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Canadian investors want a piece of the American weed pie

Canadian investors want a piece of the American weed pie

On Monday, the Vancouver-based cannabis investment firm, iAnthus Capital, announced the $17 million acquisition of Valley Agriceuticals LLC, one of just 10 licensed medical marijuana producers in New York State. The proposed acquisition, according to a press release from iAnthus, will expand their portfolio into “five regulated cannabis states in the U.S.”, making it the one publicly-listed Canadian company to have the largest footprint in the American medical marijuana industry.

iAnthus Capital’s reasoning for wanting to dip its toes in New York was two-fold — gaining access to a market with 20 million potential customers, and taking advantage of the fact that medical marijuana is on the verge of becoming a sizeable industry south of our border. New York recently added chronic pain to its list of “medical cannabis indications”, meaning that doctors can legally prescribe weed for pain management. iAnthus and Valley Agriceuticals are banking on a boost in the medical marijuana patient list as a result of this change in classification.

But iAnthus isn’t alone in its interest in the U.S. cannabis sector. One of Canada’s largest medical marijuana producers, Aphria Inc., owns Copperstate Farms LLC, the biggest weed farm in Arizona, and recently announced a $25 million U.S. expansion strategy, that will be branded as “Aphria USA”. Last year, CannaRoyalty, an investor in the legal cannabis sector, much like iAnthus, moved its corporate headquarters to Ottawa, opening up the doors for Canadians to get a piece of the American weed pie.

Taking advantage of America’s stance on weed

Canadian marijuana investors are increasingly smitten by the dichotomy between a harsh federal approach to weed, and the growing leniency awarded by some U.S. states towards medical marijuana. The former situation allows Canadian weed producers to gain a first-mover advantage in the global weed industry without being shrouded by U.S. competition; the latter allows Canadian investors to utilize their know-how in untapped markets, flush with demand.

“Having watched the development of the Canadian cannabis market up close, we are seeing striking similarities between where New York is today and where Canada was a year ago, with comparable patient numbers and a limited number of competitors,” said Julius Kalcevich, CFO of iAnthus.

“America’s success story is no longer limited to Canada,” announced Aphria CEO Vic Neufeld at an April press conference to introduce “Aphria USA”. Neufeld claims that the prize in the American weed game lies in the intellectual property advantage Canadian weed producers have sheerly by being way ahead on the research and development side of things.

Indeed, marijuana companies in the U.S. are to some extent, handicapped by the fact that weed is illegal on a federal level. It prevents them from exporting beyond state borders and receiving federal tax breaks on commodity transactions. Moreover, U.S. weed producers aren’t able to pour resources into researching the benefits and side effects of medical marijuana, because patents are federally issued and patent law is murky in a situation where a drug is legal at the state level, but illegal at the federal level.

“Less constraints” in the U.S. weed market

All this, of course, presents an opportunity for Canadian weed producers, and investors to export their expertise down south. As a testament towards this bullish sentiment, a group of marijuana industry insiders recently met with TMX Group, the folks who run the Toronto Stock Exchange, to discuss how to invest in American marijuana companies directly, given that the plant is illegal federally.

Currently, according to the Canadian Press, there is an unwritten rule of sorts stating that companies trades on the TSX or the Toronto Venture Exchange are not permitted to have investments in the U.S. cannabis sector. That shuts them out from an industry that is worth US$6 billion right now, and could be worth US$50 billion by 2026.

“What investors get when they move into the U.S. is markets with less constraints,” says Khurram Malik, a weed-sector analyst at Jacob Securities. Malik claims that the fact that weed is legal only on the state level creates a simpler, more dynamic marketplace.

“You can get a business up and running a lot quicker in the States. An investor dollar stretches a lot further over there. Most things in Canada are much more expensive to set up, partly on the growing and customer acquisition side of the medical marijuana market.”

A temporary lull in the Canadian weed market

Canadian marijuana stocks have been losing some momentum of late — some licensed producers saw their stock lose around 30 percent of its value since the government officially announced a date for the nationwide legalization of weed back in April.

“That catalyst is behind you and people are realizing that there’s a year to go before it becomes clear how and where non-medical cannabis will be sold,” Beacon Securities Vahan Ajamian told BNN in an interview.

The interest in the U.S. weed market, however, is not coming at the expense of Canadian weed stocks. “There’s definitely enough place for Canadian capital in the domestic weed sector, but quite a bit of that capital is taking a pause at the moment until we have a better idea on what the recreational rules will be on the federal and provincial level,” said Malik.

“Exceptional returns”

Canadian investors looking to expose their portfolio to the American weed sector have a growing number of options. The Horizons Medical Marijuana Life Sciences ETF, a basket of North American weed stocks, recently announced the loosening of its rules to permit investors to gain access to Canadian marijuana companies that derive some portion of their revenue from being involved in the U.S. weed market — an indirect way for the individual investor to benefit from weed sector growth down South.

Beacon Securities’ Ajamian is convinced that the U.S. marijuana sector will continue to shower Canadian investors with exceptional returns over the next few years.

“We are encouraged to see the company (iAnthus) not simply twiddling it’s thumbs waiting for a potential deal — rather getting set to be a major player in the Northeast,” wrote Ajamian in a note covering iAnthus Capital’s acquisition of Valley Agriceuticals.

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