3 UK Pot Stocks to Watch in 2020

The UK cannabis industry is finally beginning to pick up speed, so we've identified several of the pot stocks you'll want to keep an eye on in 2020.

While cannabis use in the UK is still primarily contained within the black market, over the last decade things have begun to change.

On 1 November 2018 the country officially legalized the use of medicinal cannabis, providing relief to thousands of patients while simultaneously supercharging the development of the rapidly expanding UK cannabis industry.

Although access to cannabis is still somewhat limited—requiring a GP consultation before it can be prescribed—patient numbers are beginning to rise, and healthcare providers are becoming more open-minded about the drug as a healthcare treatment option. 

And while the government is unlikely to legalize recreational use in the near future, studies have shown that there would be a substantial market already in place if the UK ever decides to pull the pin on full legalization. In fact, cannabis is the UK's most widely used illegal narcotic, with nearly a third of adults aged between 16 and 64 having tried the drug at least once in their lives.   

That's why we've decided to take a look at some of the hottest UK pot stocks that can expect to see significant movement in 2020.

Disclaimer: Past performance is not an indicator of future performance.

GW Pharma

When it comes to the UK's fledgling medicinal cannabis industry, the most well-known player is GW Pharmaceuticals (NYSE:GWPH) .

Although the GW Pharma has been active on the NASDAQ since 2013, it was previously listed on the London AIM. The company is also still headquartered in Cambridge, and over the last decade has developed two of the world's leading cannabis-derived medicines.

As a result, the company is now worth close to $50 billion, making it larger than many of its North American counterparts such as Canopy Growth and Tilray. GW Pharma's first flagship product, Sativex, is an oral spray that uses a formulation of CBD and THC to manage the symptoms of multiple sclerosis (MS).

Our fourth quarter and full-year results for 2019 reflect an exceptional launch year for Epidolex. We are proud of the positive impact this medicine has already had on thousands of patients and believe that this past year provides a compelling foundation for continued success in 2020. GW Pharmaceutical CEO, Justin Gover

Sativex has already been authorised for use in more than 25 countries, although interestingly the company does not directly market the product itself. Instead this is handled by distributors such as the German multinational biopharma producer, Bayer, which markets the product for GW in the UK.

The company's second major flagship product is Epidiolex, which is a cannabis-based drug that is used to treat severe forms of epilepsy. The drug is available for prescription in both the US and the UK—giving GW Pharma a substantial addressable market—and recently received a recommendation from the National Institute for Health and Care Excellence (NICE).

This was huge news, as NICE were pushing for the drug to receive reimbursement under the UK's NHS system—which was eventually granted at the start of 2020—making it the first cannabis-derived medicine to have its patient costs completely covered by the British government. 

According to the COO of GW Pharma, Chris Tovey, the NICE recommendation represented a momentous occasion, "for UK patients and families who have waited for so many years for rigorously tested, evidenced and regulatory approved cannabis-based medicines to be reimbursed by the NHS."

"This is proof that cannabis-based medicines can successfully go through extensive randomised placebo-controlled trials and a rigorous NICE evaluation process to reach patients."

"I am hugely proud of the entire GW team for achieving this milestone in the country where the company was founded and where both of these medicines were developed and are manufactured," Tovey said.

The company also drew considerable attention from the market in January this year, when it announced that it had achieved $108 million in preliminary unaudited revenue for the fourth quarter of 2019.

As a result, total net product sales for the year reached more than $309 million, which was driven in part by the successful entry of Epidiolex into several new European markets in 2019—including Germany, France, UK, Spain and Italy—which significantly widened the company's potential addressable market.

The CEO of GW Pharma, Justin Gover, stated that the company's goal in 2020 will be, "not only to continue to drive Epidiolex growth but also to leverage our world leadership in cannabinoid science to advance our pipeline."

"In particular, we see significant market opportunity for nabiximols in several indications in the US and will be progressing multiple late stage clinical programs in 2020."

"Our fourth quarter and full year results for 2019 reflect an exceptional launch year for Epidiolex."

"We are proud of the positive impact this medicine has already had on thousands of patients and believe that this past year provides a compelling foundation for continued success in 2020," Gover said.

Why we like GW Pharmaceuticals stock:

  • The company's two flagship drugs are already widely prescribed with considerable global coverage.
  • Both Epidiolex and Sativex were recently awarded a NICE recommendation, which means that patient's prescription costs can now be subsidized under the NHS.
  • GW Pharma performed strongly in 2019 from a financial perspective, recording $108 million in unaudited revenue.

Disclaimer: Past performance is not an indicator of future performance.

Associated British Foods

Associated British Foods (LSE:ABF), is a diversified behemoth that operates using a number of smaller subsidiaries, including several agricultural businesses—focusing on areas such as sugar and corn—grocercy operations, and the British clothing retailer Primark.

However, what many people don't know is that ABF also has a hand in the cannabis cultivation game, via its wholly owned subsidiary, British Sugar.

Although British Sugar originated as a nationalised sugar beet producer, it was subsequently acquired by ABF in 1991, and in 2017 the company repositioned a substantial portion of its horticultural assets to focus exclusively on cannabis cultivation. 

"This new era for our horticultural business uses all we have learned to date to further build this value stream for British Sugar and to benefit the pharmaceutical industry. Furthermore, we are extremely proud that our new crop will make a worthwhile contribution to the control of such a debilitating childhood disease. Annually, we will produce enough of this ingredient to treat the equivalent of up to 40,000 children globally." British Sugar Managing Director, Paul Kenward

When news of this decision broke it was a watershed moment—for both ABF and the burgeoning UK cannabis industry—as it came packaged with the announcement that British Sugar had signed a deal to supply GW Pharma with the raw material for its massively popular epilepsy drug, Epidiolex.

At the time, some investors viewed the decision to pivot towards cannabis cultivation as an odd move for an established agricultural powerhouse, but it was actually the perfect opportunity for ABF to realign its position in the market.

Despite originating as an agricultural cultivator, when 2016 rolled around this only accounted for 81.% of ABF's revenue, while sugar made up 13.42%. By this point, the lion's share of the company's revenue was instead being generated by its retail and grocery operations, which made up 44.4% and 24.43% respectively.   

Clearly, it was time for a shakeup. And since then, the company has become one of the largest producers of legal cannabis in the UK, thanks to its massive 180,000 square metre cannabis cultivation facility in Norfolk.  

According to the former Agricultural Director for British Sugar, Colm McKay, any grower or cultivator, "be it a farmer or horticulturalist, is always reviewing what crops they should grow."

"We went through a review process to see what we could potentially grow and in conversations with GW Pharma it became clear that we could very successfully grow the crop for them."

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"Our horticulturalists can grow the plant to the high level of specification that is required of this crop. The crop is highly regulated because of the quality of ingredient you need to produce for it to be used in the pharmaceutical industry," McKay said.

If you're still not sold on the company, it's also worth remembering that in 2016 a UN report found the UK accounted for roughly 45% of global cannabis production—along with approximately 70% of exports—and at that point it was all being produced by a single cultivator, Associated British Foods.

While other companies have begun to enter the cultivation game as of January 2020—ending ABF's monopoly on UK cannabis production—this head start has still allowed it to firmly entrench itself in the market.

The company has also continued to perform impressively in 2019 from a financial perspective, with its last market update showing £15.8 billion in group revenue, leaving it in a strong position to pursue additional expansion initiatives in the coming year.

"We continued to pursue the opportunities to grow our businesses with a gross investment of over £800m," ABF Chief Executive George Weston said.

"Next year the group is well-positioned for further progress, with the continued expansion of Primark, a material improvement in our Sugar profit and strong profit growth in Grocery."

Why we like Associated British Foods stock:

  • ABF's decision to pivot to cannabis cultivation in 2016 gave it a considerable early-mover advantage, and as of September 2019 it was still the only fully licensed legal cannabis grower in Britain.
  • The company's different revenue channels are highly diversified, protecting it from any adverse commodity price fluctuations the cannabis market may experience.   
  • The supply agreement with GW Pharma—along with the growing prescription rates for Epidiolex—should generate considerable additional demand for ABF's raw cannabis biomass.

Cannaray

Cannaray is a British cannabis company that is focused on delivering medicinal marijuana and CBD-based products to patients in dire need, with the eventual aim of becoming the European market leader.

The company aims to achieve this via a piecemeal expansion strategy that will see Cannaray first enter Germany, which is expected to become the "main thrust of the business", before subsequently moving on to Poland and further EU states.

And in September 2019 Cannaray took an important step towards this goal, after the company completed its first round of Series A Funding—closing with £7.8 million raised—with the eventual goal of listing on the London Stock Exchange (LSE) before the end of 2020.

We want to be in a position to grow and process cannabis, thereby creating a medical product. The lack of GMP processing facilities and the expertise to grow to tight levels of consistency has resulted in an undersupply of medical cannabis in Europe. We want to plug the gap in the European market by providing a medical product. Cannaray CEO, Scott Maguire

By this point, the company expects to have raised another £30 million, allowing it to make its debut on the LSE with a market capitalisation of £100 million. This should leave the company well-funded to pursue its "aggressive strategy" for expanding market share, which began with the acquisition of medical distributor, Therismos Limited, in late 2019.

The acquisition gave Cannaray immediate access to Britain's medicinal cannabis market—without the need to navigate onerous regulations and red tape—as Therismos already held the licences needed to import and distribute controlled drugs in the UK, along with several other EU jurisdictions such as Norway, Switzerland, and Iceland.

It even allowed the company to fulfill its first UK patient prescription in January 2020, supplying a three-year-old British girl who suffers from severe epilepsy with a cannabinoid formulation developed by global cannabis juggernaut, Aphria Inc.  

The CEO of Cannaray, Scott Maguire, described the Therismos acquisition as a transformative moment for the company.

"Obviously, the relevant licences are key to our strategy around importing and distributing medical cannabis across the EU. Without these licences, we would have spent substantial time and money applying for them with an uncertain result," Cannaray CEO Scott Maguire said.

"Furthermore, Therismos' strong relationships with the Home Office, having worked very closely with them throughout their lives as regulatory experts, is very helpful."

"With the acquisition, there is a continuous revenue stream of £20-23.7 million a year so in short order we were one of the largest European cannabis companies in revenue terms. We went from an idea with £7.8m investment to a viable European cannabis company."

The company has also partnered with the largest horticultural firm in the UK, Newey Limited, to develop growing facilities and a pharmaceutical-targeted research base which will be used to "explore new cannabis-based medical formulations".

Additionally, Cannaray is currently in the process of applying for its own cultivation license, which will make it one of only three companies in the UK that are legally allowed to grow cannabis. So, it should come as little surprise that Cannaray is expected to become "the UK's largest medicinal cannabis and CBD company" once its listing on the LSE is finalised.

Aside from its Series A funding, the company has also plans to raise additional working capital in 2020, which will be used finance further medical cannabis production and underwrite its push into overseas markets—such as Germany and then Poland—later this year.

To ensure its expansion plans can proceed unimpeded, the company has also taken additional steps to guarantee that Cannaray is "Brexit-Proof", in the lead up to its upcoming IPO. This was achieved via its agreement with Newey Limited, which saw the company establish a wholly owned subsidiary in the Republic of Ireland, allowing Cannaray to proceed full steam ahead, regardless of how the UK's exit from the EU shakes out.

Cannaray is currently on schedule to launch a range of CBD products later this year, and is also the only cannabis company in the UK with a Scientific Advisory Board comprised of key opinion leaders "across a whole host of therapeutic areas", including Chemo-Induced Nausea, Epilepsy, Chronic Pain, Tourette's and Multiple Sclerosis.

"I identified the leading specialists in the indications for which cannabis is legal and then you find out to what extent they've bought into the gospel of cannabis or are at least open-minded," Cannaray CEO Scott Maguire said.

"Our scientific advisory board is the strongest component of Cannaray."

Why we like Cannaray:

  • Although Cannaray's planned IPO will not take place untill later this year, it is expected to become "the largest medicinal cannabis company in the UK" once it finally list on the LSE.  
  • The company has already obtained the licenses needed to distribute medicinal cannabis in the UK—via its acquisition of Therismos Limited—without having to navigate the costly and time-consuming approval process.
  • Cannaray's wholly owned subsidiary in the Republic of Ireland will ensure that it can continue to operate unimpeded, regardless of any fallout generated by the UK's eventual exit from the EU in late 2020.  

This could be one of the best investing opportunities of 2020

Legislative changes are blowing through the US, and with it, an ever-increasing number of states legalising cannabis for recreational use.

With the success seen in Illinois, which legalised for adult-use on January 1 and saw products moving off the shelf at an unprecedented rate, this company is primed to take advantage of the booming US recreational market.

They have secured partnerships with the biggest cannabis companies in the US, and their portfolio is second to none.

And with the sector-wide pullback of 2019, this company is now at a bargain-basement price.

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Hugo Gray
Hugo Gray

Hugo Gray is a Melbourne-based journalist with a body of work that covers a diverse range of topics, including immigration law, sex technology, and now the rapidly expanding cannabis industry.

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