It is often said that in the land of blind men, the man with one eye is king.
As is in many hyperbolic movements in nascent markets (i.e. Big Bang Dot Com Era, circa 1995 to 2000), the rush to rise to ascendancy is often wrought with the entanglements of strewn body parts and desolate horizons after the crash. It’s simply history repeating itself. And it isn’t restricted to the rise and fall of upstarts in the third wave of our economy.
Innovation brought the automotive industry to life in the 1890s during the transition of an American agronomy into an industrial powerhouse. By the end of the 1920s a once crowded market consisting of over 2,800 auto manufacturers, financed by banks of the roaring 20s like JPMorgan (JPM:NYSE), the industry was down to just the big three, General Motors (GM:NYSE), Ford Motor Company (F:NYSE), and Chrysler (NASDAQ:FCAU). And now, today, a fourth has emerged in Tesla, Inc. (NASDAQ:TSLA).
In 2019, while the U.S. equities markets were screaming to all-time highs, the promise of the cannabis market was like the Hindenburg, dropping in a fireball of ignominy. Wall Street darling companies like Tilray (NASDAQ:TLR); Aurora (NYSE:ACB); Canopy Growth (CGC:NYSE); and Cronos (NASDAQ:CRON) have seen their shares decline from highs of $215 down to $15; $11.85 to $1.85; $53 down to $20; and $25 down to $6, respectively.
Billions of dollars were funneled into companies like these and hundreds of others by the likes of Altria and Constellation Brands. Market systems and regulatory hurdles in the U.S. posing restrictions were merely solved by hyping investor demand to a frenzy and strolling across the border at Niagara Falls. The logic was simple: “For if Canada is legal, we can multiply every dollar you can throw at such a deal.” Such is the froth, frenzy and promise of “cannabis is just a can’t miss fortune to be had”.
Wasn’t cannabis supposed to be the medicinal cure-all that rationalized the existence of a free-to-use recreational market whose lines between medicine and personal pleasure were blurred? This is the problem with coiled springs pretending to be markets. At the end of 2019, a year up in smoke for the cannabis sector, after massive wealth destruction on the backside of infinite promise, the markets are wondering, what’s next for cannabis?
On January 2, 2020, Illinois became the next state in the procession of sovereign states to legalize recreational use of cannabis. While the dispensaries sold out like it was Black Friday, the markets were fairly muted. All four of the aforementioned stocks did nothing. And so, it seems like no amount of weed can cure this market glaucoma.
Looking at macro numbers, the State of Washington, the first state to legalize recreational use and just south of the Canadian border, currently has approximately 540 retailers and 1534 producers/processors of cannabis. But since legalizing recreational use on December 6, 2012, the explosion in growth has slowed down from on average over 100% year over year growth down to a screeching average of about 33%. Surely there is still some year over year growth, but saturation and consumption have some very interesting economic lines of demarcation.
After briefly touching $2,100 per wholesale pound in September 2015, prices dropped to below $1,500 per pound by the end of 2017. It is now less than $1,000 per pound. Statista reported an article on August 9, 2019 that stated, “As of 2017, cannabis-related businesses numbered between 20,000 and 28,000 in the United States alone.”
The answer of what is next is hiding in plain sight: clinical cannabis.
Despite the inherent sector risks, the long-term prospects of the clinical cannabis industry appear to be on good footing. Many more countries and U.S. states are embracing the potential benefits of medical marijuana and, as a result, are legalizing the sale and use of medical cannabis products. The greater medical community is also recognizing these potential benefits, resulting in the endorsement leading to higher demand. This presents opportunity for risk-tolerant investors.
By startling comparison to the 28,000 pot businesses in the United States, the number of pure pharmaceutical companies seeking to make ethical pharmaceuticals out of the promise of “cannabis is medicine” can be counted on two hands less a few fingers, with the 800 pound gorilla being GW Pharmaceuticals PLC (NASDAQ:GWPH).
GW Pharmaceuticals PLC is the leader in the emerging space of cannabinoid therapeutics. They are the only company, to date, to take key chemical compounds found in cannabis, namely delta-9 tetrahydrocannabinol (THC) and cannabidiol (CBD) and turn them into branded ethical pharmaceuticals, namely Sativex, approved for use for multiple sclerosis spasticity through the European Medicines Agency, and Epidiolex, approved for use in reducing seizures in two rare and severe forms of epilepsy, namely, Lennox-Gastaut Syndrome and Dravet Syndrome.
The current market capitalization of GW Pharmaceuticals is $3.6 billion. Its science is second to none in the process via its plant-based formulary production of its quality controlled and assured pharmaceutical grade medicines. On January 12, 2020, the company pre-announced preliminary Q4 sales of its leading product Epidiolex to be around $104 million after launching the drug on November 1, 2018. Total 2019 revenues for Epidiolex are forecast to be $296 million and rise $475 million for 2020.
Companies like Noramco, a former Johnson & Johnson subsidiary now owned by SK Capital Partners, is a leader in specialty active pharmaceutical ingredient (API) development and manufacturing. They currently have their bulk CBD product, a high quality, good manufacturing practices pharmaceutical grade API, under drug master file at the U.S. Food and Drug Administration.
Other participants in the API schema of the burgeoning cannabinoid therapeutics market are setting up biosynthesis production, further reducing the price in purified cannabinoid compounds, thus making clinical research in other target compounds like cannabigerol (CBG) opportunistic points for drug discovery.
So, from a practical perspective, the emerging and exciting field of cannabinoid therapeutics from the high-speed pileup we now see in today’s cannabis market is where the real promise of future pot profits lie. For those few who remain ahead of the curve, like GWPH, you have to tip your hat to their foresight.
History is a good teacher and technological innovation is an indefatigable resource that matches mind with might. So, if you are looking for value among the most notable stocks in the medical marijuana space — consider GWPH as the least risky, first-to-market, pure play. The other stocks noted above all claim to have medical marijuana strategies in place, and to the credit of the sector there has been a recent bounce in shares of CGC, TLRY, ACB and CRON. In the world of microcaps where stocks typically trade below $2, there are a couple companies that are interesting pure plays on clinical cannabis.
Axim Biotechnologies, Inc., (OTCMKTS:AXIM) is a biotechnology company targeting oncological research with unique patented delivery systems that not only disengage the first pass liver problem associated with the consumption of compounds like CBD and THC, but also improve on the potency and dose response of these compounds. Axim recently acquired Sapphire Biotech, a leading oncology research and development company that announced this past week a licensing of technology deal with Arizona State University team working with the Mayo Clinic. Shares of AXIM trade at $0.40 per share.
Another young and pioneering company in the field of cannabinoid therapeutics is Kannalife, Inc. (OTCMKTS:KLFE), a biopharmaceutical company focused on the research and development of a pipeline of next generation cannabinoid therapeutics to treat patients with significant unmet medical needs. Kannalife was founded in 2010 and, to date, remains the only company in the cannabinoid therapeutics space to ever license a patent covering “Cannabinoids as Antioxidants and Neuroprotectants.” The company is creating a new class of patented CBD-like compounds that pre-clinical studies show are up to 200 times more potent, 10 times more bioavailable, five times safer and 1,000 times more effective than CBD. These types of compounds will eventually be considered “CBD 2.0” and is where the cutting-edge of the industry is headed. KLFE trades at $1.70 per share.
With a company like GW Pharmaceuticals trading at a market capitalization in excess of $3.6 billion in the cannabinoid therapeutics space that should, by all reasoning, be the breakout sector of the overall cannabis markets, growth opportunity seems to be best afforded in current established and pioneering companies in the clinical cannabis space.
Again, while the vast majority of cannabis companies claim to have a medical marijuana strategy, it is imperative investors do some serious due diligence before investing in stocks that make such statements. Like the bitcoin craze, if a company claimed to have a cryptocurrency or blockchain strategy, their stock temporarily soared only to get summarily crushed.
As for the cannabis sector — dead cat bounce or a bottom forming? Hard to tell. But 2020 will see a culling of the herd of pot stocks, many of which will go the way of the dot-com bust. But the greater good story emerging from the sector is that of breakthrough medical applications and treatments that address an array of diseases and debilitating medical conditions. This is the real promise that lies within the cannabis industry. We can only hope those companies dedicated to healing the sick can survive and thrive.