Cannabis Insights 2019. | VT Investors

Although a number of investors across the globe got frustrated this year, in part, because of the breaking promises made by many start-up companies expecting to achieve positive results soon, or some others -by trying to get some easy money taking advantage of the cannabis honey moon-, 2019 leaves us with a lot of trends, learnings and developments performed by companies that are important to highlight:

1. Some of the big players in the cannabis arena incorporated domestic innovation strategies oriented to product development of CBD-based cosmetics. This is in response to the lack of revenue while the medical market matures, and regulations can materialize in more profitable opportunities at a faster pace.

2. Institutional investors with arguably lesser understanding of the cannabis industry are still cautious on their moves due to the poor performance of major cannabis stocks in the world, while retail investors and first-mover players paid the price of not having turnover. CannTrust (CTST), Cronos Group (CRON) and Tilray (TLRY) fell nearly 40% average in 2019.

3. Freeing up capital to certain jurisdictions like Colombia from countries such as US and Canada remains a bottleneck. Significant progress has been achieved with the SAFE Banking Act passed in the House of Representatives, but it is still unclear if it will become a law in 2020. The good news is that financial institutions are more curious on this booming industry, perhaps because they forecast a profitable new line of revenue. In Colombia BBVA is willing to work with companies with certain level of progress.

4. Real access for patients to cannabis-based medicines in most of the jurisdictions remain to be seen. Astonished progress was accomplished in 2019 with nearly 39 countries where cannabis for medical purposes is legal today. Prohibition Partners sees the medical cannabis market worth more than US$60 billion (more than adult-use market) by 2024. More countries are expected to legalise medical cannabis in the next years, among them are New Zealand and Luxemburg, however, incorporation of cannabis-based medicines in Compulsory Subsidized Health Plans or via reimbursement of costs for insurers is a bumpy road which is going to take time.

5. New players among the European countries have emerged; Ireland, France and Slovakia have incorporated important changes in their legislation towards full legalisation. Cannabis use is still restricted in most of the African countries, in connection with this, the market needs to be more mature to see real business leads in that continent. In Asia, Philippines is taking important steps towards legalisation, while some greater markets such as South Korea, Singapore and Thailand are following the path traced by a new drug approach. 33 states in the US allow cannabis for medical proposes and 11 for adult-use. The one-million-dollar question is if sooner or later, cannabis use will be legal across the US. In January 2020 possession of cannabis will be legal in the Australian Capital Territory (ACT), while access to medical cannabis was already legal. In South America, the Ecuadorian congress approved a major reform to decriminalise possession of medical cannabis and differential treatment to hemp, Colombia has opened up a debate for recreational use, and the Brazilian Health Regulatory Agency (AVINSA) approved the sale of cannabis-based products with prescription. Cultivation is not possible on this giant yet.

5 Key challenges to be addressed in 2020:

1. Organic growth: Cost reduction in preparation for the next wave where possible sales may arise, is key. Mergers and acquisitions along with capital raises will continue its downturn so companies should be cost-effective with the available resources while investor confidence resumes.

2. Education: Efforts oriented to promote more acceptance of cannabis-based products among society should not end until its stigma is fully absorbed and supported by scientific evidence. Governments, companies and third sector institutions play a critical role at paving the way to success.

3. Corporate Social responsibility (CSR): Now companies are closer to perform in a competitive market, so those businesses concerned not only about the economic aspects, but also about social and environmental issues with a sustainability approach will differentiate from others. Available resources including standards and certifications are now available for companies.

4. Investor confidence: Retail investors were already captivated by sophisticated business plans, however larger and institutional investors are needed to play the game as well. As this is a highly regulated industry and most of the countries are learning almost at the same pace, cycles are normal but sometimes does not enable predictions, in contrast, policy makers and regulatory bodies along with research institutions must act faster in order to add more and more potential customers, and create a business environment for investors.

5. Quality and R&D: Tireless efforts towards quality must continue in order to incorporate Colombian companies in the global supply chains of cannabis.

Author  Juan C Vargas, Partner at VT Investors.