Every winter has its spring

Colombia’s cannabis pioneers are moving into a new phase and it’s time for them to show the world what they are made of.

By: Mat Youkee

It has been a harsh winter for the cannabis industry. CCI spent November in Toronto, meeting with companies and investors and many of the responses to our questions were as frosty as the car windshields in the morning. Overproduction of sub-standard product, failures in distribution and packaging, a resilient black market, major corporate scandals. All these factors play into the diagnosis of the industry’s ills. Leading stocks Tilray (NASDAQ: TLRY), MedMen (CNSX: MMEN) and CannTrust (TSE: TRST) lost more three-quarters of their value over the course of 2019, and no firm escaped the market meltdown. But do Colombia’s producers deserve the punishment? And what are the country’s leading firms’ prospects for the coming year? The answers are more positive than you might think.

MEDICAL FOCUS: At the epicenter of the weed stock apocalypse of 2019 were the impossible expectations and worse-than- expected bureaucratic incompetence resulting from the October 2018 legalization of recreational cannabis in Canada. In the event, the price of AAA flower has halved over the last year to around CAD$1,200 per pound. Only the highest quality bud, AAAA, has maintained its value. In September 2019, Canadian consumers bought 11,707 kilograms of flower, but a further 63,000 kilograms remained packaged and unsold and 102,000 kilograms was in storage, awaiting packaging. “No one wants shit product, dried out buds that’ve been sitting in vaults for months,” one industry player told us. “You can get better weed on the corner for half the price.”

Given that Colombia’s legislation forbids the sale of cannabis flower, the recreational market has never been the local industry’s focus. That hasn’t stopped some investors speculating on the possibility of Colombia supplying international recreational markets in the future – and if LPs can produce unique Andean, AAAA quality strains there’s no reason this couldn’t eventually come to pass – but the fact remains that the Colombian model has always been centered on the export of low-cost CBD and THC intermediate products for international pharmaceutical, food, and wellness companies.

In the second half of 2019 PharmaCielo, Plena Global and Clever Leaves made their first commercial exports of CBD product to Europe.

BETTER LATE THAN NEVER: This is not a revolutionary strategy and other nations around the globe are looking to follow suit. In September 2019 Vicente Fox, a former president of Mexico and a director of Khiron Life Sciences, warned attendees at the ASOCOLCANNA conference in Bogotá that if government institutions didn’t move faster, the country risked losing its first-mover advantage.

Whilst CCI has always enjoyed a good moan about Colombian inefficiency, delays, and flakiness, and appreciates Fox’s attempts to apply his cowboy boots to bureaucratic backsides, we believe this fear is overstated. In November last year, Mexico pushed back its marijuana legislation – which could include limits on foreign investment – until April 2020 and in December Brazil’s congress rejected the idea of domestic cultivation. Peru, meanwhile, remains embroiled in a battle between president and congress that makes law-making near impossible.

International analysts frequently cite delays to companies’ forecasted license acquisition and production to cast doubt on the viability of the Colombia model in general. Having watched the Colombian gold mining industry stutter, collapse, resurge and collapse again over the last decade, CCI is actually surprised by how quickly and smoothly the cannabis market has developed over the last two years. Whilst mining and fracking companies have been targets of environmental activists and indigenous rights NGOs and seen their industries embroiled in legal battles from the lowest provincial level to the highest courts, the cannabis industry’s challenges have been more prosaic. They have been caused by a lack of governmental capacity, poor knowledge of the industry and poor articulation between institutions rather than a fundamental opposition to the industry.

“The industry is unfolding towards a focus on financial sustainability and income generation”

- Andrés Fajardo, Clever Leaves

EXPORTS: It’s true that over the course of 2019, many Colombian LP’s news releases tended towards the exuberant, overstating the importance of marginal milestones and focusing on brand recognition rather than operational developments. But real progress was made. In the second half of 2019 PharmaCielo, Plena Global and Clever Leaves made their first commercial exports of CBD product to Europe, with the latter beginning sales of a retail product in the UK. “The industry is unfolding towards a focus on financial sustainability and income generation”, Andrés Fajardo, President of Clever Leaves, told CCI, “companies who understand this will move forward and grow.”

A number of other firms, including Khiron, Medcolcanna, and NuSierra began commercial production at the end of 2019 or will do so in early 2020. Along with Medcann and FMC Global, NuSierra makes up a trio of private companies that have moved silently and effectively towards commercial production with little media coverage. In October the company completed its 20,000 square foot facility in Rio Negro, Antioquia.

Investors and analysts will be eagerly awaiting the quarterly reporting of the country’s publicly traded companies to see if the sales prices and the fabled low- cost of Colombian production hit targets.

“As the industry grows, companies will mature and demonstrate revenues that will allow the investment world to look at the industry for its long-term value”, David Gordon, Chief Corporate Officer of PharmaCielo, told CCI. “We’ll see a move away from the dot.com sensation of overnight development, to one of lasting value.” The pioneering companies have navigated the complex regulations to prove that exports are possible, now it’s a question of how wide the margins are and how deep demand is from recipient countries. It seems clear that 2020 is the year that Colombian CBD exports will make an impact on the global stage. It is assumed by many that PhamaCielo will be able to massively undercut the international price for CBD isolate which currently retails at between $2,000 and $3,000 per kilogram.

THC YOU LATER: The licensing and export of THC products was always going to be a more lengthy process. The often absurd arguments between Colombian regulators and the UN International Narcotics Control Board (UNICB) which sets loose “quotas”
for psychoactive drugs, has been irrelevant given that, until late 2019, no company had received its local permissions. The news that the UNINCB has upped the country’s high-THC allotment for 2020 to 59,420 kilograms should be taken with a pinch of salt. In 2019 Khiron was allotted 560 kilograms of high-THC cannabis production and Medcann given a further 51.9 kilogram quota.

The awarding of these cupos proves that Colombian cannabis legislation is working, however slow and frustrating it might seem to outsiders.

Time line of recent - and expect - milestones for major players in Colombia cannabis

With luck, the increased UNINCB quota will give the Ministry of Justices Technical Group the confidence it needs to boost quotas for 2020. The export of THC products to Canada’s apparently protectionist market and the requirement for EU GMP certifications for export to European markets are obstacles that could well be overcome in the course of 2020 or early 2021.

DOMESTIC DITHERINGS: Perhaps the most obvious and secure strategy for Colombian firms has been to follow a B2B model, exporting cheap product to companies already producing licensed medicines, food and wellness products. Others, however, have coupled the approach with a more ambitious plan to develop own-brand pharmaceutical products in Colombia and the wider region. Nobody said it would be easy. INVIMA, the food and licensing agency, is a famous stickler for the rules and any suggestion that cannabis products would be able to swiftly bypass clinical trials were delusional. Regulations allowing the in-pharmacy preparation of “magistral formulas” – piggybacking on the back of homeopathy rules – were introduced in 2019, but it was never expected to be a major earner due to the hassle of preparing individual prescriptions. INVIMA approved prescription drugs are still years away. TSX-listed Avicanna began Colombian clinical trials on its dermatological products in July 2019 and says it wants to begin trials for pharmaceutical projects shortly.

THE YEAR AHEAD: There’s no doubt that 2020 is a make or break year for the Colombian cannabis industry, but what would represent success? CCI believes the following goals to be significant and attainable: Firstly, to have, by the end of the year, 10 companies commercially exporting intermediate CBD products with significant cost savings versus established producers, perhaps 25% the cost per gram of flower in Canada.

Secondly, for at least three companies to receive EU GMP certifications for their THC production facilities and for first exports for research purposes to have been sent. Next, to see significant progress in clinical trials for domestic pharmaceutical products. Finally, to see operations begin on a large and open cannabis processing facility and testing laboratory, offering services to small and medium growers, a major lifeline for cash-strapped license holders and a positive sign of an inclusive industry.

“Cannabis is a force for good, and Colombia has the opportunity to become a success story,” says Bibiana Rojas Country Manager of Canopy Growth Colombia. It is a hard task for the country’s growers to decouple themselves from the market noise in Toronto, but 2020 will be the year that production volumes, cost figures and export revenues will show what the Colombian model is made of.