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What do investors look for when analysing cannabis investment opportunities?

The GCI Virtual Summit explored key factors that investors look for in cannabis businesses when analysing investment opportunities. 

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What do investors look for in cannabis investment opportunities?

A panel of experts discussed key factors for cannabis investment opportunities at the Global Cannabis Intelligence (GCI) Virtual Summit for global leaders in cannabis and psychedelics.

As the nascent cannabis industry matures and more cannabis businesses are launched, what investors look for now may differ from the early stages of the industry. Initially, licence applications may have clinched a deal, but now – management teams, exit pathways or infrastructure may top the checklist. 

The panel at the GCI Summit featured: Patrick Rea, managing director at Poseidon Asset Management; Alfredo Pascual, vice president, investment analysis at SEED Innovations; Pete Karabas, founding partner at KEY Investment Partners; and, Daniel Yazbeck, founder at Yazbeck Investment Group. The experts discussed the key aspects that they look for in investment opportunities. 

Patrick Rea highlighted the increase in entrepreneurs launching businesses into the cannabis industry, with the last six to eight months seeing more companies looking at the biosynthetic production of cannabinoids. Specifically, with interest in developing rare or minor cannabinoid products.

Read more: Exploring cannabis regulations and investment in the UK

As the world looks towards alternatives to plastics and other environmentally damaging materials, Yazbeck also highlighted the increase in hemp companies falling across investment desks. 

“There are so many creative applications that are coming across my desk and I’m very excited about this space because it’s just the beginning of the hemp industry. For its industrial applications, I don’t think we have really tapped that market so I’m looking at that space heavily.”

Karabas agreed with this sentiment highlighting how this sector is ripe for innovation, and also pointed out the attractiveness of specialty finance companies and those exploring fast onset technologies. 

“I think it’s difficult to find which ones actually work – the science is still in its infancy. So, for example, how do you take an edible and change it from an edible that has an onset of an hour to an hour and a half, to having an onset of 20 minutes in some cases. That has been an interesting area of focus.”

Pascual emphasised where these development and innovations are coming from, comparing the industry stage in the US market with European countries.

“With my focus on Europe, what I see the most are companies that want to be part of the supply chain when it comes to medical cannabis, either growing or extracting or distributing. I would say that is with maybe 90 per cent of the investment opportunities that I see in the medical cannabis industry in Europe. 

“When it comes to non-medical CBD then I would say it is mostly brands that have differentiating factors – mostly in the UK – which is one of the most advanced markets in Europe when it comes to CBD. We do not have recreational markets in Europe but there are a couple of experiments just starting, in the case of Switzerland, for example. But these are limited experiments and no sales are happening yet. There’s a lot of expectation when it comes to recreational, particularly now with the new expected German government.”

Pascual noted key areas of analysis and indicators that investors are looking for today when it comes to cannabis.

“I think that it is an expectation in North America that when you invest in a medical cannabis company, that company will be able to operate in the not-so-distant future recreational market as well. The way that I see this here in Europe – whenever I recommend an investment in medical cannabis company – I need the medical cannabis company business plan to make sense with the current regulations. I wouldn’t recommend investing in a medical cannabis company in Germany just because it may legalise recreational cannabis, for example, and that company may have an upside then. If that happens, then wonderful, but there’s absolutely no certainty. 

“The business plan needs to make sense as a medical cannabis company. For that, we look at valuations, financial projections, and historical performance.”

Rea added: “There is a difference between running a venture fund with other people’s assets, making the investments and being a high-net-worth individual in the cannabis industry and the cannabinoid industry in the United States. There’s not really any institutional capital in the traditional sense of investing in the space. So, you’re left with family offices, cannabis-focused venture funds, and high-net-worth individuals. So, as an individual, you may have the ability to just sort of place your investments where ever you like, without regard for managing to a protected return target, and we definitely see a fair bit of that.

“For us as a venture firm, we have got to be very textbook in our analysis.

“There is a lot of failure in cannabis businesses and startups in general. We are always going to talk to an entrepreneur about the exit pathway and timeline because it’s important for entrepreneurs to understand that, if you’re talking to a fund, we have a projected fund timeline – we have an eight-year fund term. So, if you’re looking to continue to run this business for 12 years, we’re not a fit. 

“Very importantly at the end, is the value of the company and exit – so, what that is based upon is either multiple revenues or multiple EBITDA, and are they coming to the table with an expectation that is reasonable, nuanced and with an understanding of what that market currently is at the exit.”

Karabas added: “We look at very similar things through slightly different lenses. The cannabis industry is really at an inflection point here, especially in the US. For the first time, I think you have a critical mass of States and it’s increasing at an exponential rate, and you’re starting to see more comparables. 

“One thing we’ve run into in the current period of time is entrepreneurs setting valuation too high. And, more often than not, you can set yourself back if you have an overvalued company at a Series A or Series B. Down the road, when you need additional capital, if you haven’t left yourself a lot of wiggle room, you can find yourself in a not-so-great situation.

“So, aside from some of the more traditional financial metrics, what we look at is also in the past. If you raised capital in the past, how have you used that capital? What kind of runway is the capital that you’re raising going to get you? 

“I think a big thing across all of the cannabis industry is certainly this idea of duration risk in properly estimating how long it it going to take this company to grow, and how much more capital are they going to need. If it takes longer – if the regulatory environment doesn’t shape up how they see, before you know it – I always say – you can have a great, successful company and end up with a bad investment because you had to raise too much capital. Now all of a sudden, you’re diluted and you might not be able to hit the growth projections.”

Yazbeck highlighted that he takes a more simple approach to analysing investment opportunities.

“I look at a company or a group of folks who are producing a specific product. I’m a cash flow investor. So, can you create a product and sell it at market value? The second is, do you have the team in place to do that? And a third point that is very important for me is, does this team have the relationships to create a market for that product, do they have the capacity to do that? 

“If you look at the state of the markets – take the medical market in Europe – it takes millions of dollars to become GMP compliant. Companies like Tilray have invested millions and millions of dollars to create facilities, and what are they after – a $200m market in Germany? The goal is when recreational kicks in.

“So, are you going to be a first mover in recreational because you have a medical? In the end, if you can produce a product at a cost of goods sold, or you have a margin, and hopefully, the margins are going down, like in California with flower, for example. Do you have the relationships to do that, then you can then continue to produce a business – it’s about cash flow for me.”

The GCI Virtual Summit is taking place 7 – 9 December. Please visit summit.gcintelligence.com/ to find out more.

Markets and industry

Industrial hemp in Europe driving global market growth

A new report has projected the market to exceed $310m by 2027.

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A new report has attributed the growing hemp market in Europe as a driving factor of global growth.
Home » News » Markets and industry » What do investors look for when analysing cannabis investment opportunities?

A new report has attributed the growing hemp market in Europe as a driving factor of global growth.

A once under-utilised crop, hemp is now seeing strong growth thanks to the demand for alternative products. Food, drink and personal care products are driving the growth of the industrial hemp market.

A new report from Global Market Insights has highlighted government regulations and policies associated with the legalisation of cultivation, as well as escalating demand for hemp products as a main driver of the market.

 The market size was over USD$205m (~£151.09m) in 2020 and is projected in the report to reach $310m by the end of 2027.

Fibre and seeds

Hemp is utilised extensively in the pulp and paper industry as it is a considerably more sustainable crop than wood. This is due due to the fact its does not need bleaching produces more pulp per acre, offers enhanced paper strength, and utilises chemicals that are less toxic compared to wood paper. 

The report highlights that government regulations seeking to limit wood harvesting and the associated harmful consequences of wood pulp and paper production, are likely to foster product uptake. 

Read more: Italy plans hemp production increases: could the UK be next?

It speculates the segment will see robust growth to attain a valuation of more than $70.5m by 2027.

The hemp seeds segment is slated to surpass a valuation of around $74.5m by 2027 under food and beverages application, due to their wide use in supplements, such as protein powder and meal replacement bars and snacks. 

Europe

The report has attributed a proliferating industrial hemp market in Europe as well as mounting product application in automotive manufacturing as additional drivers of growth in the global market.

It notes that the Europe industrial hemp market is projected to progress at a CAGR of approximately 5.5 per cent over the forecast period to surpass a valuation of $80.5m.

Growing consumer awareness of the plant’s therapeutic effects has also boosted product demand in recent years, according to the report. 

To read the full report please visit: https://www.gminsights.com/roc/3306.

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Markets and industry

Canxchange launches new trading system for the cannabis market

Canxchange is introducing more transparency, liquidity and efficiency to the growing cannabis market through its new platform.

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Canxchange launches new trading system for the cannabis market

Canxchange, the leading physical hemp and CBD exchange, has launched a new electronic trading system for the cannabis market to simplify sourcing, buying and selling.

The new Canxchange trading system is the result of more than one year of product development and engineering work. 

The platform provides electronic trading, market surveillance tools, price discovery options, data and features to enhance daily business and transactions for Canxchange members.  

CEO and co-founder of Canxchange, Alex Arkentis, commented: “As we continue to improve and upgrade Canxchange, our main objective is to facilitate our members based on their feedback and market needs. 

Read more: Canxchange benchmark report reveals outlook of European hemp market

“We have spent the past two years listening closely to what our members are looking for and educating ourselves on what the industry lacks. 

“With the launch of our latest platform, now our  traders can focus on their strategic priorities, and rely on Canxchange to handle everything else.”

The platform has been designed based on market and member feedback, to simplify the process of sourcing, buying and selling. 

New platform features include: 

  • Simplified processes and more powerful user experience 
  • Production and distribution procurement contracts 
  • Market surveillance tools 
  • Data and pricing analysis 
  • Micropayments 

It will leverage the expertise and proven track record of Canxchange, a European leader in physical cannabis trading with a reputation for world-class technology, cutting-edge service solutions and trading reliability and efficiency. 

Read more: How the cannabis industry is overcoming a lack of trust

Canxchange has said that it plans to continue developing its operation and network of users globally, following the success seen by adopters of the platform across Europe.  The company aggregates farmers, producers and extractors and a wide range of industries under one roof; offering a wide network of vetted businesses to its members.

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Markets and industry

Oxford Cannabinoid Technologies sees positive progression

Oxford Cannabinoid Technologies Holdings has begun 2022 with a positive start and has announced a new date for the start of its Phase I trial.

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Oxford Cannabinoid Technologies provides positive update

Oxford Cannabinoid Technologies Holdings (OCTP) had a positive year in 2021 and has begun 2022 on the same foot. 

The company has reported financial results for the six-month period ending 30 November 2021 in line with expectation, during which approximately £920k of research and development costs were incurred. The costs were primarily on lead drug candidate OCT461201, which accounted for approximately £604k of the total.

OCTP and its subsidiary, Oxford Cannabinoid Technologies Ltd. (OCT) had total cash reserves of approximately £12m and no debt, having repaid a Government bounce-back loan of £50k in full. The group has noted that progress is being made on all four of its programmes.

CEO, John Lucas, commented: “We are pleased with the progress made on all four programmes during the Period. OCTP remains on time, on budget and in line with our expectations. 

“This was a busy period for the company following the successful listing in May. 

“During the first half, we made good strides across the board and, as such are excited by the potential as the year progresses and look forward to updating the market further in due course.”

2021 also saw the company enter into agreements with leading global cannabis company Canopy Growth Corporation, as well as with Aptuit (Verona) SRL, a subsidiary of Evotec SE (Evotec).

OCTP’s agreement with Canopy Growth Corporation gives the company an exclusive license to Canopy Growth’s cannabinoid library. This includes 335 derivatives and 14 patent families. Oxford Cannabinoids has now begun screening the drug-like compounds in multiple therapeutic areas, including pain, neurology, immune-inflammation and oncology. 

OCTP is working with Dalriada Drug Discovery to screen the compounds and Oxford Cannabinoid Technology’s (OCT) existing proprietary cannabinoid library. Dalriada previously designed, synthesised, and experimentally tested all of the compounds in the Canopy library and as such, OCT will be able to leverage Dalriada’s existing knowledge and experience as it continues its experimental research. 

The aim is to identify two drug candidates for pre-clinical development by the end of 2022.

A further agreement with Oxford Stemtech announced in November 2021, is supporting the research and development for all the company’s drug development programmes, with a particular focus on programmes three and four.  

Stemtech’s “pain-in-a-dish” model replicates human pain using stem cells from volunteers that are re-programmed into pain neurons. This agreement also marks an evolution of OCTP’s relationship with Oxford University Professor, Dr Zameel Cader.

OCT also entered into a £2.6m contract research agreement with Aptuit (Verona) SRL, a subsidiary of Evotec SE (Evotec) in July 2021. 

Read more: Further drug development agreement for Oxford Cannabinoid Technologies

The company has confirmed in its update that the planning phase has been completed and “wet-work”, manufacturing process development and crystallisation development have now been initiated. 

It has also confirmed that it is anticipated that Evotec will provide the OCT with a submission-ready regulatory document and an approved batch of drug product that is ready for Phase 1 clinical trials by Q1 2023. 

Originally set to commence in Q3 2022, the date for the trial has been moved to Q1 2023 due to technical issues requiring additional optimisation of the crystal development for scale-up manufacturing, which has been now successfully implemented.

The OCT board has stated this will not impact time to Phase II clinical trials, there is no material cash flow impact and the time to market is currently anticipated to remain the same.

The agreement with Voisin remains on track according to the update with a roadmap ti clinical development having been generated to support the ongoing pre-clinical package for programme one.

Voisin has also undertaken activities in preparation for the commencement of the Phase I clinical trials and is providing the  Group with regulatory support to address immediate priorities for filing and registration of Programme 2’s metered-dose inhaler in the UK and US market.

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