Cannabis Sector Enjoys Fresh Capital, Bringing Back M&A
Jazz Pharmaceuticals PLC’s recent $7.2 billion acquisition of GW Pharmaceuticals PLC is the largest deal to date in the cannabis industry. And experts say it’s likely just the beginning.
The deal is for $7.2 billion in stock and cash. Every GW Pharmaceuticals shareholder will receive $20 in Jazz ordinary shares for every GW Pharma ADS (American Depositary Share) and $200 in cash.
The deal has been approved by the boards of both companies and is expected in 2021’s second quarter. Prior to signing the deal with GW Pharmaceuticals, Jazz Pharmaceuticals announced that it expected to report earnings between $2.32 and $2.38 billion in 2020.
In a conference call with analysts, GW Pharmaceuticals CEO Justin Gover discussed the past 20 years. He said the company had been able to demonstrate that the cannabinoid platform was a compelling and real science. He added that there’s significant potential for growth in the approved indications.
GW Pharmaceuticals contrasted itself with other marijuana companies that capitalize on medical marijuana products. Those companies might not have conducted clinical studies. But GW Pharmaceuticals has developed products using regulatory approval pathways, which include conducting clinical trials.
Tilray Inc. and Aphria Inc.
Earlier, in December 2020, Tilray Inc. and Aphria Inc. set the record for blockbuster deals in the cannabis industry. Obsevers valued that merger at $3.8 billion. Under the terms of this agreement, Aphria Shareholders received 0.8381 shares of Tilray for each Aphria common share. Tilray Stockholders plan to continue to hold their company with no adjustment to their holdings.
Upon conclusion, Aphria Shareholders will own about 62% of the outstanding Tilray Shares on a fully diluted basis. This will result in a reverse acquisition of Tilray. This represented a premium of 23% based on the share price at market close on December 15, 2020 to Tilray shareholders.
On a pro forma basis for the last twelve months reported by each company, the Combined Company would have had revenue of $685 million.
Constellation Brands and Canopy Growth Corp.
In May of last year, Constellation Brands, through its subsidiary Greenstar Canada Investment, upped its stake in Canopy Growth in $174 million deal. In 2018, Constellation increased its holding to 38% by investing another $4 billion in the Canadian supplier of marijuana. With its move last year, Constellation has exercised nearly 18.9 million shares.
Cannabis Megadeals Predicted This Year
These mergers and acquisitions evidence the growing interest in pharmaceutical-grade cannabinoids. And with the amount of money moving into this sector and the broader industry, it also foreshadows more megadeals this year.
Activity is heating up in the U.S. as many states have legalized marijuana in the 2020 general election. This has created an optimal climate for an M&A upturn.
California will be a critical player. There are several multistate operators that aren’t present in the Golden State now will soon be eying California. One analysist said that the state is by far the biggest market in the country, The market overshadows the whole of the Canadian market as far as demand.
Some states have legalized medical marijuana but have yet to legalize recreational use. They will also continue to attract companies that are looking to establish a beachhead prior to the legislative transition. For example, Cresco Labs’ $213 million deal with Bluma Wellness in January 2021 to move into Florida.
“Our strategy at Cresco Labs is to build the most strategic geographic footprint possible and achieve material market positions in each of our states. With Florida, we will have a meaningful presence in all 7 of the 10 most populated states in the country with cannabis programs – an incredibly strategic and valuable footprint by any definition. We recognize the importance of the Florida market and the importance of entering Florida in a thoughtful way – we identified Bluma as having the right tools and key advantages for growth,” remarked Charles Bachtell, CEO of Cresco Labs.
In fact, U.S. investors are beginning to blank-check firms to search for deals, including in the cannabis space.
In addition, many investors will also look at ancillary technologies that support the industry, including logistics companies and e-commerce specialists. Analysists again believe that California is a ripe geography for acquisitions. That’s due to the fact that cannabis has been legal for longer there, providing a more developed market.
One of the most intriguing factors to recognize in this consolidation is the science. An increasing number of companies are pursuing research on the compounds in marijuana plants and their impacts on specific diseases and disorders. Observers said this was a primary factor in the GW-Jazz deal.
GW has developed an epilepsy medication called Epidiolex—the first drug derived from the cannabis plant to gain approval from the FDA. However, the acquisition was about more than Epidiolex. It was also about the prospect of its late-stage trials for other cannabis-derived compounds. These compounds would treat maladies such as multiple sclerosis, autism, and schizophrenia.
However, pharmaceutical companies are just one of the industries interested in rare cannabinoids. Those products can be extracted from plants or synthesized from labs and typically come without psychoactive effects. The now $20 billion market is also attractive to consumer companies. It’s believed that cannabinoids will likely become an integral ingredient in pharmaceuticals and consumer goods. As a result, one analyst says that the GW-Jazz merger is a “game changer for the industry.”