In 2014, when the Canadian government first allowed private companies to produce medical cannabis, instead of the state, the Canadian Securities Exchange (CSE) decided to get involved in the sector, despite its questionable reputation. The medical cannabis sector is now the largest on the CSE by a wide margin. "160 of our 507 listed companies are cannabis companies," says CSE CEO Richard Carleton. The other companies engage in mining, technology, and oil, sectors in which investors are able to tolerate risk.
Trading in cannabis stocks has completely changed the CSE's status. The CSE used to be overshadowed by its big sister, the Toronto Stock Exchange. It was merely a stepping stone for small companies. Today, the CSE is attracting global attention because of its cannabis activity, and is considered the world's liveliest trading arena for cannabis companies. Carleton himself was recently described as the "cannabis king." When a cannabis company grows, it usually continues on to the larger stock exchange, but for Carleton, this, too, is a sign of success. When the company was traded on the CSE, it attracted liquidity and attention from new investors.
One decision made at the outset by the CSE was to take a chance by listing US companies operating in the US. These companies could not be listed for trading on Nasdaq or the New York Stock Exchange, because although their activity was legal in the specific US states in which they were active, it was illegal at the federal level. 64 companies listed on the CSE operate in the US, and are therefore ostensibly in violation of US federal law.
"We decided to take a calculated risk," Carleton says. "Is it likely that the US government will really enforce legal sanctions against companies operating in this sector? As of now, it hasn't happened. It could happen, and the companies disclose this to investors in their reports, after which the investors can make an educated choice. Will the US government prosecute the stock exchange? I don't think we're first in line to be prosecuted."
Carleton says that thanks to his position, the CSE has established itself as the liveliest arena in the cannabis sector. For example, he takes pride in the fact that US company MedMen is listed on CSE at a $1.5 billion market cap. The company operates in the US, and the stock exchange that was willing to assume the risk won the IPO.
"For a Canadian company, if it's listed on Nasdaq or the Toronto Stock Exchange, it's harder to operate in the US," Carleton explains. "When Canadian company Canopy (one of the world's leading cannabis companies, which is listed on the Toronto Stock Exchange, G.W.) wanted to acquire Acreage Holdings, which is listed on the CSE and operates in the US, it did not make a real acquisition, but only received an option to purchase, so that there would be no conflict about trading on the Toronto Stock Exchange. Other cannabis companies said that the deal was 'risky' from a legal point of view. Investors didn't like the deal so much because of the risk. If cannabis is legalized in the US, however, Canopy will be the first of the large companies to hold such an asset."
Fluctuation in the number of deals
At the present time, 70 companies are waiting in line to hold offerings on the CSE, but Carleton says, "The number is probably higher, because these are only the companies that have announced their intention of holding an IPO. There are also companies that have not yet publicly reported their intention, and also some that plan to merge with a stock exchange shell."
Canadian companies account for about half of the amount raised on the CSE. Other companies account for the rest, including Israeli companies and companies with an Israeli connection, such as Canna-v-cell, founded in Canada by Dr. Zaki Rakib.
"Globes": Who are the leading players in this market, other than the Israelis?
Carleton: "Latin America could be a leading force in cannabis agriculture because of the cost of labor and the weather. We have companies from the Caribbean, Jamaica, and a company from Thailand that is developing a cannabinoid-based medical product. We see fewer European companies in the cannabis sector, but the Canadian companies listed with us sometimes acquire activity in Europe, which exposes our investors to this."
What are the main trends that you see in the sector?
"One trend is a rise in the values of the Canadian companies above those of the US companies, with the higher value resulting from the fact that they have no legal risk.
"In recent months, share prices have been falling, given the challenges in the recreational cannabis sector following legalization. Companies aren't meeting their revenue targets because of the differences in policy between the various Canadian provinces, in some of which anyone can establish a store for selling cannabis, while in others, the government manages the stores. In places where the government is responsible for sales, there are few stores and the mix of products is not diverse. These stores aren't consumer-oriented.
"There were also supply chain problems that created product shortages, and as soon as a store doesn't get merchandise, the store is also affected, and is even liable to close down."
In view of this situation, will cannabis imports into Canada be allowed?
"No, no, no, and no. Agriculture is a sector of trade barriers. A province that has invested so much in creating a local market will not open it so quickly.
"The only exceptions to this attitude will be for very, very specific products with high added value, in the consumer market, but mainly in the medical market. Also, in the longer term, the cold weather in Canada will lead to price differences with the rest of the world, and Canadian consumers may then exert pressure to open the market, but that will take more time."
Have you seen similar trade barriers when Canadian companies seek to export?
"Every country has its own barriers, and where there's a severe shortage, the trade barriers are lowered. The large Canadian companies, such as Canopy and Aurora, are already marketing to Germany and other markets. They entered by acquiring local companies. That's what they did in Italy and Denmark."
Another trend cited by Carleton is the search for products with added value that generate larger profits. Differentiation can be in the product itself, or even just in the brand name and packaging. "We hear this from investors and investment bankers. They say, 'We don't want agriculture - give us brands. Give us adaptation of products to the consumer on a big data basis. Today, it's hard to position yourself as a leading company based on a leading position in agriculture and nothing else," Carleton explains.
Are the Israeli companies believed to have potential for developing such a brand advantage?
"Oh, yes. Israel is a strong cannabis brand, and has a chance of grabbing investors' attention. Although the Israeli companies don't operate in Canada, that makes no difference."
Can Israeli investors trade on the CSE?
"This is one of the things that we're working on. They can trade through an international broker or a US broker, but on the retail side, we have a small problem. But we're encouraging companies to be listed for OTC trading in the US as well, where anyone can trade, and without taking the Canadian dollar exchange rate into account. Some of the companies are also listed on the Frankfurt Stock Exchange. If an investor from Israel has access to the Frankfurt Stock Exchange and wants to trade in euros, he can do it there. But arbitrage gaps are sometimes not completely closed, and this has to be taken into account."
What else are investors looking for?
"Sales and profits, of course. Today, more than ever, the eye is on growth and cost management, meaning which company is really well managed at the operating level. This is an important point. The cannabis market is no longer just 'Wow, grass!' It's 'Let's see how we can make money here.'"
Published by Globes, Israel business news - en.globes.co.il - on June 13, 2019
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