Some of Canada’s biggest cannabis companies are expanding their presence in Europe through a series of strategic acquisitions, designed to secure a first-mover advantage in a region that is firmly on the path towards the legalization of medical weed.
In the last week alone, two of the biggest deals in the Canadian cannabis space had Europe’s medical cannabis market in mind.
When Aurora Cannabis succeeded in its takeover of CanniMed Therapeutics — a two-month bid that was fraught with hostilities — it not only acquired the most well-oiled medical marijuana machine in the country, it bought over a company whose advances in cannabis research perfectly complement Aurora’s own foray into the burgeoning medical cannabis markets of Denmark, Italy and Germany.
That’s a big reason why CanniMed fit in to Aurora’s long-term business strategy, CEO Terry Booth told the Globe and Mail recently. “We will make that company far more money than they ever thought they were going to make. I mean that,” Booth declared.
The legal status of cannabis varies throughout Europe, but much of the continent’s approach towards weed — dating back to the legalization of medical cannabis in the Netherlands in 2003 — has been progressive, both socially and politically.
For Leamington-based Aphria, the $826 million acquisition of medical cannabis firm Nuuvera Inc. was worth the hefty cost, simply because of Nuuvera’s advantage in the Italian market — it owns one of only seven licenses to import medical cannabis into Italy. The potential size of Italy’s medical marijuana market, claims Nuuvera CEO Lorne Abony could be “$9 billion larger than the combination of the recreational and medical markets in Canada.”
In Italy, where Aurora also has a license to supply medical cannabis to the Italian government through the Ministry of Defence, weed for medical use was legalized in 2013, ahead of many other European states. Netherlands, because of its 10-year advantage over Italy, became the only external source of weed, and hence a costly one. In 2015, the Italian army began growing cannabis for the local population, but its scale was nowhere close to meeting the country’s demand.
“The Italian market has been provided almost entirely by import and almost entirely by one company in the Netherlands,” Abony told shareholders and analysts at a conference call on Monday to address Aphria’s friendly acquisition of his company.
Although the legal nuances around the import and export of weed between Canada and Europe can be tricky, its success lies in just one factor — whether both governments are in agreement. “Getting weed through borders even where the drug is legal, is kind of like a Mexican standoff. You each have to get the other guy to say yes,” says Ranjeev Dhillon, a partner at Bennett Jones LLP.
In Germany, a country that has Canadian companies like Canopy Growth, Cronos Group, Medreleaf and Aurora jostling for market share, medical weed became legal in March 2017, along with full insurance coverage for cannabis patients across the country. That essentially guarantees a base demand for weed, one that the industry expects will only grow.
And Aurora acquired German weed distributor Pedanios in May 2017 exactly for that reason — the expansion of insurance coverage laws to cover weed immediately “doubled” Pedanios’ monthly sales. In fact, Canopy Growth, which bought German-based MedCann back in November 2016, did so only so it had a channel to start putting Tweed-branded cannabis into German pharmacies.
Denmark too, has become a potential market for Canadian cannabis companies, even though medical cannabis is not fully legal in the country yet. Certain drugs including Sativex, a plant-based spray and and Marinol, a THC synthetic are available as prescription medication, although the government recently started a pilot medical cannabis scheme that would prescribe medical cannabis to a limited number of patients.
That was the motivating factor for Canopy Growth to set up a 40,000 square feet production facility in Odense, Denmark that will begin production as soon as a license is obtained. In the meantime, Canopy will export its weed to Denmark. And unsurprisingly, Canopy’s only real competitor in the Scandinavian country is Aurora — it recently teamed up with a Danish tomato producer to form Aurora Nordic, which professes to produce up to 120,000 kg of cannabis annually.
“Canada is only so big a market — Germany and Italy combined have four to five times the population of Canada,” says Khurram Malik, a cannabis industry analyst at Jacob Capital Management Inc.
But Malik believes that European markets will prove much more lucrative for Canadian companies, not just because of their larger population size, but because by 2020, there will be a glut of legal weed in Canada — a direct result of the mass licensing and production going on in the lead up to legalization.
“From now to 2019, there will be a shortage, that’s for sure. But if you want to be one of the survivors of the oversupply that will take place in Canada in say 2020 or beyond, you have to stake your claim now in early stage markets,” Malik says.
Beacon Securities analyst Vahan Ajamian is of the opinion that Canada’s taxation rules will be the ultimate determinant of how much legal Canadian weed leaves its borders. “If high tax, and the provincial distribution model squeezes prices too much these companies are not going to be able to justify selling most of their weed locally,” he told VICE Money.
“At the margins, if I can make 50 percent more exporting weed at higher European prices then why wouldn’t I?’