January 27, 2018 the Canadian Marijuana Index peaked at 972. A couple of weeks before the legalization of marijuana in Canada that same index was a healthy 852. By December 22 that same index bottomed out at 422.
Is marijuana over? Has Canadian cannabis been overhyped and over bought?
The short answer would seem to be that “reality” in the form of recreational marijuana shortages, wildly inefficient licencing, Canadian provinces dropping the retail regulatory ball and a general sense that legalizing recreational marijuana was going to be harder than it looked, has caught up with the exuberant market caps of many marijuana stocks. That reality meant that investors has to look much more closely at the actual business plans cannabis companies were attempting to execute.
For some major players in the Canadian Cannabis business the goal was to get licenced and then build out growing facilities to meet the anticipated recreational demand. Which was a decent plan as far as it went, but even the most optimistic forecasts of recreational marijuana demand in Canada pegged the market at around 7 billion dollars a year.
Even with the currently depressed cannabis stock prices, the top six Canadian cannabis companies have a total market capitalization of over 33 billion dollars which makes little sense for a competitive market worth, at best, 7 billion.
Many of the Canadian cannabis companies are looking for an edge which will take it outside the purely “producing for the recreational market” herd. There has been a lot of excitement about deals with beverage companies or international arrangements. And there is no question that Canadian companies will enjoy a significant international competitive advantage as the result of legalization.
Where companies have growing capacity, accessing the Canadian recreational market in a planned and profitable way is a pretty obvious element of a comprehensive business plan. But it is not the whole thing. Where is the value add?
The problem with recreational marijuana or beverage deals or many international arrangements is that very few of these routes give much scope to the need to add value. If all a company is doing is growing for the recreational market it is in a race to the bottom in a sector which is rapidly becoming a mass market commodity driven space.
So, while servicing the recreational sector is in many business plans, smart companies are looking elsewhere to add value.
One of the biggest problems cannabis faced when it was illegal was that it was next to impossible to do serious, scientific, research into the medical and pharmacological opportunities the cannabinoid molecules which can be synthesized from cannabis. There are over 100 of these molecules and it has only been very recently that biotechnology and pharmaceutical companies have been able to look at what benefits these molecules may offer.
In an August 2018 interview, FSD Pharma (OTCQB:FSDDF) (C.HUGE) Co-Chair and Founder Anthony Durkacz, said, “the medical market is more interesting in the longer term than recreational pot. The pharmaceutical market is much bigger than the recreational marijuana market. A single medicine can have a value over 7 billion dollars but there are many different medicines for many different health ailments so compared to the recreational market it is huge,” motherlodetv.net/...
For a company like HUGE, with a large growing facility, a focus on the development of cannabis based pharmaceutical products makes a lot of sense.
There are over 100 cannabinoid molecules which are derived from cannabis. Each molecule has the potential to create real medicine for real illnesses. Right now, companies which understand cannabis in terms of biotechnology have the potential to dwarf pure recreational or marijuana plays.
Putting the pieces together is the challenge. For a company like FSD Pharma the story starts with a facility. A large facility, 620,000 sq. ft. with the potential to expand to 3,000,000 sq. ft. in the former Kraft food production plant in Cobourg, Ontario, approximately an hour’s drive from Toronto. Fully paid.
Building out the grow facility is typically the largest expense for a cannabis company. The intention being to build, in stages, the largest hydroponic cannabis growing operation in the world will cost money.
However, that’s just the raw material. For the pharmacological potential of cannabis to be explored in a scientific way you need scientists and you need other, less glamorous, nuts and bolts capacities. On the scientific front, HUGE has aligned with Israeli company SciCann Therapeutics which gives the company access to cutting edge biotech expertise.
On the nuts and bolts end of things, FSD Pharma has allied with, and invested in, Canntab Therapeutics (C.PILL). Canntab’s expertise lies in the oral delivery of measured and controlled doses of cannabis-derived substances. After all, if you are attempting to create useful medicine from cannabis you need to be able to deliver that medicine in measured doses in ways which ensure the medicine is properly taken up by the patient.
You also have to be able to extract the substances you want to work with and to that end FSD is working with a private (soon to be public) company, World Class Extractions.
Both Canntab and World Class are taking space at the FSD facility in Coburg. Which means the "nuts and bolts" are all under one roof.
Building out a facility and creating “added value” products with an emphasis on the pharmacological opportunities offered by cannabis gives FSD Pharma a significant competitive edge in the crowded Canadian and international cannabis business.
As the Canadian marijuana business integrates the reality of legal, recreational, marijuana the winning companies will be those which look well beyond recreational retail and find places which offer significant opportunities to add value. FSD Pharma’s focus on the biotechnology and pharmaceutical opportunities offered by cannabis give it a huge head start in the race for value.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.