One of the most significant trends in the cannabis industry involves international markets and this is a vertical that we are bullish on. Going forward, we expect international markets to serve as a substantial growth catalyst for companies that are levered to this sector of the industry and this is a trend that we are closely following.
From Germany to Mexico, a number of countries have jumped on the cannabis bandwagon and we are of the opinion that this trend is just getting started. During the last year, several new markets in the European Union (EU) and in South America have opened. Over the next few years, we expect these markets to become major growth opportunities and want to highlight 3 international markets that we are bullish on.
Mexico: Legal Recreational Cannabis is Coming Soon
Mexico has quickly become a market of interest after President Andrés Manuel López Obrador said he will support legislation to legalize recreational cannabis. If the Senate approves the bill, Mexico will be one of only a few countries that have legalized recreational cannabis at the federal level.
So far this year, we have noticed a substantial increase in interest in the Mexican cannabis market. Currently, there are only a few companies that own assets in Mexico and are positioned to capitalize on new legislation. Although we can speculate on which companies will likely be beneficiaries of such legislation in Mexico, there is no clear leader and we expect to see operators battle each other for market share when the market opens.
Khiron Life Sciences Inc. (KHRN.V) (KHRNF) has been capitalizing on the Colombian cannabis market and has been working on expanding into additional strategic markets. In 2018, the company appointed Vicente Fox as a member of its Board of Directors and we expect this to help the company capitalize on a change of legislation. Fox served as the 62nd President of Mexico and bring significant relationships to Khiron.
In 2018, Aurora Cannabis (ACB.TO) (ACB) reported to have acquired a licensed Mexican cannabis business. Since the announcement, the company has not provided much of an update on the transaction and we are not completely sure as to how the business is positioned to capitalize on the opportunity in Mexico. Last year, Aurora Cannabis announced major changes to the management team and we will monitor how the new team advances the business.
Israel: Overtakes Germany as the Largest Cannabis Importer
Last year, Israel overtook Germany as the largest importer of medical cannabis flower in the world (according to data compiled by the Israeli Cannabis Magazine and Marijuana Business Daily). This is a market that we are bullish on due to the export opportunity to the EU and climate being perfect for cultivating cannabis.
From an economics standpoint, Israeli cannabis producers have an advantage and have been able to grow cannabis for less than $0.40 per gram (all-in costs). In Canada, the all-in cost per gram is closer to $1 to $2.
From a geographic standpoint, Israel is located much closer to the EU than Canada. As a result, shipping costs from Israel to the EU are lower than shipping costs from Canada to the EU. This provides Israeli cannabis companies with another key advantage and we are favorable on the impact this has on profit margins.
HEXO Corporation (HEXO: NYSE) (HEXO: TSX) is an operator that has attractive leverage to the Israeli cannabis market and is a business that we have been closely following. Last year, the company announced a strategic supply agreement with Breath of Life (BOL), a GMP Israeli medical cannabis company that has an established distribution network through pharmacies.
BOL works with Super-Pharm, Israel’s largest pharmacy retailer with 258 locations and we expect this to play an important role in how HEXO capitalizes on Israel and on the EU. The focus on the Israeli market is an important aspect of the HEXO story and we will monitor how this side of the business ramps up in 2021 and beyond.
Germany: The Next Country in the EU to Legalize Recreational Cannabis?
For several years, we have been excited about the German cannabis opportunity and believe that it is one of the most important markets to be focused on in the EU. We are of the opinion that the next few years will be transformationalwill transformational for the German cannabis market and expect other countries in the EU to follow Germany’s lead.
A few years ago, Merkel announced that she would step down as the leader of the Christian Democratic Union (CDU) and that she would not run for a fifth term as Chancellor in 2021. We believe that a change in leadership is the catalyst that the German cannabis industry needs and expect the next leader to legalize recreational cannabis.
Aphria, Inc. (APHA.TO) (APHA) was a first mover on the German cannabis market and owns attractive distribution assets in the country via CC Pharma. In late 2020, Aphria announced an agreement to mergemerger with Tilray, Inc. (TLRY) and we are bullish on the growth prospects of the combined company. Tilray owns strategic EU GMP cultivation assets and we expect the merger to make the combined company a clear leader in the EU and will monitor how the story advances from here.
If you are interested in learning about emerging cannabis markets as well as the companies that are positioned to capitalize on the international opportunity, please send an email to [email protected] with the subject “The International Cannabis Market” to be added to our distribution list.