|Shares Out. (in M):||590||P/E||0||0|
|Market Cap (in $M):||5,605||P/FCF||0||0|
|Net Debt (in $M):||-45||EBIT||0||0|
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Short Canadian LPs versus US MSOs
Recommendation: Going long high quality US MSOs vs. short overpriced Canadian LPs
 Per BAML and BDS, Cannabis’ total addressable market (TAM) for legal + illicit cannabis is estimated at $166b globally, growing to $265b by 2032. The US at 34% of global cannabis TAM, followed by Europe 25%, Asia 21%, Africa 9%, Latin America 6%, Canada 3% and Oceania 2%. Barclays estimates that global cannabis figure could increase to $272b by 2028 (Barclay’s European Consumer Staples Report, Sept 2018). Cowen analysts estimate the U.S. market opportunity is valued at ~$40-50b currently and expect it to grow to $80b by 2030 (assuming national availability)
 Recent legislation passed in NYC and several other cities and states bars employers from testing for marijuana. This will likely reverberate through numerous industries that once barred job applicants from using marijuana (for instance the financial services market), while over the longer term a full legalization on the federal level will also lead to workplace safety rules being rationalized. Recall marijuana was scapegoated during Reagan’s ‘War on Drugs’ following a spat of high-profile rail and truck accidents. This led to regulations that increased testing requirements in businesses that deal with Government contracts or in fields such as transportation/construction/etc. The impact of cannabis on safety is likely exaggerated, as unlike alcohol, proving causation in such scenarios is much harder (since marijuana remains in a user’s blood long after the “high” has worn off). Scientific studies into the impact of cannabis on safety have been stymied, as congress barred agencies such as the NHTSA from expending funds on this type of research.
 “Impacts of Marijuana Legalization in Colorado,” published by the Division of Criminal Justice within the state of Colorado’s Department of Public Safety, October 2018.
 The legal Canadian Rec market is estimated to be C$1b in 2019 (Canadian medical sales were C$600m in 2018) and is expected to grow to C$12b by 2025 according to Cowen. US state licensed sales were ~$7b in 2018
 Under section 280E of the US federal tax code, the only expenses plant-touching marijuana businesses can deduct for tax purposes are the cost of goods sold, which essentially results in cannabis businesses being taxed at the gross margin level
 Even without congressional action, a recent lawsuit against the DEA may force the federal bureaucracy to reschedule marijuana down from a schedule 1 drug (which is the most restrictive category alongside the likes of heroin and meth) toward at least a schedule 2 (which is a category for drugs that have high potential for abuse but some beneficial uses, and includes the strongest opioids and cocaine) if not further de-scheduled toward a 3 or 4 (less addictive categories that include sleep aids and benzodiazepines such as Ambien and Xanax, etc). The DEA recently re-scheduled CBD to schedule 5 following its approval of Epidiolex, which effectively “admits” that cannabis related products have true medical use.
 CBD is a non-psychoactive cannabinoid found in cannabis, and it is often taken to treat anxiety, inflammation and arthritis (think alternative to Aleve or Ibuprofen). According to a 2017 report by the World Health Organization, it hasn’t exhibited any potential for abuse or dependence, and there is no evidence of any public health-related problems associated with its use. Preliminary studies indicate CBD’s effectiveness in reducing anxiety, while several clinical trials are underway to test CBD’s ability to treat several ailments and symptoms, such as how it affects mood and the impact on nausea associated with chemo. Other even data suggests potential with GI disorders and opioid addiction withdrawal. Note, FDA regulations do not allow CBD-infused foods or beverages to enter interstate commerce, nor does it allow CBD to be marketed as a dietary supplement. This is expected to change near term as recent hearings are being conducted on the topic and CBD is already utilized as the API in FDA approved drugs such as Epidiolex (approved to treat rare forms of seizures in children). Almost 7% of Americans polled in January by Cowen & Co. reported using CBD as a supplement. The European Food Safety Authority considers it a novel food, meaning the agency has to perform a safety risk assessment of any product containing CBD before it can be sold in the EU.
 Besides THC and CBD, the cannabis plant contains over 100 other chemical compounds known as ‘Cannabinoids’ Other popular cannabinoids such as cannabinol (CBN), cannabigerol (CBG), cannabichromene (CBC) and Cannabidiolic acid (CBDA), which have a range of potential therapeutic applications such as helping with sleep, inflammation/pain mgmt. and anxiety, but do not get the user high like with THC. Less common cannabinoids like cannabicyclol (CBL), cannabivarin (CBV), cannabichromevarin (CBCV), cannabielsoin (CBE), and cannabitriol (CBT) are generally found in trace amounts of the cannabis plant, and their medical value has not been studied in any form to this point. R&D into virtually all of these has been obstructed by cannabis’ schedule 1 rating.
 M&A activity began in late 2015, when Canopy Growth (then known as Tweed) acquired Bedrocan Cannabis, marking the first merger among publicly traded LPs. Cross border transactions, particularly from Canada into the US have proved difficult. Canopy’s deal to acquire Acreage was the first large cross border acquisition but employed a very unique structure to satisfy listing requirements. Prior to this deal the trend was in the opposite direction as CAD LPs looked to shed US assets or restructure ownership to satisfy concerns over listing requirements (for example Aphria and Liberty Health Sciences).
 Curaleaf has strong positions in high barrier states on the East coast, namely FL, MD, NY and MA, along with CT, NJ, and ME. The company is in the process of acquiring licenses in PA and OH. See link for PF footprint. https://d1io3yog0oux5.cloudfront.net/_12849f23e1be9c9b73c4e153741a3157/curaleaf/db/295/2345/pdf/Piper+Jaffray+Investor+Presentation_Final+-+Copy+-+Copy+%281%29.pdf
 Select has a strong presence in CA, NV, OR and AZ. Select’s products have #1 market share positions in CA, OR and NV, and a #2 position in AZ. It also has a presence in Michigan and plans to expand into Colorado in 2019.
 Total debt of $128m including leases. Note, CURA has used some of this cash to fund further acquisitions recently including $18m cash for Emerald dispensary in AZ, $20m (w/$5m cash upfront and further breakdown not disclosed) for cultivation & processing licenses in Ohio and the $70m (including $25m cash) deal for NV assets (Acres) announced in March.
 On May 15th Aurora entered into a sales agreement whereby the selling agents will sell up to US$400m of Aurora shares at the market from time to time at Aurora’s discretion over a period of 25 months
 Meanwhile the current trend in the industry is to adopt an ESG friendly framework that will address issues ranging from greenhouses gas emissions to product safety to ethical conduct, in hopes that it will attract even more ESG conscious investors such as pension funds and other global institutional investors (the majority of which are now including ESG criteria in their investment decisions, according to EY). Some participants also believe that another benefit may be getting regulators to trust the industry more and take a lighter touch in the future.
 In Mid-May, Tilray said it now doesn’t expect the Canadian market to see a balance in supply and demand for another 1.5-2yrs, vs. its prior prediction of 1.5yrs made in March
 For the first year after the merger closes, the 75 million shares currently held by Privateer will only be released to institutional investors or large companies looking to make a strategic investment in the industry, and then only at the discretion of Tilray. In the second year, the remaining shares will be subject to a staggered release.
 Tilray has had a partnership with the Canadian unit of Novartis’ Generics drug subsidiary Sandoz. Tilray and Sandoz Canada have been working together since March 2018 and extended this partnership last December.
 Recall, On April 18, Canopy and Acreage entered an agreement that grants Canopy the right to acquire 100% of Acreage, with a requirement to do so once cannabis production and sale become federally legal in the US, subject to approval of shareholders in each company. Canopy paid $300m upfront and will exchange 0.5818 shares for each Acreage share. In the interim, Acreage will continue to be run independently of Canopy, and can continue to conduct acquisitions, but will benefit from a zero fee brand/IP licensing agreement with Canopy. Canopy also has further optionality via its 27% stake in Canopy Rivers, exchangeable shares in TerrAscend, and warrants in Cannabis Branding focused Slang Worldwide (SLNG CN).
SAFE (Banking) Act
Tax Changes (Section 280e)
Under section 280E of the US federal tax code, the only expenses plant-touching marijuana businesses can deduct for tax purposes are the cost of goods sold, which essentially results in cannabis businesses being taxed at the gross margin level
Relaxed Listing Requirements for NYSE and TSX
Legalization by other countries, particularly Mexico
As seen by Canada’s legalization, legalization of marijuana by neighboring or other developed countries puts increased pressure on US politicians to act.
Mexico seems to be next in line after a controversial supreme court decision last year which effectively struck down prohibitions on recreational cannabis coupled with the new President who supports full legalization
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