MJ And The Multi-Billion Dollar Market For Hemp Rx

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About: ETFMG Alternative Harvest ETF (MJ)
by: Zhiyuan Sun
Summary

Clinical trials involving THC and CBD have the potential to displace a $16.5 billion U.S. patient market for just 3 indications.

Use of cannabis for alleviation of chronic pain could be the solution we are looking for in the ongoing opioid crisis.

Legal barriers are slowly disappearing as more and more countries realize the medical benefits of marijuana and push for its legalization.

The Top 6 players in MJ's portfolio all have some degree of exposure to medical cannabis and have superb financial health for upcoming R&D expenses.

Introduction

Cannabis was once widely prescribed as a drug for various forms of medical pain relief in the early 19th to 20th century. After rumors and anecdotes surfaced linking THC to crime and psychosis, the Federal Bureau of Narcotics began regulating the drug in the 1930s, which resulted in its outright ban for medical and recreational use. It was not until some 40 years in 1976 when medical marijuana users began challenging its designation as a Schedule I substance. Since then, hundreds of studies have been performed to confirm that both the active and non-psychoactive ingredients of cannabis, CBD and THC, have ample therapeutic uses for a variety of indications. In this article, the author will explore how just three of such indications have a combined market value in the 11 figure range in the United States alone and poses a significant area of opportunity for companies running CBD/THC clinical trials. Many of these companies are included in the ETFMG Alternative Harvest ETF (MJ), making the index fund an ideal exposure for investors looking to get into the lucrative medical marijuana sector. As an international wave of deregulation for marijuana is happening as we speak, without further ado, let us investigate the potential for the emerging medical marijuana market and how players in MJ are riding this wave.

International Medical Marijuana Market

Source: drugscience

Since the early 1970s, over 20 countries representing over 1 billion of the world's population have decriminalized the use of medicinal cannabis. Out of this population, approximately 8% (80 million) are users of marijuana for medical purposes. To gain insight into the world's largest healthcare market, let us zoom into the United States and investigate its medicinal marijuana exposure:

U.S. Medical Marijuana Market

Source: Statista

Over 33 states have legalized cannabis for medical use as of Q12019 with an estimated 3.5 million users in this category. This represents an unprecedented opportunity for weed companies to conduct clinical trials regarding CBD drug developments (which was outright illegal until the 1970s). Since the discovery of the endocannabinoid system in 1992, there has been a flurry of research on the use of CBD for several key indications that have no satisfactory treatment methods. The author has pulled the use of CBD/THC to treat 3 such conditions each with at least one billion dollars in market value (as of FY2018) for analysis. They are migraine headaches, chronic pain, and epilepsy. Let's have a look below.

Migraine Headache

Source: PMC

To date, there has been no definitive deterrence for the onset of migraine headaches nor an effective analgesic after its occurrence. The standard remedy of taking caffeine pills with mild analgesics such as aspirin would nonetheless result in an excruciating pain with limited relief. Furthermore, migraine drugs such as Teva Pharmaceutical's (TEVA) Ajovy only marginally reduce the onset of headaches while costing over $6,900 for an annual dose.

As for cannabis, both THC and CBD (via inhalation) are thought to potently activate the CB1/CB2 receptors in the brain stem which in turns blocks the release of migraine mediator CGRP. The end result is the suppression of the vasodilatory effects of this mediator that causes migraine headaches. Aside from a known mechanism of action, there have been numerous case studies linking cannabis with efficacy in treating migraine.

Source: PMC

In a study of 9 California clinics (n = 47), 40.7% of patients self-reported that cannabis had therapeutic benefits for headaches and migraines. In another study involving 121 patients, the occurrences of migraines decreased by over 50% from 10.4 to 4.6 per month. Keep in mind, the newly developed Ajovy was only able to reduce this metric by less than 2 occurrences a month. While these are not data from clinical trials, it is clear there may be a non-random link between cannabis and treatment of migraine which warrants further investigation.

Source: Migraine Foundation, Bloomberg Intelligence, Grand View Research, Author's Curation

The market for migraine treatment is emerging, being valued at roughly $2 billion as of FY 2018 but growing nearly 20% Y/Y. As mentioned previously, there are 40 million such patients with a severe unmet medical need. Migraines are known to induce acute amounts of pain in its onset and render work activities almost impossible. Speaking of pain, let us examine this condition in detail and how marijuana could lead to a better treatment than standard opioids.

Chronic Pain

Source: PMC

Over 60 million Americans suffer from chronic pain, an indication which can only be treated effectively via opiate painkillers. Unfortunately, such class of analgesics are extremely addictive and opens up many channels for abuse. More than 130 Americans are killed each day due to opioid overdose, with an estimated $115 billion in annual costs to the U.S. economy.

Marijuana, however, has the potential to be the cure to this devastating opioid crisis and act as the top of the line treatment for chronic pain. In one study involving 1,365 patients, medical marijuana was found to be effective in 72 to 80% of cases for alleviating severe to debilitating pain. Moreover, the cost of purchasing THC for such relief only amounted to $500 to $4,000 each year. Perhaps, most importantly, marijuana is extremely difficult if not utterly impossible to overdose, with the first ever case occurring just this June out of billions of joints smoked. To put it into perspective, there are an estimated 44,000 cases of abuse and 6 cases of overdose per 1,000,000 tablets of opiates prescribed.

Image result for opioid overdose

Source: Dana Foundation

There has been an exponential growth in the deaths from opioid overdose due to black market dealers, unethical marketing practices, and synthetic opioids such as fentanyl imported from foreign countries. Unfortunately, as opioids are the only effective treatment for chronic pain, lawmakers cannot simply prohibit its use to combat the crisis. On the other hand, medical marijuana has a decent chance of posing as a solution to this overdose epidemic.

Source: CDC, CNN, Bloomberg Intelligence, ASAM, Author's Curation

Chronic pain is prevalent among an estimated 20% of Americans. Based on the prescription data from Bloomberg Intelligence, the opiate painkillers used for the treatment of this indication has an estimated market size of at least $10 billion in FY2018. With high rates of abuse and deaths from overdose, clinical trials involving CBD/THC are in dire need to alleviate this situation. Any % of market share captured by an FDA approved, cannabis-based painkiller is likely to save the life of an opiate-addicted individual. Lastly, let us look at another therapeutic area of CBD/THC, epilepsy.

Epilepsy

Source: PMC

Since its legalization in Colorado, patients using medical marijuana have reported a 38-65% benefit in alleviation of their seizures stemming from epilepsy. Moreover, CBD was proved in various double-blinded clinical trials to reduce the frequency of seizures by 37-42% vs. 13 to 22% for placebo (p = 0.01) for two rare but severe forms of epilepsy (Lennox-Gastaut Syndrome (LGS) and Dravet Syndrome). In fact, there has already been one CBD drug approved by the FDA developed by GW Pharmaceuticals (GWPH) for epilepsy. Let's take a look below.

Source: GlobalNewsWire

In its Phase 3 clinical trial, Epidiolex was able to demonstrate a whopping 48-70% decrease in monthly seizures for epileptic patients. The top-notch results have caused the drug to be in the process of label expansion to LGS, Dravet syndrome, and various forms of sclerosis. Since hemp has over 400 compounds in its formulation, it is likely new chemical entities regarding CBD for the indication of epilepsy will be developed independent of Epidiolex's patent protection, which lasts until 2035.

Source: GlobalData, Pharma Intelligence Center, Drugs Database, Author's Curation

With epilepsy drug sales of over $4.5 billion based on a prevalence rate of just 1.65% in the U.S., there exists ample potential for further CBD drugs to enter this sector, especially on an international level. As a final note, let us look at how companies in the MJ portfolio are keeping up with these advances in medicine.

How The Sector Players Are Doing

Source: Multiple SEC 10-Q Filings, ETFMG, Clinicaltrials.gov, Author's Curation

As we can see from above, companies such as Aurora Cannabis (OTC:ACB), Tilray (TLRY), Canopy Growth (OTC:CGC), Aphria (OTC:APHA), Cronos (OTC:CRON), and GW Pharmaceuticals account for nearly 50% of the MJ ETF, and with 4 out of 6 such companies having significant clinical exposure to investigating the pharmaceutical effects of CBD/THC. A common theme among all players is their superb financial standing, with no company having a net debt over $200 million. This allows the sector players to set aside ample research and development expenses for investigative clinical trials involving cannabis, without much risk of dilution to shareholders. Moreover, CGC is arguably the best player in this sector with regards to medical marijuana with nearly $3 billion in cash on hand for over 40 ongoing clinical trials.

At the same time, there is no clear path forward as to which of these companies will develop the first blockbuster cannabis drug, since many of these trials are in the infancy stage (Phase 1/Phase 2). Hence, the best way to gain exposure in the medical marijuana sector is to simply have a weighted portfolio of all such prospective companies. For investors, the MJ ETF provides a decent exposure in this aspect.

Conclusion

Source: Clinicaltrials.gov

It is important to note there are more fields which would potentially open opportunities for medical cannabis such as chemotherapy, PTSD, and sleep disorders. The 3 indications the author analyzed in the article have found non-cannabis drugs in these sectors are generating well over $10 billion in revenues in the United States alone. There exist ample opportunities for medical marijuana to revolutionize the healthcare sector, especially in terms of solving our ongoing opioid crisis. As most clinical trials surrounding CBD/THC are in their infancy phase, the best way to gain exposure in this field is through a marijuana ETF such as MJ. Many of the top sector players conducting clinical investigations are already part of the top holdings in its portfolio. With marijuana deregulation growing in momentum all over the world, weed companies have the potential to deliver value both to its patients and shareholders who take the risk to reap its rewards.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MJ over 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.