IG Group London Provide Their Overview As To What They Think The UK Cannabis Market Is
An introduction to the UK cannabis industry: shares, companies and regulation
The UK has taken tentative steps toward legalising cannabis but has a long way to go before embracing marijuana like other nations. We have a look at the UK cannabis sector and the top UK marijuana stocks.
Cannabis in the UK: what you need to know
The UK’s attitude toward marijuana has changed dramatically over the last decade, but the drug is still confined to the black market. According to cannabis consultancy Prohibition Partners, there are as many as 2.5 million people buying marijuana illegally in the UK - just under 4% of the country’s population - valuing the country’s black market at well over £5 billion. For perspective, just over 22% of the UK smokes tobacco, which is worth over £18 billion a year, while alcohol, enjoyed by around 60% of adults, is worth over £68 billion.
Marijuana regulation in the UK
The UK’s regulatory stance toward cannabis is complex and, in some cases, contradictory. Medicinal cannabis was technically legalised at the start of November 2018 following several high-profile cases about children with severe forms of epilepsy being unable to access potentially life-changing cannabis-based treatment.
Yet, access to legal medicinal marijuana remains extremely limited. It cannot be prescribed by your average general practitioner (GP), only by those listed on the Specialist Register of the General Medical Council. The cannabis being prescribed is grown around CBD – the medicinal component – and must contain as little THC – the psychoactive element – as possible (below 0.2%). Public perception is improving and although the number of doctors able to prescribe medicinal cannabis is growing, they are not being encouraged to give it to patients.
The response from the medical community has been underwhelming. Institutions like the Royal College of Physicians and the British Paediatric Neurology Association have said cannabis should only be prescribed as a last resort, while the UK National Institute for Health and Care Excellence – which effectively chooses what drugs can be funded on the National Health Service (NHS) – have also imposed strict guidelines for prescriptions. Right now, there is only a handful of conditions that doctors will consider treating with cannabis, including multiple sclerosis, epilepsy and to help alleviate the effects of chemotherapy treatment. And when someone is suffering from one of these conditions, doctors are effectively directed to try every other possible treatment before prescribing cannabis.
Recreational cannabis is still illegal in the UK under all circumstances.
And yet, the UK is the world’s largest exporter of legal cannabis in the world
While the government’s tone implies it does not have great belief in the medicinal applications of marijuana, it is more than happy to rake in money from a few select firms that it allows to legally grow and produce cannabis. In fact, a report released by the UN’s International Narcotics Control Board last year found the UK is the world’s largest producer and exporter of legal medicinal cannabis in the world.
The UK government does not disclose the list of companies that can legally produce marijuana on British soil, but we do know that only two pharmaceutical cannabis products are licenced in the country. The first, Sativex, is owned by GW Pharmaceuticals and produced in the UK. The second, Nabilone, is produced by Eli Lilly. However, these treatments are not available through the NHS (primarily because of NICE guidelines) and therefore only available through private prescriptions.
This means virtually all of the legal marijuana produced in the UK under licence is exported. With Nabilone produced overseas, it also means that almost all cannabis produced is in the form of Sativex.
Outside of the medical applications, the UK has also laxed its rules on CBD and hemp oil. Again, these must contain less than 0.2% THC. These oils can be bought legally in the UK, but they have been banned from making any medical claims without obtaining a medical licence which, for many, is too expensive to obtain. This means the majority of those offering CBD or hemp oil can’t claim the products offer any medicinal benefits. This has created a further grey area in the market and has forced many producers to rely on informal marketing techniques, such as word of mouth, to flog their oils.
UK’s indecisiveness on marijuana comes with serious risks
It is clear that the UK government remains undecided when it comes to legalising cannabis. It is quite happy to profit from the vast amounts of legal medicinal cannabis being produced by a small handful of companies. But, while it is happy for this to be exported to other countries, it is still very difficult for UK patients to gain access to the handful of legal treatments available. This highlights the hypocritical and contradictory nature of its policy, and could cause further problems for an industry still in its infancy.
The first potential consequence could be inadvertently creating a monopoly among the handful of licensed producers. GW Pharmaceuticals has already become the unrivalled leader in the UK and the fact it has teamed up with other UK producers, like AB Foods, shows how little competition there currently is. The stringent rules, high costs and complex regulation means there are high barriers to entry.
Plus, the longer the UK persists with this grey area of legislation, the more likely it is that new start-ups will set up shop elsewhere, in more favourable jurisdictions like Canada. For example, there is a debate over how UK-based investors can gain exposure to legal cannabis firms at home or abroad and not fall foul of anti-money laundering laws when receiving dividends or income.
This is also causing companies to delay going public because they fear operating in a grey area of regulation, as are concerns that investors are worried about backing potentially-illegal operations. The Financial Times recently reported that specialist law firm Memery Crystal had said ‘we are doing significantly more due diligence [for new cannabis listings] than we would for an oil or mining company in the same jurisdiction because of the Proceeds of Crime Act’.
Best British marijuana stocks to watch
Although there are plenty of hurdles for cannabis companies to overcome, there is already a large number of publicly-listed firms in the UK. Most of those listed on the London Stock Exchange or AIM are not pure plays, meaning they have other activities outside of marijuana. Most smaller pure play stocks in the UK are listing on the NEX Exchange, which is known as AIM’s younger brother and designed for small businesses looking to raise smaller amounts of money from the public.
We have a look at the top UK cannabis stocks that you can trade with IG and explain how investors can gain broad exposure to the market rather than ploughing their cash behind one individual stock.
GW Pharmaceuticals is the undisputed leader in the UK medical marijuana space. The firm was founded in 1998 and listed on AIM in 2001 before it left London to join the NASDAQ in 2013. Over the past decade, GW Pharmaceuticals has developed two of the world’s leading cannabis-based treatments and grown into a company worth over $50 billion – considerably larger than the main North American cannabis stocks such as Aurora, Tilray and Canopy Growth.
Sativex is a spray containing both CBD and THC that is used primarily to treat types of multiple sclerosis (MS). It has been authorised in over 25 countries, including the UK, and GW Pharmaceuticals does not market the product itself. For example, in the UK it is marketed by Bayer. Its second product, Epidiolex, has been awarded approval in the US but not in the UK, and is used to treat severe forms of epilepsy. However, it hopes to get clearance for Epidiolex from the EU before the end of 2019.
Associated British Foods
AB Foods is a diverse company consisting of a variety of agricultural and ingredients businesses, such as sugar and corn, as well as its clothing retail arm Primark. But it is less well known that the company is also one of the UK’s largest producers of legal cannabis – even if it keeps quiet about it (it doesn’t even mention it in its latest annual or quarterly reports). It has converted a large amount of capacity in Norfolk to produce CBD-based cannabis rather than tomatoes, which is supplied to GW Pharmaceuticals to make its medical treatments, specifically Epidiolex.
Futura Medical is a research and development business based in Guilford that specialises in producing transdermal technologies (essentially gels and creams) that can be used to deliver medicinal treatments through the skin. It calls its transdermal technology DermaSys, and its lead product helps with erectile dysfunction. However, the company has established a joint venture with CBDerma Technology to explore how its transdermal system could be used to make cannabis-based products for patients.
AfriAg is primarily a logistics firm serving the agriculture industry across the world, but it announced late last year that it would be entering the medicinal cannabis market. It has said it will apply for a UK licence that would allow it to cultivate and manufacture cannabis in the UK for medicinal purposes and has invested in a Jamaican medicinal cannabis firm named Apollon Formularies, which has successfully made three harvests. Its new production facilities saw Apollon recently announce the production of its first licensed medical cannabis oils that will be primarily used to make pharmaceuticals, beverages and cosmetics.
Integumen has spent the last year or so selling off its old businesses and acquiring Rinocloud, enabling it to offer an ‘automated, real-time, real-world skin-testing digital data platform service’. Although the company is working with a small group of blue-chip businesses in the US and the EU on how it can help improve soap and cosmetic products, it has also signed a number of deals to test its platform to create a number of CBD-based goods, including skincare products, anti-inflammatory and pain relief creams, as well as wound-care and burn dressings infused with CBD.
Zoetic International has recently transformed itself into a vertically-integrated CBD business, having previously been an oil and gas company named Highlands Natural Resources. After discovering gas in Kansas, US, the company found it had high purity levels of nitrogen and high concentration of hydrogen – which together have been used to make a fertiliser being used in a pilot project to improve yields at a cannabis growing facility. It already has two commercially-available brands in the US, including a range of Chill smokables and vapes and Zoetics ‘tinctures’ and soft gels. It has recently launched online sales of CBD tinctures in the UK with a view of expanding into Europe. The company retains interest in oil and gas, which is providing the cash to build the CBD business.
Sunrise Resources is another natural resources company that has found itself chasing the momentum behind legalised cannabis. The company is developing a mining project in Nevada, US. It is hoping to produce pozzolan, used in cement and concrete, and horticultural-grade perlite, which it believes it can supply to cannabis growers in the US. The country mines less perlite than it needs, meaning it has to import the rest, mostly from Greece, so Sunrise is hoping to benefit from that deficit. It says demand for horticultural perlite ‘has been invigorated by the growth in cannabis cultivation’ in the US and Canada.
Other UK cannabis stocks to watch
There are other UK-listed cannabis stocks to watch, and most of them offer greater direct exposure to the legal marijuana market.
Freyherr International listed in July and says it is a ‘profitable, vertically integrated medicinal cannabis company’ operating in Slovenia. Sativa Group is a seed-to-sale business focused on CBD products for the medicinal and wellness markets, which hopes to become one of a handful of firms allowed to grow cannabis with high levels of THC for medicinal research and development purposes.
Ananda Developments is an investment firm that backs cannabis companies, including iCan Israel-Cannabis and Liberty Herbal Technologies. World High Life is also looking to back a medicinal cannabis business, but it is yet to make its first investment. Cash shell Spinnaker Opportunities is in the process of buying Kanabo Research, which helps formulate medicinal cannabis and over-the-counter products, as well as sells a pharmaceutical-grade vape pen.
What is the future for cannabis in the UK?
The UK’s approach to medicinal cannabis is more complex than most other nations. It is happy to produce and sell it to other countries but is less keen to give it to its own citizens, which for now are mostly having to pay for pricey private prescriptions if they want to get access. The country has taken a tentative step toward legalisation – but only because it was forced to. For now, it has only legalised medicinal cannabis in name.
But attitudes are still moving in the right direction, albeit slowly. Before moving to his new role as chancellor, Sajid Javid, the then-home secretary, said the government’s position on medicinal cannabis ‘was not satisfactory’. Legalisation has featured prominently in electoral campaigns by the likes of the Liberal Democrats and the Green Party. And even the institutions that have so far proved a roadblock to widespread access, such as the Royal College of Psychiatrists, has said it is willing to reconsider its view.
Still, there are concerns that progress in the UK could stagnate, especially whilst all the political energy is being consumed by Brexit. However, if ignited then the flame could catch quickly. Germany was in a similar position to the UK three years ago but has now grown into the largest medicinal cannabis market in Europe since legalising it in 2017. Last year there were over 185,000 medicinal cannabis prescriptions issued in the country to up to as many as 80,000 patients. It has allowed big North American companies, like Aphria and Aurora, to set up shop in the country and cultivate cannabis. While the UK has established a large production base, it has concentrated it among a handful of businesses, meaning other countries could become manufacturing hubs for the European market rather than the UK. Germany offers both a domestic market and the potential to export, while the UK only offers the latter. The same is true for investors and financiers which, keen to tap into the momentum building before it’s too late, will flee to where the regulatory environment is more favourable.
The UK is at a crucial stage. As a priority, it should look to establish a clearer framework for medicinal cannabis to operate and take a more-balanced approach between allowing business to produce cannabis and allowing patients to access it to remove the ambiguity in the market – not only for users and companies, but for investors that fear they are operating in grey area.
The opportunity on offer is huge. Prohibition Partners estimates the UK’s medicinal cannabis market could be worth over £7.8 billion by 2028. Plus, whilst there are no signs that it is about to be made legal in the country, estimates show a recreational market could represent a bigger opportunity with a forecasted value of £8.5 billion. That means the total value of a fully-legalised cannabis market in the UK could be over £16 billion within less than ten years.
How to trade cannabis in the UK
You can trade a variety of UK-based cannabis stocks with IG using either CFDs or spread betting. You can read more about the difference between the two here.
This allows you to speculate on future price movements of an individual stock (by going long or short) and to use leverage. You can try out IG’s platform and your strategy using a demo account or, if you’re ready to place your trade, open an IG live account.
IG Cannabis Index: taking a basket approach
One option for traders keen to capitalise on the rising appetite for cannabis stocks is to take a basket approach. Rather than put all your eggs in one basket and trade one individual stock, you can instead trade the IG Cannabis Index, which tracks the top 20 largest publicly-listed cannabis companies in North America. This allows you to spread risk and trade the industry as a whole.