Cannabis Industry in NORTH AMERICA and Europe

Published by CityU Student Research & Investment Club

Charts & Graphs

SINGH Mandeep

THE FINAL PAGE OF THIS REPORT CONTAINS A DETAILED DISCLAIMER The content and opinions in this report are written by university students from the CityU Student Research & Investment Club, and thus are for reference only. CityU Student Research & Investment Club is not responsible for any direct or indirect loss resulting from decisions made based on this report. The opinions in this report constitute the opinion of the CityU Student Research & Investment Club and do not constitute the opinion of the City University of Hong Kong nor any governing or student body or department under the University.

CITY UNIVERSITY STUDENT RESEARCH AND INVESTMENT CLUB (CURIC) DOES NOT CONDONE THE ILLEGAL USE OF DRUGS, IN PARTICULAR, THE USE OF CANNABIS FOR ANY PURPOSES. ANY MENTION OF DRUG USE IN THIS REPORT PERTAINS EXCLUSIVELY TO LEGAL DRUG USE IN COUNTRIES WHERE LEGAL ADJUSTMENTS

FOR DRUG USE HAVE BEEN MADE.

Copyright © CityU Student Research & Investment Club 3 Table of Contents Industry Overview ...... 5 Introduction ...... 5 What is Cannabis?...... 5 Legal Status ...... 6 Key Players ...... 8 Segments in the Cannabis Industry...... 11 Medical ...... 11 Recreational ...... 15 Industrial Hemp ...... 19 CBD Oil ...... 21 Supply Chain ...... 24 Upstream (Producers & Wholesale) ...... 24 Midstream (Distribution)...... 25 Downstream (Retailers) ...... 25 Investing Opportunity ...... 26 Drivers of Change ...... 27 Political Factors ...... 27 Medical Factors ...... 28 Social Factors ...... 28 Economic Factors ...... 29 Challenges ...... 29 Political ...... 29 Economic ...... 30 Industrial ...... 31 Deals In this Space ...... 31 Mergers and Acquisitions ...... 31 Venture Capital ...... 32

Introduction

The Cannabis industry is now one of the most promising and fast-growing industries in the world. Reports suggest that the global legal marijuana market size was estimated at USD13.8 Billion in 2018 and is projected to grow at a CAGR of 23.9% to USD66.3 Billion by 2025. Currently, the global Cannabis market is dominated by the U.S, Canada and several other European countries. Combined, these account for 97% of the total market size in the world. Data as of 2019 suggests that United States is the undisputed leader in the world with USD11.1 Billion in sales revenue, followed by Canada with USD1.1 Billion and Europe with USD700 million.

While the Cannabis market is currently concentrated in a few countries and regions, its consumer base is expected to broaden with more countries legalizing Cannabis usage in different capacities.

Global Legal Cannabis Market Size

Canada 12%

Rest of the US World 80% 3%

Europe 5%

Figure 1

What is Cannabis?

Whilst most people intuitively perceive the term “Cannabis” as the drug, Cannabis is actually a genus of flowering plants in the family Cannabaceae, which consists of three primary species: Cannabis sativa, Cannabis indica, and Cannabis ruderalis. The different varieties of products that are known to the public are derived from these source plants.

Copyright © CityU Student Research & Investment Club 5 Cannabidiol (CBD) and tetrahydrocannabinol (THC) are two natural compounds found in the plants of the Cannabis genus. They have very similar chemical structures and provide many similar medical benefits but are different in psychoactive effects. THC is associated with “high/intoxicating” sensation and euphoric effects. Therefore, the differences in the concentration level of these two compounds in the Cannabis- derived products will drastically differentiate their effect, usage and even legality relative to each other.

Different terms are used to classify the Cannabis-derived products that contain different amounts of CBD and THC. For instance, Hemp is a term used to classify the varieties of Cannabis that contain 0.3% or less THC content (by dry weight) and the term Marijuana, on the other hand, is used to describe Cannabis with a THC concentration higher than 0.3%, and is commonly regarded as a controlled substance and still prohibited in majority of the countries in the world.

Legal Status

So far, more than 23% of the world has legalized the usage of Cannabis at different levels. Among these countries, 45 have legalized Cannabis for medical use; while only 4, including South Africa, Georgia, Uruguay and Canada, have legalized Cannabis for recreational use as well.

Figure 2 Region Total countries in No. of countries No. of countries No. of countries the region in the region with in region with that legal medical legal recreational decriminalized Cannabis Cannabis recreational programmes programmes usage Africa 54 2 1 0 Asia 48 4 0 1 Americas 35 10 2 14 Europe 44 26 1 13 Oceania 14 3 0 1 Total 195 45 4 29

* The U.S. is not included in the list as Cannabis is illegal at the federal level. However, 33 states have legalized Cannabis for medical use and 11 have legalized for adult-use, with an additional 15 states with decriminalized Cannabis usage.

Because of different legal status, the usage of Cannabis greatly varies across the world. The industry is just starting to gain some traction while initiating trends to follow in the future. Even within a country, the

Copyright © CityU Student Research & Investment Club 6 Cannabis policy can be inconsistent among different states or cities. United States, for example, is currently one of the largest Cannabis markets in the world with 33 out of the 50 states having legalized Cannabis usage in different capacities, yet it still remains illegal at the federal level.

We believe that it is fair to say that the industry is currently experiencing a legalization trend as more and more countries begin to legalize or at the very least decriminalize the usage of Cannabis in some or the other form. However, decriminalized status should not be seen as equivalent to legalized. Decriminalization is the loosening of criminal penalties imposed for personal use of marijuana, even though the manufacturing and sale of the substance remain illegal. This means instead of criminal charges; defendants face civil fines.

The constituents of the markets which this report focuses upon, the United States, Canada and several countries in Europe, are as follows. Out of all, the US has the most users of Cannabis in one form or another, at 36 million Americans (aged 18 and above.) Following this, the European Union has 16.6 million individuals using Cannabis. Lastly, Canada has 4.9 million, or 16% of Canadians aged 15 and older (who have consumed Cannabis in the previous 3 months).

Key Players

Tilray Inc. (TICKER: TLRY)

Market Cap USD 2.19 Bn (06/11/2019) Stock Price USD 22.43 (06/11/2019) Revenue 2018 USD 43.1 Mn

Tilray Inc. engages in the research, cultivation, processing, and distribution of medical Cannabis. The company offers its products to patients, physicians, pharmacies, governments, and hospitals; and for researchers for commercial purposes, and compassionate access and clinical research applications. It operates in Argentina, Australia, Canada, Chile, Croatia, Cyprus, the Czech Republic, Germany, New Zealand, the United Kingdom, the United States, and South Africa. The company was incorporated in 2018 and is headquartered in Nanaimo, Canada.

Canopy Growth Company (TICKER: WEED)

Market Cap USD 6.91 Bn (06/11/2019) Stock Price USD 19.88 (06/11/2019) Revenue 2018 USD 139 Mn

Canopy Growth Corporation, together with its subsidiaries, engages in production, distribution, and sale of Cannabis in Canada. It operates through two segments, Cannabis Operations and Canopy Rivers. The company's products include dried flowers, oils and concentrates, soft gel capsules, and hemps. It offers its products under the Tweed, Spectrum, DNA Genetics, CraftGrow, Tokyo Smoke, DOJA, Van der Pop, and Maitri brands. The company also provides growth capital and a strategic support platform that pursues investment opportunities in the global Cannabis sector. Canopy Growth Corporation has a clinical research partnership with NEEKA Health Canada to investigate the efficacy of cannabinoids for the treatment of post-concussion neurological diseases in former NHL players; partnership with Parent Action on Drugs; and a collaboration with Cure Pharmaceutical Holding Corp. for the development of low dose cannabidiol oral thin films. The company was formerly known as Tweed Marijuana Inc. and changed its name to

Copyright © CityU Student Research & Investment Club 8 Canopy Growth Corporation in September 2015. Canopy Growth Corporation is headquartered in Smiths Falls, Canada. Aurora Cannabis Inc. (TICKER: ACB)

Market Cap USD 3.87 Bn (06/11/2019) Stock Price USD 3.76 (06/11/2019) Revenue 2018 USD 41.9 Mn

Aurora Cannabis Inc. produces and distributes medical Cannabis products. It is vertically integrated and horizontally diversified across various segments of the Cannabis value chain, including facility engineering and design, Cannabis breeding, genetics research, production, derivatives, high value-add product development, home cultivation, wholesale, and retail distribution. The company produces various strains of dried Cannabis, Cannabis oil and capsules, and topicals kits for medical patients. It also sells vaporizers; consumable vaporizer accessories, including valves, screens, etc., and herb mills for using CanniMed herbal Cannabis products, as well as grinders and vaporizer lockable containers. In addition, the company engages in the development of medical Cannabis products at various stages of development, including oral, topical, edible, and inhalable products; and operation of CanvasRX, a network of Cannabis counseling and outreach centers. Furthermore, it provides patient counselling services; design and construction services; and Cannabis analytical product testing services. As of September 11, 2019, the company had operations in 25 countries across five continents. Aurora Cannabis Inc. is headquartered in Edmonton, Canada.

GW Pharmaceuticals PLC (TICKER: GWPH)

Market Cap USD 4.14 Bn (06/11/2019) Stock Price USD 134.75 (06/11/2019) Revenue 2018 USD 13 million

GW Pharmaceuticals plc, a biopharmaceutical company, focuses on discovering, developing, and commercializing cannabinoid prescription medicines using botanical extracts derived from the Cannabis plant. Its lead product is Epidiolex – an oral medicine for the treatment of refractory childhood epilepsies, as well as for the treatment of Dravet syndrome, Lennox-Gastaut syndrome, tuberous sclerosis complex, and infantile spasms. The company also develops and markets Sativex, an oromucosal spray for the treatment of spasticity due to multiple sclerosis. In addition, it develops various product candidates for the treatment of glioblastoma, neonatal hypoxic-ischemic encephalopathy, and schizophrenia. Furthermore, the company has license and development agreements with Almirall S.A., Bayer HealthCare AG, Ipsen

Copyright © CityU Student Research & Investment Club 9 Biopharm Ltd, and Neopharm Group. It primarily operates in Europe, the United Kingdom, the United States, Canada, and Asia. GW Pharmaceuticals plc was founded in 1998 and is based in Cambridge, the United Kingdom. It is also important to note that the revenue for Q2 2019 for GWPH is USD 72Mn. This result is mainly because of the drive in sales of Epidiolex.

Cronos Group Inc. (TSE: CRON)

Market Cap USD 2.8 Bn (06/11/2019) Stock Price USD 8.23 (06/11/2019) Revenue 2018 USD13.02 Mn

Cronos Group Inc., formerly known as PharmaCan Capital Corp., is a principal investment firm. The firm invests in companies that are either licensed, or actively seeking one, to produce medical marijuana pursuant to Canada's Marijuana for Medical Purposes Regulations (MMPR). The firm typically invests in companies based in Canada. The firm, which is primarily an equity investor, may also advance debt as appropriate. The firm seeks board representation in-line with the size of the investment but does not need control. Cronos Group Inc. was incorporated in January 2013 and is based in Toronto, Canada.

Although Cannabis has existed in mankind's history for over 10,000 years, in the modern era, the major usage of Cannabis can be broadly divided into 3 categories: Medical, Recreational and Industrial.

Medical

The Global Medical Marijuana market was estimated at approximately USD11.8 Billion in 2017 and is expected to grow to USD40.9 Billion by the end of 2024 at a CAGR of about 19.4% between 2018 and 2024.

One of the stereotypes associated with consuming Cannabis is that it is solely used for pleasure/recreational purposes. However, in recent times, Medical Cannabis has been gaining a lot of attention, as a result of which many pharmaceutical companies are investing into R&D for its usage in treating critical medical diseases and conditions. Medical Cannabis is usually referring to products containing high CBD content, which helps in subsiding pain and inflammation, controlling epileptic seizures and possibly even mental illness and addictions.

Copyright © CityU Student Research & Investment Club 11 All these factors together contribute towards a substantial and quick growth of the CBD Market. The global CBD market is expected to grow from USD14.54 Billion in 2018 to USD17.35 Billion by 2026 at a CAGR of 36.3% during the forecast period of 2019-2026.

The United States Market

In 2019, new medical markets including Florida, Maryland, Ohio, Oklahoma and Pennsylvania saw strong patient demand of medical marijuana, broad lists of qualifying conditions and adequate access to dispensaries. These factors propelled sales beyond initial expectations.

Two of the most comprehensive medical markets in the nation – California and Michigan – will probably see precipitous declines in MMJ sales as recreational programs in both states get off the ground. Moreover, only a few states remain where medical use is not legal including South Dakota, Wisconsin, and Wyoming – many of whom have expressed little to no concern in changing that.

Medical Use; US Estimated Sales Figures (in USD Billion)

7.65 7.1 7.1 7.5 6.15

4.7 Total ($) Retail Sales Total

2018 2019 2020 2021 2022 2023

Figure 3

Figure 3 shows the growth in terms of revenue of the Medical sector in the U.S. over the forecasting period of 2018 – 2023.

All Cannabis Users

Medical Only Recreational 16% Only 61%

Medical/ Recreational 23%

Figure 4

The Medical Cannabis Market in Canada generated approximately USD450 million in 2018. According to AllianceGlobalPartners, the whole Canadian Cannabis market is expected to experience a 38% CAGR growth during the period 2019-25. The estimates assume clinical trials supporting the benefits of the plant as well as increases insurance coverage.

Medical Use: Estimated Canadian Sales Figures (in USD Billion)

0.9

0.8 0.8

0.7 0.7

0.6 Total ($) Retail Sales Total

2018 2019 2020 2021 2022 2023

Figure 5

In Canada, Canopy Growth (TICKER: WEED) is the market leader with 25% of the market share and approx. 83,000 registered patients. Listed below are the prices per gram of WEED. They also show the potential of international expansion as the price of the same company in Germany is 47% higher than in Canada.

Canadian Medical Market 3rd Quarter 2019: Price Per Gram

Others 29% WEE D 13.28 9.03 Canntrust 6.96 17%

Canada Adult use Canada Medical Germany TLRY ACB 8% 21%

Figure 6 Figure 7

The European Market

According to a new report, Europe is expected to become the world’s largest market of Cannabis. With a population more than double that of the US and Canada combined, the region has great potential which is already starting to show. The industry in the region has grown more in last year (2018) than the last six combined.

France, the UK, and Spain are reviewing current legislation, while countries considered industry leaders – Germany, Italy, and the Netherlands – are focusing on expanding their existing medical programmes. The total number of estimated Cannabis users is 25 Million with ages 15 to 64. Germany has the most extensive customer base for Cannabis among all EU nations. It is estimated that the medical Cannabis market alone will be worth USD8.5 Billion. Germany intends to pursue the local cultivation of Cannabis for medical purposes.

Nevertheless, companies entering this space might need to spend between USD33.1 - USD66.2 million due to high application fees and exacting requirements. These costs will remain high over the following 1-and- half years, at least, as supply deficits guarantee strong sales and high market prices for any successful applicant.

Revealed by a 2016 UN report, England exported 2.1 tons of medical marijuana that year. This accounted for around 70% of the world’s total legal Cannabis exports while producing 95 tons of this "green gold" for

On the other hand, Britain’s black-market Cannabis trade is worth USD3.31 Billion per annum, with 255 tons traded to 3 million users in the UK between the 2016/2017 period. From these statistics, the Institute of Economic Affairs (IEA) has concluded that if Cannabis was legalized, tax revenues alone could exceed USD1.27 Billion per year.

Interestingly, Portugal is emerging as a top hub for medical Cannabis production and distribution. Aurora Cannabis and Tilray have invested in production facilities in the country. Tilray CEO, Brendan Kennedy, highlighted the lower production costs on operating in Portugal in the company's recent Q4 conference call. Tilray CFO Mark Castaneda said that its Portuguese facility will be used "to meet demand from countries around the world".

Recreational

Recreational marijuana is also known as adult-use marijuana. It can be purchased, particularly in American states like Colorado and Washington, by anyone who is at least 21 years old with a valid government-issued ID from a recreational dispensary. Strict by-laws govern recreational Cannabis pharmacies in contrast to medical Cannabis pharmacies. Generally, recreational Cannabis strains have higher levels of THC. There are a number of factors to increase in consumption, and therefore demand of Recreational Cannabis. Some of which are – elevates mood, reduces anxiety/strain, helps sleep, increases creativity, improves sex life, etc.

Factors increasing recreational Cannabis Factors decreasing recreational Cannabis To help relax or sleep Traffic accidents and deaths increase To reduce stress or anxiety It is addictive To have fun with friends Emergence of Black Market To improve mood Increase in medical related emergencies As an alternative to alcohol Negatively effects brain To make activities more interesting Increase mental health problems For specific medical reasons such as acute pain hurts businesses by causing preventable accidents relief, etc. and lost productivity.

To increase creativity or expressiveness Harms the Environment Figure 8

The United States Market

Advocates of legalizing Recreational Marijuana said that it would boost the economy by creating employment, free up scarce police resources, and reduce or prevent the enormous racial prejudice in marijuana enforcement. Moreover, regulating marijuana will not only break the back of drug cartels by taking away business from them, but also lower street crime, and make marijuana use safer through required testing, labeling, and child-proof packaging.

Sale of U.S. retail marijuana is on pace to surge by 35% in 2019. Additionally, sales in mature markets such as Colorado, Oregon, and Washington state continue to increase, although slowly. By the end of 2019, each of those states could experience single-digit YOY sales gains – the first time that this would have happened in a recreational marijuana industry. Nationwide recreational sales are set for a significant increase in the

Recreational Use; US Estimated Sales Figures (in USD Billion)

20.05 17.4 14.35 Total ($) Retail Sales Total 11.2 7.75 5.75

2018 2019 2020 2021 2022 2023

Figure 9

Copyright © CityU Student Research & Investment Club 16 coming years, as California and Massachusetts are supposed to hit their strides by 2020, and markets such as Maine and Michigan are expected to come online.

The above figure shows the growth in terms of revenue of the recreational sector in the U.S. over the forecasting period of 2018 – 2023. The recreational sector is set to overtake the medical one, both in terms of YOY growth and revenue. Already, sales revenue generated from medical & recreational sector dominate the overall revenue generated from the industry. The world's two largest Cannabis markets, the U.S. and Canada, together contribute about USD11 Billion worth of spending on medical and recreational use of Cannabis (as of 2018).

The Canadian Market

Reports suggest that the recreational Cannabis market in Canada generated approximately USD115 million in 2018. As mentioned earlier, the market is expected to experience a 38% CAGR growth

Recreational Use: Estimated Canadaian Sales Figures (in USD Billion)

3.1

Total ($) Retail Sales Total 2.3 1.6

0.8 0.2 2018 2019 2020 2021 2022 2023 during 2019Figure-25. 10The estimates assume the availability of novel form factors, and an increase in B&M stores which will help in better competing with the black market. In the recreational market, Canopy Growth Company is also the market leader.

Figure 11

The European Market

Whilst recreational Cannabis is illegal in almost every EU country, cities such as Amsterdam and Barcelona are known for their social clubs and coffee shops. Punishments for marijuana possession and consumption vary: some EU countries have prison sentences, but others have entirely decriminalized possession of small amounts (Portugal, Germany and Spain). According to a 2016 World Health Organization survey, France had the highest number of teenage Cannabis users in the world. To date, more than USD558 million has been invested in the Cannabis Market as a whole.

The Netherlands is laying the foundation to become the first country in Europe to allow the production of adult-use (recreational) marijuana. Although initially, the program would be considered an experiment, it would permit a minimum of six and a maximum of 10 Dutch municipalities to participate.

“Since the beginning of 2018, Germany, Denmark, Malta, Greece, and Italy have all discussed the

Canadian Recreational Market

WEED Others 32% 45%

TLRY ACB 5% 18% possibility of a fully regulated Cannabis market, while Luxembourg has promised to introduce a regulated adult use market before 2023. By 2028, we estimate the European recreational Cannabis market will be worth €65 Billion. New products, distribution, and supply channels have further advanced Cannabis consumption and presence throughout Europe over the last 10 years,” the European Cannabis Report states.

Meanwhile, an analysis by Deloitte highlights that the legal Marijuana market in Europe could grow to USD4.3 Billion.

Hemp has been regarded as the strongest natural fiber in the world and has over 10,000 years of history with mankind using it to produce crucial resources such as food, rope, clothing, paper, housing material, CBD oil and more. Hemp started gaining attention and interest after the passage of the 2018 Farm Bill in December which removed Hemp from the Federal Drug Enforcement Administration’s list of controlled substances and put it under the oversight of the U.S. Department of Agriculture (USDA).

The global industrial hemp market is expected to grow from USD4.41 Billion in 2018 to USD14.67 Billion by 2026 at a CAGR of 16.2% during the forecast period 2019-2026. The growth of the industrial hemp sector is very likely stimulated by the increasing application and demand in industries and the growing legalization of hemp cultivation.

The United States Market

The new rules call for the USDA (United States Department of Agriculture) to award hemp planting licenses to farmers, but the agency has not yet regulated the process, meaning individual states are still issuing the licenses. Industrial hemp plantings this year could double from the 78,176 acres seeded in 2018 to 156,352 in 2019, said Eric Steenstra, President of advocacy group ‘Vote Hemp’. U.S. sales of hemp reached USD1.1 Billion in 2018 and are projected to reach USD1.9 Billion by 2022, according to ‘Vote Hemp’ and Hemp Business Journal, a trade publication.

The Canadian Market

Copyright © CityU Student Research & Investment Club 19 According to the most recent data from Health Canada, 77,800 acres of industrial hemp was planted in 2018 – 30,000 acres (38.5%) in Alberta, 27,100 (35%) in Saskatchewan, and 11,500 acres (15%) in Manitoba.

Industrial Hemp in Canadian Market

Manitoba 17%

Alberta 44%

Saskatchewan 39%

Figure 12

According to market experts, over 90% of the seed for hemp cultivation is produced and manufactured in Canada. Hemp seed yields typically reach nearly 1,000 lb./acre on dryland (around 22 bushels/acre on a 44-pound bushel), and up to 3,000 lb./acre on irrigated fields. Certified organic hemp production is a growing trend, reaching about half of the total output, according to industry estimates. In 2018, Canada exported approximately 5,400 metric tons (MT) of hemp seed valued at nearly USD50 million. More than 70% of Canada’s export volume went to the United States, followed by South Korea and the European Union (EU) member countries. Canada has generally imported insignificant amounts of hemp seed under HS 1207.99. In 2017, Canada imported 726 MT of hemp seed, valued at USD1 million, mostly from the United States (323 MT), followed by EU countries and China. In September 2018, the federal government declared an investment of CAD 330,550 (around USD 250,000) for the Canadian Hemp Trade Alliance (CHTA) to develop industry-wide grading standards so that Canadian hemp products could be known globally for their quality and consistency.

The European Market

Switzerland is developing an impressive and competitive hemp market. Coop, the Swiss supermarket chain, now stocks Cannabis cigarettes high in CBD (around 20%). Swiss-brand Heimat, produced by Koch & G sell AG, launched Cannabis cigarettes in July 2017 to add to their existing range of hemp-infused products such as iced tea, beer, and food supplement oils.

Copyright © CityU Student Research & Investment Club 20 France is the world’s leader in hemp seed production, currently responsible for 59% of the total seeds globally. The country also dominates the market for use of hemp fiber, accounting for over 50% of hemp- based pulp and paper production in Europe, even though only 20 specific strains are allowed to be cultivated legally. While dwarfed by France, Germany’s industrial hemp production is in the top five in Europe.

The Chinese Market

In 2014, the Ministry of Public Security Global Hemp Sales in (Billions $USD) said it found a large number of unregistered hemp and marijuana plantations across the USA 1 Europe nation, particularly in Jilin and Inner 0.98 Mongolia. According to Hanma Industrial Group Co. Ltd.’s website, half a million hectares of land were used to grow hemp in Anhui province, close to Shanghai in South & Central America eastern China, in 2014. Other provinces, China 0.22 excluding Heilongjiang and Yunnan, 1.2 accounted for 0.4 million hectares. Figure 13

China permits the sale of hemp seeds and hemp oil and the use of CBD in cosmetics, but it has not yet approved cannabidiol for use in food and medicines. So, for now, the bulk of Hempsoul’s product — roughly two tons a year — is bound for markets overseas. It is interesting to note that whilst Cannabis is still illegal in China, it is the largest supplier of Hemp in the world with nearly USD 1.2 Billion in 2018, followed by the United States (USD 1.0 Billion), Europe (USD 980 million) and South and Central America (USD 220 million).

CBD Oil

Cannabidiol, also known as CBD, is extracted from hemp plants and marijuana. It possesses numerous medical benefits, such as anti-anxiety, anti-inflammatory, etc. It does not contain any intoxicating effects, and therefore it is best known as non-psychoactive phytocannabinoid.

The Global CBD market is expected to reach USD17.3 Billion by 2026 from USD1.4 Billion in 2018 at a CAGR of 36.3% during the forecasting period 2019-2026. Adoption of various Cannabis products

Copyright © CityU Student Research & Investment Club 21 simultaneously with increasing consumer expenditure on Cannabis products, usage of CBD in medical applications, and significant Research and Development investments in the pharmaceutical industry have spurred the growth of the industry.

Currently, the CBD market in the US is worth USD3 Billion and is expected to reach USD25 Billion by 2025. As expressed in the graph below, this market has great potential but is currently in the initial developing stages. Many corporations would be willing to seize this opportunity to either expand their current base or to enter the US Market (e.g. Canopy Growth Corporation (TICKER: WEED)).

The sales of CBD in the USA are expected to swell fivefold until 2024 because of the spurt of new products and distribution channels. The most significant determinant of this growth might be a swell in hemp-based CBD sales via general retail outlets such as CVS and Kroger, plus mass merchants such as Walmart. The sale of CBD-based Epidiolex* of GW Pharmaceutical accounts for current pharmaceutical channel sales in the U.S. Figure 14 US CBD Sales (Billions($)) 12.6 General Retail

9.4

6.7

5.3 Dispensary 4.4 4.6 4.1 3.5 2.8 2.1 2.2 Pharmaics 1.8 1.4 1.5 1.2 1 1.2 0.6 0.6

2018 2019 2020 2021 2022 2023 2024

* Epidiolex (cannabidiol) is a prescription medicine used to treat seizures in people with Lennox-Gastaut syndrome or Dravet syndrome.

Analysts at U.S. financial services firm Cowen & Co estimate that products with CBD as an ingredient will generate USD16 Billion in retail sales for humans and animals in the U.S. by 2025. Companies are also

Copyright © CityU Student Research & Investment Club 22 making big bets: Kroger Co, the nation’s largest grocery chain, said that it plans to sell CBD creams, balms and oils in nearly 1,000 of its stores across 17 states. Unilever Plc’s Ben & Jerry’s ice cream chain said in a May 30 statement that it planned to debut CBD-infused ice cream flavors, as soon as consuming the oil is “legalized at the federal level.” In Kentucky, which launched a pilot program for hemp in 2014, farmers who used to grow tobacco are finding hemp grown for CBD oil to be a profitable alternative with a better reputation. Farther west, in the U.S. midsection where farmers are more familiar with commodity crops, like corn and wheat and have been more scarred by the trade war, some see hemp as a rotational crop grown on a larger scale for seed and fiber, rather than for its labor-intensive CBD oil.

CBD infused products sold through licensed dispensary channels in legal Cannabis states may account for only about 26% of the category sales in 2024, down from 65% currently, according to BDS Analytics Data.

Figure 15 Cannabis Oil Sales Market in Canada (Liters)

5,688

5,122 4,968 5,012 5,064 4,683 4,760 4,686 4,533

The graph above shows the sale of CBD Oil in Canada from Oct’18 to Jun’19. The variation experienced in roughly 10% month on month.

Reports suggest that CBD industry in the UK could be around USD1.28 Billion a year by 2025, which will be equivalent to the current UK Herbal Supplement industry in size. The German supermarket chain Lidl began selling low-THC, high-CBD Cannabis products in Switzerland, as alternatives to tobacco, the Botanicals produced two varieties at the price of USD16.6 for 1.5 grams. This company offers Cannabis strains produced in automated greenhouses through sustainable agriculture and claims to be completely organic. Meanwhile, another company, KannaSwiss, has begun selling CBD oil for a rather steep price at 150.18 USD in Switzerland.

Although Germany is the most prominent Medical Cannabis market in Europe, the largest European CBD markets right now are the United Kingdom and Austria. Brightfield Group estimates that by 2023, the CBD markets in the U.K. and Austria would reach USD440.8 million and USD137.4 million respectively.

Supply Chain

The Cannabis industry can be divided into two main parts: plant touching and ancillary businesses. The primer refers to cultivations, processing, distributions and retail. The latter refers to companies providing B2B support for growth, processing and sale of Cannabis products, without actually touching the plant itself. Examples of such businesses include data platforms, accessory manufacturers, agricultural technology, legal field, banking solutions, consulting, digital marketing, and infrastructure.

Among all the aspects of the Cannabis industry, the supply chain management appears to be a segment that people are intrigued about. The following section will give an overview of the supply chain of the Cannabis industry.

Upstream (Producers & Wholesale)

Sample Cultivation Harvesting Testing Processing Packaging Wholesale Testing

As Cannabis is essentially an agricultural product, the very first step of the Cannabis production is farming. The cultivation process of Cannabis can be done either indoor or outdoor, and like any crop, the quality will be affected by the growing environment and the manner in which it is grown. Companies that invest heavily in this stage are looking for technologies and proprietary growing methods of growing that can offer a consistent and dependable harvest schedule that can shorten the time it takes for the Cannabis plant to mature and at the same time, enhance the quality.

Once the crop is mature, the harvest will be sent to a wholesaler for the drying and trimming process and then, based on the regulations of different countries and states, these semi-finished products are usually required to go through a lab test which will provide reporting on cannabinoid potency and the presence of pesticides and other foreign agents.

Copyright © CityU Student Research & Investment Club 24 Then, the dried Cannabis products will be processed and transformed into different types of end products, including vaporizers, topicals, edibles and more. These finished products will then go through another sample testing to make sure the products are made from the same original harvest and with the same constituents. These test results are then associated with that batch in the state’s seed to sale software.

If the finished products can pass the testing, they will go into the final stage before wholesaling to the distributors, which is the stage focused primarily on the packaging and branding of the products. One thing to mention is that many ancillary companies are engaging in the production and wholesale support include packaging, banding, testing, and seed to sale software development.

Midstream (Distribution)

The packaged and branded products will wholesale to different distributors in the market. Since the industry has just recently turned into a legalized business, it is still new and has not developed a mature reselling system.

Therefore, at this stage, they are still many forms of Cannabis distributors in the market. The 5 major types of distribution are as follows: • Shipping product on behalf of the wholesaler • Warehousing product on behalf of the wholesaler • Serving as an external sales team for the wholesaler • Collecting payments from retailers and moving money on behalf of the wholesaler • Contract manufacturing of product

As the industry is growing larger and more mature, we believe there will be a consolidation and simplification of these models in the near future.

Downstream (Retailers)

The legal sources to buy Cannabis at this stage are usually through licensed retailers, often called dispensaries. Like other retail stores in other industries, these dispensaries will provide different types of Cannabis products with different qualities in order to cater their customer demographic.

Copyright © CityU Student Research & Investment Club 25 An important thing to notice is that the retailers are usually required by the law to input their inventory into a seed to sale software system to ensure the traceability of every unit of product from the moment it was placed in the soil all the way through to its purchase by a consumer.

Investing Opportunity

The cultivation and retail sectors of the Cannabis Figure 16 industry are by far the most profitable sectors in the investment circle. While most people are looking for investment opportunities in the “plant-touching” companies, firms within the cultivation and retail sectors appear to be highly volatile. Some of the big names of the Cannabis industry engaging in the cultivation and retail business have been suffering severe loss recently, including Cronos Group and Green Thumb Industries, whose stock price has decreased by 50% over the past six months.

The major factor that lead to the setback of the “plant-touching” companies might be the possible change in the U.S. federal law of lifting the interstate trade restriction. If the interstate trading restriction is cancelled, it could shake the supply of the industry due to a free flow of Cannabis supply within the U.S. As a result, the oversupplied states could quickly flood the market with cheap supply, and companies that are high-cost growers and in area with less favorable climates for Cannabis growing will be undercut. Therefore, the prospect for these plant-touching companies is full of uncertainty.

An alternative to the investment into the cultivation and retail companies will be investing into the ancillary business of the Cannabis industry. Investing into the “non-plant touching” companies will be a safer option, as their businesses are not directly affected the supply or demand of Cannabis, and they can make profit as long as there are more players in the industry that they can provide services to.

In addition to the above factors the Cannabis stocks are further very volatile/falling down because of: 1. Shift from Upstream to Downstream 2. Oversupply in Canada (as a result of which price per gram is falling)

Copyright © CityU Student Research & Investment Club 26 3. Mistrust of Cultivators (Health Canada recently suspended the license of a top Cannabis grower CannTrust after it was found conducting unlicensed cultivation and giving inaccurate information).

One of the lucrative segments within the Cannabis ancillary sector will be the real estate investing (Canna- Real Estate). As more and more countries and states are considering legalizing Cannabis, it is foreseeable that there will be a booming demand for land and property that can be used as a Cannabis cultivation factory.

Investing in a Cannabis real estate trusts is also another option. A major problem that the Cannabis growers in the U.S. are facing now is that they cannot apply for a regular loan or mortgage to facilitate their business expansion, as Cannabis is still illegal at the federal level and the banks are still very conservative towards the industry. The function of these Cannabis real estate trusts is to provide financing solutions to these growers, usually in a sale and lease-back format, so that the Cannabis company will have free cash flow to finance their expansion plan. A good example of a profitable Cannabis real estate trust will be Innovative Industrial Properties (NYSE: IIPR). The company usually makes a rental yield of 15% on these deals (double the U.S. average for industrial property) and its stock price has gone up by 96% so far in 2019.

Drivers of Change

There are several factors that drive the booming Cannabis industry, such as legalization, shifting of the consumer base, the economic conditions, etc. All of these factors can be divided into three different aspects, political, medical, and social.

Political Factors

The legalization of the Cannabis industry helps in reaching the true potential and, thus, can affect the industry in a major way. Currently, several countries allow legal trading of industrial Cannabis. Legalization from the government can regulate the industry so that providers have to ensure the quality of the product; additionally, investments can only be conducted via trusted agencies when there is government intervention.

Sources suggest that “broader legalization and the advent of fresh consumers and consumption missions will drive the legal market to around 80% of the total, at USD166 Billion in 2025 when legalization is in place”.

Copyright © CityU Student Research & Investment Club 27 The legalization of marijuana in the Canadian market has increased the total sales by 10% in just one quarter. That said, legalization offers stability in the economy for the industry, and hence the investor will be more convinced and confident about the idea of investing in this industry. Therefore, in terms of politics, legalization of the Cannabis industry creates a momentum that aids a dramatic increase in the size of the industry.

Medical Factors

Since 2010, the Cannabis industry was stormed by the innovation of new products; this includes vaping equipment, different edible products such as olive oil and beverages. There is still extensive research taking place and products undergoing development and testing stages. If Cannabis-related products are removed from the Schedule I classification i.e. the drug which is not considered safe and not accepted for medical use even if used under medical supervision, the medical sector of Cannabis is expected to see a notable increase. Various breakthroughs in the pharmaceutical development of Cannabis has boosted the growth of the industry. With ever-evolving medical technology, it was discovered that Cannabis has a good curative effect on various intractable diseases such as depression, epilepsy, Parkinson's disease, skin disease, and mental illness.

This status change would allow for rapid adoption across the USA, potentially developing into a more significant segment of the Cannabis market virtually overnight. Given the 2018 U.S. Farm Bill (ending hemp prohibition and making hemp a legal commodity in the US), some analysts expect that hemp-related products, in particular, could be on the rise in 2019 but it’s too soon to tell as the law still categorizes hemp derived CBD products with less than 0.3% THC as a schedule I drug. Till now, only EPIDIOLEX has been rescheduled from a Schedule I to a Schedule V drug (FDA-approved drugs that contain CBD derived from Cannabis and no more than 0.1% THC).

Social Factors

The socially increased acceptance of Cannabis has diversified the consumer base. As more and more people believe that smoking and alcohol consumption will have a detrimental effect on their health, they are willing to embrace the newly rising Cannabis industry. Additionally, according to statistics gathered by Deloitte, over half of the people in the USA believe that recreational Cannabis has the same effect as alcohol; this reflects that the public will increasingly favor legalization (which can be seen in the US at the moment).

Copyright © CityU Student Research & Investment Club 28 With globalization, countries can trade freely with one another, and talents in this industry can move around as well for mutual benefits. With time, it will engrain more and more in the consumers’ daily routines.

Economic Factors

Many factors can influence investment returns, but at a basic level, the business cycle is perhaps the most important factor driving investment performance. Business naturally booms during cyclical expansions, and younger, growth-oriented firms and industries often enjoy strong spurts of growth that make their investments attractive early in these cycles. When the inevitable recession arrives, economically sensitive investments are most likely to underperform, while defensive investments and those that are sensitive to falling interest rates have greater potential to outperform. As the Cannabis industry is considered as one of the latest industries that falls under both recreational and medical, the industry is expected to perform well during both expansion and recession periods. Medical demand should remain steady throughout the cycle and recreational demand is expected to grow during expansion periods.

Challenges

Even though the industry size has significantly grown over the past few years, different problems can impede the growth of the industry; these challenges can be divided into several different perspectives, ranging from political to social factors.

Political

Copyright © CityU Student Research & Investment Club 29 The difference in legal systems around the globe hinders the development of the industry. In the world, only Canada and some states in the USA consider marijuana to be legal. That said, it is forbidden to conduct any business for recreational marijuana in any other part of the world, which could potentially cause more than half of the revenue loss. Even if other derivatives of Cannabis are available for sales, heterogeneous legal and financial systems cast difficulties on importing and exporting these products. Moreover, the voice against the legalization of the Cannabis industry remains a difficulty in the development. The American Society of Addictive Medicine believes that: “Marijuana is a mood-altering drug capable of producing dependency. While popularly thought to be a fairly benign ‘drug,’ marijuana can have adverse effects on memory and learning, perception, behavior and functioning, and on pregnancy.” Since crude marijuana contains over 60 active cannabinoids, yet few of them are well studied. Marijuana growers often breed their plants to alter the concentrations of different chemical compounds. For instance, the strength of tetrahydrocannabinol (THC), the principal psychoactive ingredient, is more than 20-fold more than in marijuana products used several decades ago. Therefore, given that medical evidence of justifying the use of marijuana is still lacking, some population believes that there could be a detrimental effect on the users and hence the legalization of the Cannabis industry.

Even though the cultivation of Cannabis is not a complicated process, just like any agricultural crop, it takes knowledge and experience to grow the best quality. According to Professor Lester Grinspoon, Emeritus at Harvard Medical School, author of ‘Marijuana, The Forbidden Medicine,’ the genetic of the seed plays an indispensable role in determining the quality of the plant. Unfortunately, for an inexperienced grower it is hard to observe the difference. Moreover, a cultivation license is required to grow Cannabis in different regions of the world. For instance, in the USA, Pennsylvania, was only granted 13 licenses with a 13 million population, Florida was granted 7 licenses with over a 20 million population, and Ohio was granted 12 with only a population of 11 million people according to Forbes. This reflects that the companies fortunate enough to have one see sky-high values attached to these licenses even before they become operational. Therefore, the environmental factor can be a challenge to the business as the competition for these limited permits is extremely fierce, and having a license is extremely crucial to thriving in the Cannabis industry.

Economic

Different laws of economic institutions of the world can also hinder the development of the sector. Different countries have different restrictions when it comes to trading in the Cannabis industry. To make matters worse, since the Cannabis industry is often associated with the impressions of underground economy, the business is unlikely to receive support from the Federal Union, not to mention the soaring taxes as all the

Industrial

Looking at the industry, it can be said that even at the early stages, it is very competitive in the established markets. The barriers of entry are too high at the national level (Capital Expenditure and Paper Work) as well at the local level (Paper Work, Licenses and other regulations). As much as legal Cannabis is an interesting market to enter, consumption drivers and regulatory complexity are in line with tobacco companies. It is also attractive to the tobacco and alcohol industry leaders as an expansion and diversification plan. Applying for a business license in the Cannabis industry is a complicated, time- consuming, and expensive procedure especially for a small business owner. Even after bearing all the costs, the probability of getting a license is very low.

Deals In this Space

Mergers and Acquisitions

2018 and 2019 were both very important years for the Cannabis industry as they witnessed quite a lot of acquisitions than mergers. Given the current fragmentation of the Cannabis industry, the companies who are flushed with cash and have access to cheap capital (due to very strong valuations) are on a company- shopping momentum. Just like motives for other M&A deals, players in this space seek economies of scale, enter new markets, and expand their current customer share. As legalization comes closer, the size of the deals started to grow as well.

Figure 17

This year is already set to experience a 31.7% increase in annual legal Cannabis sales around the globe. U.S. specifically is on track to a USD13.6 Billion revenue in the Cannabis market.

In addition to the deals stated above, some other mid-cap deals took place in various markets. • In Sep 2019, Medicine Man Technologies Inc. (OTC: MDCL) purchased several outlets of ‘Starbuds,’ one of Colorado’s largest dispensary chains for USD31 million and stock shares. Later in the month, MDCL acquired Colorado Harvest Company for USD12.5 million. These events took place soon after Colorado passed a bill allowing public companies to hold ownership in other Cannabis Companies. • In April, Cresco Labs Inc. (OTC: CRLBF) purchased Origin House (OTC: ORHOF) for USD823 million. Because of the acquisition of Origin House’s 500 dispensaries, CRLBF gains a leading market share and a 60% market penetration. • Health Harvest and Recreation, Inc. (OTC: HRVSF) is set to acquire Verano Holdings for USD850 million all stock deal. This was the largest deal in the U.S. Cannabis Industry and covers 16 states and 200 facilities.

Venture Capital

Copyright © CityU Student Research & Investment Club 32 2018 was the biggest year for VC Financing in the global Cannabis industry. Investors put in around USD881 million across 139 deals as per PitchBook. That is more than double the amount invested in 2017.

Figure 18 Capital Invested (Million($))

881

400 300 200 100

2014 2015 2016 2017 2018

It may come as a surprise that the largest fundraise of the year went not to a company, but to an investor, ‘Privateer Holdings,’ the first PE firm to invest exclusively in Cannabis. It raised USD100 million in Series C funding.

Some of the top VC Investors in the industry are: • Altitude Investment Management • Casa Verde Capital • Salveo Capital • Green Acre Capital • Merida Capital Partners • Canopy Ventures

Copyright © CityU Student Research & Investment Club 33 DISCLAIMER This report is produced by university student members of CityU Student Research & Investment Club (the Club). All material presented in this report, unless otherwise specified, is under copyright of the Club. None of the material, nor its content, nor any copy of it, may be altered in any way without the prior express written permission and approval of the Club. All trademarks, service marks, and logos used in this report are trademarks or service marks of the Club. The information, tools and materials presented in this report are for information purposes only and should not be used or considered as an offer or a solicitation of an offer to sell or buy or subscribe to securities or other financial instruments. The Club has not taken any measures to ensure that the opinions in the report are suitable for any particular investor. This report does not constitute any form of legal, investment, taxation, or accounting advice, nor does this report constitute a personal recommendation to you. Information and opinions presented in this report have been obtained from or derived from sources which the Club believes to be reliable and appropriate but the Club makes no representation as to their accuracy or completeness. The Club accepts no liability for loss arising from the use of the material presented in this report. Due attention should be given to the fact that this report is written by university students. This report is not to be relied upon in substitution for the exercise of independent judgement. The Club may have issued in the past, and may issue in the future, other communications and reports which are inconsistent with, and reach different conclusions from, the information presented in this report. Such communications and reports represent the different assumptions, views, and analytical methods of the analysts who prepared them. The Club is not under an obligation to ensure that such communications and reports are brought to the attention to any recipient of this report. This report, and all other publications by the Club do not constitute the opinion of the City University of Hong Kong, nor any governing or student body or department under the University aside from the Club itself. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of the Club, the Club has not reviewed any such website and takes no responsibility for the content contained therein. Such addresses or hyperlinks (including addresses or hyperlinks to the Club’s own website material) is provided solely for your own convenience and information and the content of any such website does not in any way form part of this Report. Accessing such website or following such link through this report shall be at your own risk.