Recent Cannabis Industry Deals Reveal Interesting Trends: Canadian Market Maturing Faster Than U.S.

“We are continuing to see Canadian companies invest in or acquire assets in U.S. cannabis markets [...] looking to take advantage of increased demand abroad,” Viridian Capital Advisors analyst Harrison Phillips told Benzinga on Wednesday, going over some of the most recent M&A activity, deals and capital raises in the marijuana industry.

So, let’s take a look at some of the most relevant transactions and trends seen last week, ended February 3.

Canadian LPs Continue To Expand

"This kind of follows a trend we've seen with other Canadian licensed producers,” Phillips explicated. “These guys are bolstering up their capacity, not only in anticipation of the recreational market that Canada is trying to roll out nationally, but [...] recently there's been quite a lot of import-export arrangements: Europe and South America are starting to import from Canada, which is also getting involved in Australia. With both the recreational market and the possibility of export. These guys can really build up their capacity for this extra demand."

"The underwriters increased the amount of the raise to the maximum amount. This basically shows support that there's continued investor interest in that these companies can generate more capital when they go on raises,” the analyst commented. "They likely received more interest that they could fill with the IPO itself, so they exercised the over-allotment to help satisfy some of that investor demand."

Testing And Quality Gain Relevance

"Not only is this technology company coming out of Israel [...] which has had a medical system for many years — so they are well versed in quality control, but we are seeing that the lab testing, and QA [quality assurance] and QC [quality control] side of the industry are generating additional interest,” the expert pointed out.

"Diagnostic Lab Corp makes sure that, for example, infused products manufacturers are abiding by good manufacturing practices and rules that make it a consistent quality and safe product for consumers,” Phillips explained. “So, similar to lab tests that monitor pesticides and such, these firms go in and make sure that the processes that actually go into making these products or converting them from one state to the other are made to ensure highest compliance, safety and quality."

"This just shows that the industry continues to mature [...] As consumers have become more sophisticated— it's not just the stoners on the corner [that are consuming weed], it's the more sophisticated, quality-conscious consumers that are coming in,” he supplemented.

In addition, Phillips noted, now Canada and several U.S. states have higher standards, and thus require more stringent testing.

Canada Vs. U.S.

"This is a significant transaction in the industry and I believe it's created a company that's worth over $1 billion,” the analyst voiced. "When we see these mergers of large players, especially where there's limited competition, like in Canada, where there are less than 40 licenses out— It will be interesting to see how this affects pricing over the next 6 to 12 months, as this company is now controlling over 1/4 of the patients in Canada [and is reaching economies of scale].”

"This one is in contrast with Canopy's case,” Phillips stated. “Canopy and Mettrum merged because the Canadian industry is growing quite rapidly, and it's nationally medically legal, so they can do these mergers with larger banks. In the meantime, New York has been stagnating and their licensees are struggling financially, and they require a company to come in buy them out.”

"So, there's quite a dichotomy there between the rapidly growing and maturing Canadian industry, and the slowly growing and struggling New York industry,” he concluded.

Trends In 2017

Finally, the analyst went into year-to-date trends. “So far this year, capital markets and the industry have been strong, even compared to last year. So, we expect to see continued activity in the capital raising and M&A side as we move through 2017.”

“We are continuing to see Canadian companies invest in or acquire assets in U.S. cannabis markets,” he added. “Some companies up in Canada are even grabbing licenses in several legal states in the U.S. So, we saw Maple Leaf secure a site for its Nevada facility, and then, Liberty Leaf, sign an LOI to acquire an equity stake in a California-based medical licensed cannabis company."

"Canadian LPs are building some really high tech cultivation facilities. As they start to invest in more advanced technologies, they are raising the bar on what is acceptable as a top tier cannabis cultivation facility,” he finished. “So, we are starting to see agricultural technology companies start to grab other firms to bolster their IP and product portfolios."