German cannabis market could be significant for Canopy Growth Corp, says PI

The acquisition of MedCann GmbH Pharma and Nutraceuticals could pay dividends for Canopy Growth Corp. (Canopy Growth Stock Quote, Chart, News: TSX:CGC) in years to come, says PI analyst Jason Zandberg.

This morning, Canopy announced it would acquire German-based pharmaceutical distributor MedCann for 674,631 common shares. Another 367,981 common shares will be issued to MedCann on the 18-month anniversary of obtaining an import and distribution license from the German Health Minister. And a further 122,660 common shares in the company will be issued to MedCann upon achieving certain other milestones within two years of closing the transaction.

“Germany has begun a process of enabling medical access to cannabis and through a policy that recognized Canopy as the first legal supply source from North America,” said Canopy CEO Bruce Linton. “This acquisition establishes a distinct and purely medicinal corporate entity that helps us today but also positions us for domestic medicinal production inside Germany if the regulatory environment shifts.”

Zandberg notes that no domestic production of cannabis currently exists in Germany, which imports from Canada (through Tweed) and Holland. The analyst says the German market is currently tiny, but it could see significant growth, particularly since the German government has introduced a recent bill aimed at increasing availability of cannabis within drug stores across the country, reimbursing patients through their health insurance, and allowing cultivation within Germany.

“Before this acquisition, MedCann purchased Tweed’s product and resold it within Germany,” he says. “Post acquisition, Canopv will realize the additional margin and also have the ability to obtain a cultivation license in the future. Although the German market is small today (one-tenth of Canada), the potential market could be significant based on Germany’s population of 80M people (2.3x larger than Canada).”

In a research update to clients today, Zandberg maintained his “Buy” rating and one-year price target of $12.00 on Canopy Growth Corp.

Zandberg believes Canopy will generate EBITDA of negative $5.0-million on revenue of $37.9-million in fiscal 2017. He expects these numbers will improve to EBITDA of $15.7-million on a topline of $84.5-million the following year.