A Survey Of The North American Marijuana Index - Part One

by: Don Steiger


Canopy Growth and GW pharmaceuticals are relatively low-risk long-term marijuana investments.

Axim Biotechnologies, a high flying marijuana stock, may not be all that it claims to be.

United Cannabis is a small company with a lot of potential.

In this survey we will be reviewing the stocks that make up the North American Marijuana Index. In Part 1, we'll look at Canopy Growth Corp. (TWMJF), GW pharmaceuticals (NASDAQ:GWPH), Axim Biotechnologies Inc. (OTCQB:AXIM), and United Cannabis Corp. (OTCQB:CNAB). But first, a brief introduction to the marijuana plant.

Reasons to invest (or not invest) in marijuana

Marijuana, a subspecies of cannabis sativa, is rich in bio-active and psycho-active endocannabinoids. At last count, over 60 have been identified. The most abundant and widely studied of these are CBG, THC, and CBD.

The individual endocannabinoids tend to have very distinct properties. For example: CBG causes the "munchies," THC possesses potent psychoactive properties (it is responsible for the "Cheech & Chong" effect); and CBD, an uncontrolled substance in the U.S. and the most widely studied of the cannabinoids, has been found to be effective in relieving pain, nausea, epileptic convulsions, and PTSD trauma.

Looking toward the horizon, the cannabinoids in marijuana may someday play an important role in treating cancer. Several cannabinoids -- CBD, THC, CBGA, CBGV, and CBGVA, to name a few --have been shown to have anticancer activity. The most widely studied of these, not unsurprisingly, are CBD and THC. CBD is an angiogenesis inhibitor -- it kills cancer by cutting of its blood supply. In a recent study, a high CBD marijuana extract was shown to be more effective at treating glioblastomas than currently used treatments. The cancer fighting properties of THC may be even more impressive. THC appears to be toxic to cancerous cells yet completely non-toxic to non-cancerous cell. And for neuronal cells it may even be neuroprotective. This ability to kill cancerous cell without harming non-cancerous cells is somewhat of a Holy Grail in cancer research; currently approved cancer treatments are almost as toxic to healthy cells as they are to cancerous cells.

Most people, myself included, feel that there is a lot of money to be made in cannabis. But things can go wrong. An example of this is the situation in Colorado and the State of Washington--the first states to legalize recreational marijuana. In both of these states, supply has outstripped demand. In Washington prices dropped 75% in two years, and in Colorado wholesale prices dropped 40% in the first six months of 2016. The industry in these states is privately held, making it difficult to determine what this has done to profits. There is a very real possibility here that the inflated excitement that is taking place will result in an oversupply that turns into inflated losses. There are also no guarantees with medical marijuana; ultimately marijuana may turn out to be nothing more than snake oil that has been propelled by the placebo effect.

Canopy Growth Corp.

Canopy Growth Corp. is a Canadian medical marijuana producer and retailer; they are world's largest producer of legal marijuana. In addition, they also own a 10% interest in an Australian medical marijuana producer and have made arrangements that will allow them to export medical marijuana to Germany and Brazil. During the 2016 calendar year, Canopy had 12.7 million dollars (Canadian) in revenue. This compares to 2.37 million in the previous 15 months. Their customer base for medical marijuana is growing rapidly; however, losses are growing even faster. The losses are primarily a result of a rapid expansion that includes a tripling of their production capacity.

Normally, past performance is a good indicator of future performance. But this may not be the case here. As everybody reading this already knows, Canada is expected to legalize recreational marijuana in the very near future. The details of how this is done will determine the future of companies like Canopy.

Currently entry into the Canadian medical market is rife with regulatory hurdles. If similar regulatory hurdles are put in place for the recreational market then established entities like Canopy will have an advantage over companies that have not yet entered the market. On the other hand, if entry into the market turns out to be easy then it is very possible, if not likely, that supply will exceed demand, and profits will become scarce. In the latter case Canopy, because of its size, will probably outperform and outlast its competitors. And may even be able to acquire some of them at bargain basement prices.

GW Pharmaceuticals

GW pharmaceuticals is a twenty year old British company that has been focusing on developing cannabis derived pharmaceuticals. For the fiscal year ending September 30, 2016, GW's revenue was $10.31 million and their net income was -$63.66 million, for the previous fiscal year the corresponding numbers were $28.54 million and -$44.56 million.

GW is currently conducting human clinical trials with CBD (Epidiolex, GWP42003), THC (GWP42002), CBDV (Cannabinovarin, GWP42006), and drugs that have various ratios of THC/CBD (Sativex, and mixtures of GWP42002 and GWP42003). The GWPXXX drugs still have a long way to go before they enter the market -- if ever. Sativex, GW's only approved product, is primarily used to control spasticity due to multiple sclerosis. It has been approved in 30 countries, not including the United States, and is being sold in 16 of those countries. In the U.S., Sativex has failed three Phase III trial that were centered around pain relief. For the 2016 fiscal year, Sativex revenue increased about 25% to $6.71 million, while in the previous year revenue growth was flat. Epidiolex, on the other hand has yet to be approved. However, it has successfully passed two phase 3 trials and has been given orphan status by the FDA. A new drug application (NDA) is expected to be submitted to the FDA in the first half of 2017.

When/if Epidiolex is approved in the U.S. it will face an inherently different, and a somewhat unique, marketing situation. Epidiolex is basically CBD, and CBD is legally available in all 50 states. In states where medical marijuana is legal, high quality marijuana derived CBD is readily available; in states where medical marijuana is still illegal, a lower quality hemp based CBD is available. These products will be direct competitors to Epidiolex, and if Colorado and the State of Washington turn out to be harbingers for the rest of the nation, then competition will drive prices down to potentially unprofitable levels. GW may have an advantage here. With FDA approval, insurance companies will cover the price of the drug, effectively insulating Epidiolex from having to compete on price.

Axim Biotechnologies Inc.

Axim sees itself (or more likely sells itself) as the next GW pharmaceuticals. From the company's 10-K:

In early 2014, we discontinued our organic waste marketable by-product business to focus on our anticipated new business to become an innovative biotechnology company working on the treatment of pain, spasticity, anxiety and other medical disorders with the application of cannabinoids based products as well as focusing on research, development and production of pharmaceutical, nutriceutical, oral health and cosmetic products as well as procurement of genetically and nano-controlled active ingredients.

And also from the 10-K:

Our focus is on the development of innovative pharmaceutical, nutriceutical [sic] and cosmetic products focusing on diseases and conditions for which currently there are no known efficient therapeutic ingredients or delivery systems for known active pharmaceutical ingredients.

They sound like a cutting-edge, state-of-the-art company. However, neither their website nor their 10-K provide any examples of anything that is cutting edge or state of the art.

Axim seems to be claiming, among others things, some sort of advanced cannabinoid drug delivery technology, but they don't provide any details. They do, however, have some patents that involve cannabinoid drug delivery. These patents are very likely the basis of their cannabinoid product line.

Looking through their patents, the following cannabinoid delivery methods came up. Patent WO 2016126592 A1 addresses the making of cannabinoid chewing gum and lozenges. An example of the methods described in the patent is:

Add 2 grams of A9-THC oil at 90% THC by weight into 40 mL of ethanol (95% purity, food grade) and stir. The resulting slurry is added into 20 grams of isomalt [Isomalt is a mixture of mannitol, sorbitol, xylitol, lactitol, maltitol, and erythritol-these are all readily available and widely used non-caloric, non-cariogenic sweeteners] then stirred for at least 15 minutes. The slurry is placed in a flask, and the flask is placed on a heat plate. Set the heat plate to 50° C and apply continuous vacuum to the flask by a top connector connected to a vacuum pump with a glass trap immersed in liquid nitrogen. Pressure is reduced to between 100 mmHg to 300 mmHg. Ethanol is evaporated under reduced pressure condition. Continue to apply reduced pressure and heat until the slurry becomes a solid. Harvest the solid and grind if needed.

The important thing to note about this recipe is that it is very low tech -- it can easily be made in any high school chemistry lab.

An eye-drop treatment for glaucoma can be found in patent US 20160184259 A1. It can be made as follows:

Percentage (%) Weight (NYSE:G)
THC 0.151.5
CBD 0.252.5
CBG 0.252.5
Hydroxymethyl cellulose 0.22
Benzalkonium chloride 0.020.2
Polysorbate 80110
Water 98.13981.3

All ingredients as above, except for water, were weighed and added into a mixing flask. Add 970 ml of purified water into the mixing flask. Place the flask on a heat and stirring plate, stir the mixture while heating to 70° C. to allow dissolution. After returning to room temperature, the solution is made exactly 1000 ml by adding purified water.

This formulation doesn't even need a high school chemistry lab -- it can be made at home. Similar comments apply to their patents on anti-microbial cannabinoid creams and cannabinoid toothpaste.

To put a perspective on these patents, click here to see what other companies are doing. Also take a look at the United Cannabis patent below. Clearly, the delivery methods described in the axim patents do not qualify as state of the art.

Axim is conducting several clinical trial. Their lead products are cannabinoid laced chewing gums. From their website:

MedChewRx™ is the first of its kind pharmaceutical, functional chewing gum containing cannabinoids. The clinical studies are ongoing in world renowned universities in Europe and the USA. The research protocols are conducted in strict adherence to the FDA/ EMA guidelines. AXIM's team of researchers is the first to realize the beneficial, neuroprotective benefits of the act of mastication (see Selected Research Articles, accessed on March 23, 2017).The patented controlled-release, functional chewing gum is the first preparation of its kind...

The link above has several articles on why chewing gum is good for you. But what seems to be missing, from the website and the 10-K, is some discussion on why MedChewRx is superior to Wrigley's.

Based more on what information is not provided than what is, I suspect that their drug formulations are based more on anecdotal evidence rather than pre-clinical scientific research. Skipping pre-clinical scientific research saves time, but increases trial failure rates and ultimately results in greater costs.

Despite all this, they may yet get FDA approval. And as discussed above, this would provide an important marketing advantage. However, this company raises too many red flags for me and feels more like the next Theranos than the next GW pharmaceuticals.

United Cannabis Corp.

United Cannabis is a small company with four employees (nine if you count its 50% owned Jamaican subsidiary) and some big plans. From their 10-K, their revenue for 2016 was $715,000, up about 50% from the previous year. Their loss for the year was $3,854,000, a million dollars higher than the previous year. And their current liabilities exceed/exceeded their current assets by a factor of three. Despite these numbers, the company is in no immediate danger of going under. United Cannabis has signed a funding agreement for up to $10 million with Tangiers Global. This should be sufficient to fund the company's R&D and expansion plans.

From the company's website, it appears that their activities are centered around providing consulting services and promoting their Prana cannabinoid product line. They claim to provide consulting services that cover all aspects of starting and running a cannabis business: cultivation methods, licenses, taxes, employee training, etc. Given the current environment this seems like a ideal business to be in; however, it is difficult to see how they can provide any meaningful level of consulting services with only four employees. On the other hand, their Prana product line appears to be of much greater significance.

Prana is a line of cannabinoid products That have been designed to deliver precisely measured cannabinoid doses. For example, the product labeled P1-20NA claims to contain exactly 6.85 mg/g of THC, 30.27 mg/g of THCA, and 0.21 mg/g of CBDA. Prana, according to the company's claim, has an exceptionally high bioavailability. This high bioavailability is a result of the company's proprietary patented (WO2016064987A1) delivery system.

Prana seems to be at the center of the company's growth plans. In California, a state with a population approaching 40 million people, Prana is, or soon will be, manufactured by Advesa Corporation and distributed by Harborside Health. In Colorado it will be manufactured by Blue River Inc., no word yet on its marketing. And in addition to their U.S. marketing plans they will be conducting phase I clinical trials for Prana in the near future.

United Cannabis seems to be a well positioned start-up company. But the landscape in this industry is rapidly changing; with ever-increasing competition, it becomes very difficult to sort out the winners from the losers.


The marijuana industry is currently in a gold rush mentality. It is probably safe to assume that both a lot of money will be made and lost. How the dynamics play out will, to a large degree, depend on whether or not supply exceeds demand. One reason that I like GW pharmaceuticals and Canopy Growth is that they are in a position to do well in either scenario. On the other hand, United Cannabis being a small company may have serious problems if the market becomes too competitive. As for Axim, I feel that this company is more image than substance. It should be avoided by the long investor, but may have great potential for short sellers and traders.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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