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Global cannabis stocks are plunging as investors shift from upstream to downstream markets
In the few short years since cannabis companies first floated on stock exchanges around the world, they have developed a reputation for being volatile and high risk.
At the start, stocks exploded in value, peaking around the start of 2018. Then the hype started to fizzle, but industry experts said 2019 was the year cannabis was supposed to take off again.
However, it seems most cannabis stocks in the mature market of Canada – where the drug was legalised for medical purposes in 2001 and for recreational use a year ago – have lost at least half their value over the past year.
Compared to January, stock market data shows multi-billion-dollar companies such as Canopy Growth Corp (NYSE: CGC, TSE: WEED) and Cronos Group (TSE: CRON) have dropped by more than 50%, with Tilray (NASDAQ: TLRY) plummeting by a whopping $6.7 billion, or 74%.
Medical cannabis industry expert Dr Sud Agarwal spoke with Small Caps about the reasons behind Canada’s struggling cannabis stocks and whether Australia could be heading in the same direction.
Dr Agarwal is an internationally-recognised key opinion leader in the industry who is the chief executive officer and co-founder of Australia’s largest medicinal cannabis distribution and research company, Cannvalate.
He also serves on Impression Healthcare (ASX: IHL)’s board as a non-executive director and chief medical officer.
Oversupply in Canada
The latest crowdsourced data released by Statistics Canada has shown the average price per gram of cannabis in the third quarter (June to September) fell 6.4% to C$7.37/g (A$8.29). This is the first time the price has dropped since the country legalised the drug.
According to Dr Agarwal, this is the first “alarm bell”, reinforced by Health Canada forecasting the market heading into oversupply by the end of 2019.
“Up until now, because demand has been escalating with the recreational legalisation and export opportunities, the price per gram was always going up,” he said.
Mistrust of cultivators
In addition, Health Canada recently suspended the licence of one of Canada’s top cannabis growers, CannTrust, after it was found conducting unlicensed cultivation and providing inaccurate information to the federal regulator.
Shares in the company, which was once worth more than $1 billion, were shot down with CannTrust now being valued at around $257 million.
According to Dr Agarwal, the distrust generated by the incident had a rattling effect on the rest of the market.
“That was the first time anybody started questioning cultivators, who say they’re allegedly producing a pharmaceutical grade product but are actually not adhering to pharmaceutical quality standards,” he said.
Investors shift from upstream to downstream
Dr Agarwal said one of the reasons behind cannabis stocks’ struggling performance is investor sentiment moving away from companies exposed to cultivation.
The cannabis industry is split into upstream, midstream and downstream markets.
The upstream market is comprised of companies involved in plant cultivation, specifically growers, landowners, those who build facilities, or provide equipment or software related to cultivation.
The midstream market are the value-adding services such as manufacturers, extractors and packaging companies.
Downstream is any company considered “patient-touching” such as clinics, doctor networks and researchers.
“A general trend in the public equity markets has been the redeployment of cannabis investment capital from upstream businesses to downstream businesses, particularly those with established revenue, intellectual property, diversified income streams and other non-plant-touching businesses,” Dr Agarwal explained.
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