Bitcoin, electric vehicles and recreational cannabis are all the rage across the investment community. Each of these industries is highlighted as having had a historic 2018. Investors with exiguous financial resources but enthralled by the hype about marijuana stocks ought to consider less dicey investments than in growers, processors, and distributors making the headlines. My money in cannabis continues to be across the economic transom in pure pharmaceutical companies discretely experimenting in their laboratories. My leading choices currently are Novartis AG (NYSE: NVS), Merck (NYSE: MRK), Pfizer (NYSE: PFE), and Sanofi S.A. (NASDAQ: SNY). I wrote Seeking Alpha articles going years back with my recommendation to buy GW Pharmaceuticals plc (NASDAQ: GWPH) earning investors successful returns that may blossom into a blockbuster if the stock pops over $200 per share.
Investment High at Any Speed Causes Crashes
Pharmaceutical companies produce medicines; that separates them from medical products a distinction of which investors must be aware. Big pharma has stable underpinnings and infrastructure accepted for producing patentable, scientifically researched, tested and reviewed products for FDA approval. Big pharma offers sophisticated methods of distribution, insurance reimbursements eligibilities and assured government regulation for consistent quality to the highest medical standards.
There are crevices and fissures of distinctions between recreational marijuana and medical marijuana but there are canyons between these two and cannabis-based medicines. One researcher says, “It’s more a matter of the motivation for use” when referring to the first two. Between them and medicines is a matter of effectiveness, FDA approval, and legacies. Testing for cannabinoid profiles, pesticides, and biological contamination is flexible for the first two products but vital and obligatory for medicines. GWPH grows its own cannabis.
Growers, processors, and distributors are changing the language from medical marijuana used to relieve pain and soothe ailments to life science marijuana. All are touting growing and selling strains of marijuana altering the THC strengths. THC is the psychoactive component responsible for the drug’s high that produces amelioration of symptoms. This group is a budding “drugarchy” capitalizing on an illegal agricultural product in such widespread use it is now a consumer commodity but an unproven medicine. Companies have not been around very long, have little infrastructure, product R&D, procedural standards and measures for short-term or long-term use, quality control, THC testing, and more.
Pharmaceutical companies produce drugs with healing properties. GWPH claims its FDA unanimously approved drug does not contain THC but employs a pharmaceutical-grade cannabis synthesis scientifically-tested and proven to provide relief from symptoms for some of the most awful diseases. Analysts expect GWPH revenues ranging from $1.3B to $2.2B annually from Epidiolex coupled with greater revenues from its Sativex already approved in 28 countries around the world.
Pot is so popular its use is ultra vires, but small investors need to keep in mind banks will not touch proceeds from the $9B industry--not their cash, process credit card charges and, my broker tells me, his company is legally restricted from buying and selling pot stocks “forcing these entrepreneurs to conduct most business with cash.” These conditions raise serious security concerns and limit funding to scale possibilities. There are tax and accounting issues buying and selling pot stocks in Canada and Israel.
Currently, the thrill is all about being in cannabis stocks like Cronos Group (NASDAQ: CRON), Canopy Growth Corporation (NYSE: CGC) and Tilray, Inc. (NASDAQ: TLRY). Their soaring share prices are more reliant on M&A and touted investment news from multinational companies than good news about their own revenues, profits and other key financial data.
Share prices are volatile in this type of hyperactive market. Cron currently sells near its 52-week high for $20.35 per share from a 52-week low of $4.75 relying on announcements of outside investment from a tobacco company for the share price to dramatically rise. TLRY shot from a low of $20.10 to $300 in one year with talk of a beer and beverage company getting involved but then sunk back to its current ~$80. CGC sold for $16.74, hit $59.25, fell to about $27, and hovers around $49 currently following news TLRY is entering the hemp industry now that New York granted CGC a license for hemp. Regardless, investment dollars are flooding into these life science marijuana companies.
CRON’s website tells potential investors it is about being “a geographically diversified and vertically integrated cannabis group that operates within Health Canada’s Access to Cannabis for Medical Purposes Regulations and distributes globally.” The juxtaposed mission statement is in part to “transform the perception of cannabis and responsibly elevate the consumer experience.” Which is it, a health and medicine company, or about the joy of pot? Small investors need to be especially cautious investing in a bubble type industry.
I’m no arch-heretic regarding investing in marijuana stocks. There are many people who have made a lot of money, and there is a plethora of experiential information about how marijuana relieves or reduces effects of chemotherapy, pain and other afflictions, suppressing anxiety and helping mental disorders. But retail investors need forbearance to withstand the fluctuations in share prices and legal ramifications. To paraphrase Anja Aronowsky Cronberg, commenting on the fashion industry, small retail investors move like a shoal of fish. They are reactionary. The industry is alchemy. Choosing where to invest is all about listening to the right person at the right company at the right time who cajole, bully or encourage people into continue buying.
Big pharma has more to offer investors
Big pharma companies are full into the cannabis space but they are sleepers. Searches of their website for marijuana or cannabis and overwhelmingly the response is “No Results.” Yet, an August 2018 report from New Frontier Data, a global authority in data, analytics and business intelligence for the cannabis industry, reported, “7 of Canada’s top 10 cannabis patent holders are major multi-national pharmaceutical companies.” Strikingly,
The top nine medical conditions for which Cannabis can be used as an alternative treatment could cannibalize as much as $20 billion in U.S. pharmaceutical sales in the next two years. As more medicinal applications for the plant are discovered, and more physicians and patients integrate cannabis into treatment regimes, the potential impact of cannabis on healthcare will continue to grow for years to come,” said New Frontier Data Founder & CEO Giadha Aguirre de Carcer.
Leading Canada’s Cannabis Patent Race
- CIBA-GEIGY AG (Switzerland): 21
- PFIZER PRODUCTS INC. (United States of America): 14
- GW PHARMA LIMITED (United Kingdom): 13
- TELEFONAKTIEBOLAGET LM ERICSSON (Sweden): 13
- MERCK SHARP & DOHME CORP (United States of America): 11
- SOLVAY PHARMACEUTICALS B.V. (Netherlands): 7
- KAO CORPORATION (Japan): 7
- OGEDA S.A. (Belgium): 7
- SANOFI-AVENTIS (France): 6
- UNIVERSITY OF CONNECTICUT (United States of America): 6
The American government is the largest single holder of patents in this field. Its agencies are tethered to big pharma in any numbers of ways not the least of which is millions of dollars spent on lobbying. The power of big pharma and its cash resources makes it the powerhouse in the nascent industry. NVS and TLRY are engaged in one deal.
Downsides Apparent But Minimal for Big Pharma
Overall, big pharma is slow to enter the field and get cannabis-based pharmaceutical products to market. In the meantime, they are aware that marijuana is eating away at profits of proven drugs because of cost differentials, availability, cultural acceptance differences and possible differences in the number and severity of side effects.
Holistic organizations are arguing for greater cannabis availability to replace painkillers like Vicodin, sleep aids like Ambien and antidepressants like Zoloft. My son suffers chronic pain from a vicious auto accident ten years ago. He tells me the painkillers prescribed make him lethargic and sleepy. They dull his mind. Doctors warn him the prescriptive medicines can damage organs, lead to osteoporosis, and addiction. Meanwhile, he has been smoking medical marijuana for years and it makes the pain manageable. Now he feels the medical marijuana clouds his mind for weeks after not smoking, so he quit and is evaluating how best to go forward. His story confirms revealing new research that America’s most illicit used drug, marijuana, changes teen brain volume. Nobody knows the impact from THC in soft drinks and beer.
Brick by Brick Dollar by Dollar
Big pharma is largely playing a waiting game for while momentum gathers for America’s Federal government to legalize marijuana. This public face of discreteness comes despite conspiracy theories circulating the cannabis industry. In the interim, they will continue to quietly pursue their own R&D and develop cannabis-based medicines in the model of GWPH.
Revenues are built one billion dollars at a time, so we can expect big pharma to enter the market with medicines because cannabis obviously offers relief and healing properties. New revenues from cannabis medicines will add enough to the NVS $50B in sales, MRK’s $40B, PFE’s $52B, and Sanofi’s $38B for small investors to profit.
As for buyouts and takeovers by big pharma of companies developing cannabis medicines, there are more than 160 life sciences marijuana companies and fewer than 20 in one stage or another testing products for skin conditions, psoriatic arthritis, PTSD, etc. They are small-cap companies with limited funds and revenues are sparse; they are a high-risk gamble for small investors.
One day, doctors who prescribe marijuana for medicinal purposes are going to be attacked for reaching beyond guidelines treating ailments and illnesses with cannabis-based drugs, not FDA approved. Then this market might crash. My recommendation to retail investors is stick with any of the pharmaceutical companies’ stocks for the long-term profit potential in cannabis medicines. In the end, their market control and deep pockets to get FDA approvals will perhaps dominate and control the cannabis market.