned to enter the market, buying up smaller firms and entering the cannabis trade without taking on too much risk.

French pharma firm Sanofi is one such company. With a market cap of $123.99 billion market cap, this titan has no need to gamble on short-term investments, and can afford to wait out the changing cannabis market and dive in once the waters look safe for swimming.

Since its IPO in July 2022, Sanofi's performance has been 8.41 percent. It's biggest growth has come from the drug Dupixent, an anti-eczema drug which is expected to reach US sales of $4.3 billion by 2022. After winning FDA approval in March 2017, Dupixent is set to take the US market by storm.

Another drug, dupilumab for treating severe asthma, should also prove a winner for Sanofi, which recently released data for the first round of clinical trials. The drug, which is essentially the same as Dupixent but directed at different ailments, will enter a billion-dollar market and challenge rival GlaxoSmithKline.

So, with two new drugs about to come on the market and a mountain of cash at its disposal, Sanofi is a firm that will be well-positioned to meet new demand.

Other companies to watch:

Celgene Corporation (NASDAQ: CELG) is a biopharmaceutical company based in Summit, New Jersey. Coming from humble beginnings in 1986, the company has grown tremendously through a series of high profile acquisitions, gaining skill and expanding its knowledge base along the way. Celgene made this list because the company is in the process of developing a drug in a partnership with Abide Therapeutics which targets the CB2 and CB1 receptors, the very same receptors that THC, the primary active chemical in marijuana, target.

Intec Pharma Ltd. (NASDAQ: NTEC): Intec is an Israeli based pharmaceutical company that earlier this year announced an early-stage study testing its painkiller made of natural CBD and THC extracts. This kind of marijuana based painkiller will become increasingly popular as full scale legalization takes place, and as one of the first movers in the space Intec is undoubtedly one to watch.

With its stock trading around the $5 mark and a market cap of over $160 million, this is a secure and cheap option for traders looking for limited exposure to the space. Analysts have given this innovative company price targets upwards of $10, and despite its recent drop in value, the bullish sentiment appears to be hanging around.

By Charles Kennedy

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