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MedReleaf poised for worst Canadian IPO debut since 2001 as pot stocks wilt

Medical marijuana is pictured at a Smith Falls facility on Jan. 21, 2016.

Dave Chan/The Globe and Mail

MedReleaf Corp. fell 22 per cent in its trading debut, the largest decline for a sizable Canadian IPO in 16 years, amid growing concern that pot stocks are overvalued.

Shares in the Markham, Ontario-based company -- trading under the ticker "LEAF" -- closed at $7.40 in Toronto on Wednesday, giving it a valuation of $669-million. The drop is the biggest for a sizable Canadian IPO since Intier Automotive Inc. fell 34 pe rcent in 2001, according to Bloomberg data.

MedReleaf's Chief Executive Officer Neil Closner declined to comment on the share price but said being listed on the TSX will contribute to efforts to grow the business.

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"We're very optimistic about the growth opportunities ahead," he said by phone.

MedReleaf priced its shares at $9.50 apiece last week, raising $100.7-million in the largest initial public offering for a pot producer in North America. It is now the second-largest publicly traded medical marijuana company in Canada behind Canopy Growth Corp., which became the first pot producer to be added to the S&P/TSX Composite Index in March and has a market cap of -$1.1-billion.

MedReleaf's debut comes amid broader weakness in the market for pot stocks, after Health Canada said May 26 that it will make several changes to its medical cannabis program that are expected to result in more licensed producers, increasing supply and competition.

Many analysts were expecting MedReleaf would start trading below issue, said Chris Damas, editor of the BCMI Report in Barrie, Ont. Companies are announcing new marijuana expansions on a daily basis and investors are becoming "jaundiced" and are having trouble differentiating them, he said.

Bear Market

The Horizons Medical Marijuana Life Sciences ETF has plunged 17 per cent since it started trading in early April as companies that saw their share price surge have pulled back from recent highs. It rose 2.8 per cent Wednesday. Canopy, the first marijuana unicorn, has tumbled 22 percent this year while Aphria Inc. has declined 3 per cent and Aurora Cannabis Inc. is down 7.4 per cent.

"It's being launched in a bear market," Mr. Damas said in a telephone interview. "If this was November, MedReleaf would probably go over issue."

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All marijuana companies rose during the "pot mania," regardless of their investment merit, and the industry is now seeing the opposite as strong businesses like MedReleaf, Cronos Group and Aphria fall in line with "inferior cannabis stocks," PI Financial analyst Jason Zandberg said in an email. Accumulating shares of market leaders as prices fall may prove to be a profitable trade, he said.

MedReleaf sold $80.7-million worth of shares from treasury and another $20-million from existing shareholders. The offering was led by GMP Securities. It was the second IPO for a pot producer in Canada after CanniMed Therapeutics Inc. raised $69-million in December. Other publicly traded companies have listed mainly through reverse takeovers.

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