Pot Stocks: What Are The Options?

Posted on by Brian Colwell

Digging into resources, I’ve gone through TONS of articles and tried to “weed” out the pump-and-dump types… so what’s left? What’s left for the creation of a Cannabis Stock Index?

U.S.-Based Pot Stocks:

AbbVie (ABBV)

  • $ABBV is a major drug manufacturer with $24 billion in annual sales and a market cap over $100 billion
  • However, the company does have exposure to the cannabis industry through the drug Marinol
  • FDA-approved Marinol treats nausea and vomiting from chemo and is derived from synthetic cannabinoids
  • Marinol is not one of ABBV’s major cash generators, so you’ll only be indirectly investing in medical marijuana through this company
  • Yet, it’s still a safe alternative to get some exposure to the space

CannaGrow Holdings (CGRW)

  • A Liaison and Consultant providing turnkey solutions to licensed growers in the cannabis industry
  • Recently announced an update on their Colorado Buffalo Ranch Project
  • The CEO of Cannagrow Delmar Janovec confirmed that NuGro Industries Inc., the owner and developer for the current Colorado Buffalo Ranch Project, executed a purchase order through the International Greenhouse Company (IGC) for the initial three of six greenhouses set for Phase I & II build out
  • Cannagrow CEO stated,
    • “We intend to have the greenhouses erected and fully functional for seasonal production starting this spring, with first harvest in the Autumn”
    • “In addition, the installation of Modine BTU gas heater units in each of the three (3) greenhouses will enable extension of the growing season and harvest potential into the early winter months”

Cannabis Science (CBIS)

  • Is a U.S based company that specializes in the development of cannabis-based medicines
  • Has been able to rally off of GW Pharmaceuticals (GWPH) recent achievements in their phase III testing of a CBD-based medicine to treat patients with rare forms of Epilepsy
    • This allowed companies like Cannabis Science to go ahead and move forward with their own testing in Europe as well as the United States
    • This also benefits the company because it permits for a faster regulatory process in result to additional research being made accessible for regulators as well as more experience with these types of treatments
  • Cannabis Science continues to work on their testing for its own CBD- based products currently in California
  • CEO, Raymond C. Dabney quotes, “We couldn’t be happier with GW Pharmaceutical’s success, as these positive results continue to be found in pivotal studies, public and regulatory perception opens up to the effectiveness of CBD in treating disease, both physically and mentally”

Cara Therapeutics (CARA)

  • Cara Therapeutics ($CARA) is an emerging biotechnology company focused on developing novel drugs to treat diseases associated with pain, inflammation, and pruritus
  • Unlike $GWPH and $INSY, $CARA is a clinical-stage biopharmaceutical company
  • Because of the developmental nature of the business, the company is quite a bit smaller than its peers
  • $CARA is developing drugs that help reduce pain
  • However, the company’s drugs are focused on the body’s peripheral nervous system, alleviating pain by selectively targeting kappa opioid receptors, a human protein… and it has a first mover advantage in this space
  • Pain medication CR845 is the company’s lead candidate
  • But its other pain drug, CR701, which studies the effect of marijuana (cannabis), has shown considerable promise in pre-clinical testing
  • The company is looking to move the drug into a phase I clinical study (Source: caratherapeutics.com, last accessed October 2, 2015)
  • The company has a market cap of $390 million, $43.2 million in cash, and no long-term debt
  • The company has a more diverse and bigger portfolio of compounds focused on targeting immune cells (CB2) and unique opioid analgesics than any of its peers
  • With the development of marijuana-based analgesics expected to shift toward CB2 receptors, Cara Therapeutics, with its first-mover advantage, is set to benefit
  • Being bullish is an understatement for what analysts think about shares of Cara Therapeutics

GW Pharmaceuticals (GWPH)

  • For now, let’s take a quick look at the granddaddy of medical marijuana companies, GW Pharmaceuticals (GWPH)
  • Often referred to as the “best in breed,” GW Pharma was one of the first companies to enter the pharmaceutical cannabinoid space
  • The company focuses on developing and commercializing cannabinoid prescription medicines
  • A Nasdaq-listed company, GWPH is probably the safest way to invest in medical marijuana right now
  • “GW Pharmaceuticals has the strongest Wall Street coverage and its shares are covered by Bank of America and Morgan Stanley”
  • The biopharmaceutical company sports a nearly $2.2 billion market cap and trades over 700,000 shares a day on average
  • Has discovered more than five dozen cannabinoids from the cannabis plant
  • There are also plenty of reasons to be optimistic about the company’s future with the upcoming potential treatments in its pipeline
    • As a result of robust R&D, the company has other promising cannabinoid products in various early and mid-stage clinical trials for the treatment of several diseases and mental disorders, including diabetes and schizophrenia
    • The company expects to release results from those trials within the coming year; Any successes should cause the stock to soar
  • GW Pharmaceutical’s primary product is Sativex, a spray used for the treatment of spasticity due to multiple sclerosis
    • The company is also in Phase III clinical development of Sativex for treating cancer pain
    • Sativex is already approved for use in Europe and New Zealand
  • What’s more, it has another product in its pipeline called Epidiolex for treatment of various conditions from epilepsy and diabetes to Dravet syndrome and schizophrenia
    • Not yet approved anywhere, but the FDA has granted it an orphan drug designation, loosely pointing to the need
    • This unique status, given to drugs that treat rare diseases, gives GW Pharmaceuticals benefits such as seven-year marketing exclusivity in the United States
    •  Although the company is expected to confirm the benefits of cannabinoids, which are derived from marijuana and used in medicines, management said that patients who took Epidiolex, experienced 39% fewer seizures each month than they did earlier
  • The company is already generating revenues (about $30 million of the last year), while maintaining a solid balance sheet
  • With a cash balance of $277.72 million, nearly negligible debt of $15.43 million and no dividend payments to make, GW Pharmaceuticals is in position to make significant investments in research and development to ensure the success of its cannabis-based drugs
  • This company should not only survive but also deliver outsized capital appreciation
  • If you’re looking for a place to start investing in marijuana, you would be hard-pressed to find a better first investment than GWPH
  • There’s a significant need for new painkilling medicines and cancer treatments that mainstream pharmaceutical giants such as Johnson & Johnson and Merck & Co. aren’t meeting

Insys Therapeutics (INSY)

  • Another sizable company that could be considered a play on the marijuana industry is Insys Therapeutics, with a market value of $2.4 billion
  • Insys Therapeutics is a commercial-stage specialty pharmaceutical company that develops and commercializes innovative supportive care products
  • Insys Therapeutics is very profitable, but that’s squarely because of sales of Subsys, a sublingual mucosal spray designed to treat breakthrough pain associated with cancer
  • In the second quarter, Insys generated $77.6 million in product sales, and all but $0.9 million came from Subsys, which is not a marijuana-based compound
  • To proclaim Insys as a medical marijuana stock is almost a stretch
  • Not a pure-play marijuana stock, but it does have one cannabinoid-based drug in its pipeline
    • The company recently received orphan drug status from the FDA for its pharmaceutical cannabidiol (“CBD”) for the treatment of Glioblastoma Multiforme (“GBM”); GBM is the most common and aggressive form of malignant primary brain tumor affecting thousands of patients worldwide
    • Oral dronabinol is a close cousin of nausea/anorexia therapy Marinol
    • Insys Therapeutics believes its Marinol reformulation, which would be sold under the brand name Syndros, can more effectively help treat patients suffering from nausea that is caused by chemotherapy
    • If approved, Syndros would also be used to restore appetite in AIDS patients
    • Marinol generates more than $100 million in annual revenue, but an easier-to-use formulation of the treatment could prove bullish for $INSY stock
  • Unlike many other CBD-focused companies in the space, Insys specializes in producing synthetic forms of cannabidiol that are over 99% pure
  • Management believes that it is the only U.S.-based company with the capacity to produce pharmaceutical CBDs in large quantities
  • In addition to its GBM program, the company intends to pursue numerous other areas of the CBD industry. There are many different types of products in the CBD market, for example CTFOCBDOnline sell CBD skin care oils as well as CBD oils for diffusing around the home. It is also expected in the coming years that many new CBD products will be create and marketed.
  • Insys also won the 2014 Arizona Bioscience Company of the Year Award by the Arizona Bioindustry Association (AZBio)
  • In one of the hottest years for biotech IPOs in recent memory, Insys was the top performing IPO of 2013 with over 380% growth in shareholder value and a market cap in excess of $800 million at the end of the year
  • 2014 brought even faster growth, with $97.3 million in total net revenue reported in the first six months of the year
  • Despite its recent problems, analysts expect Insys Therapeutics to deliver annual earnings growth of 28% over the next five years, outpacing the industry’s expected growth of 25.80% and 7.46% for the S&P 500

Canadian-Based Pot Stocks:

Of the 18 companies operating in the Canadian market, there are 8 publicly traded companies. Although there are 18 companies growing and selling cannabis, five of those companies control 42%+ of the market.

  • Aurora Cannabis (OTCQB:ACBFF) – 3,000 patients
  • Aphria – 4,500 patients
  • Canopy Growth Corporation (OTC:TWMJF) – 12,000 patients
  • Mettrum (OTC:MQTRF) – 6,145 patients (as of February 2016)
  • Organigram (OTCQB:OGRMF) – ~2,000 patients*** (as of 10/21/16)

Aurora Cannabis (CSE:ACB)

  • Aurora’s production facilities are located in Mountain View County, Alberta, near the Rocky Mountains
  • The company aims to “produce the cleanest, safest medical cannabis available on the market,” and all of its strains are currently offered at $8 per gram
  • June 8, 2016, announced a best efforts private placement for gross proceeds of approximately $15 million
  • Also, Aurora acquired CanvasRx, the largest medical cannabis patient outreach service in Canada

Aphria (TSXV:APH)

  • Licensed under MMPR, Aphria is located in Learnington Ontario, at “Canada’s southernmost point”
  • The company announced on June 2 that it expects to more than double its growing capacity—the company’s board recently approved a $10 million project increasing its greenhouse square footage from 43,000 to 100,000 square feet
  • Canada is a better investment opportunity than the United States in terms of publicly traded stocks
  • Aphria is a low-cost producer and is poised to be a market leader in the burgeoning Canadian cannabis market
  • With a market capitalization of $129 million and long-term EBITDA potential of $145 million, Aphria is a very promising company
  • Aphria has approximately 7% market share
  • Now that recreational cannabis will begin in 2017, Aphria has made strategic investments to ensure they will be a market leader in the Canadian cannabis market
  • Currently, there is over 1 million square feet of approved production capacity licensed in Canada
  • Of that ~1 million square feet of growing capacity, Aphria currently is licensed for 44,000 square feet
  • While that may not seem like a large chunk of square footage in comparison to the market, Aphria inked arguably the best deal in MMPR that went completely unnoticed
  • Low Cost Producer
    • Aphria produces a gram of cannabis for $1.67 and its “All-in” costs are $2.22 (“All-in” costs include packaging, shipping, testing, etc.)
    • Aphria is a low-cost producer because they are growing in a greenhouse in Leamington, Ontario (“The Tomato Capital of Canada”) that provides a conducive environment for growing
    • They boast Gross Profit margins of 74% and that will only increase as they scale their 44,000 square foot facility to eventually 1 million square feet
    • With 42% of their costs fixed, Aphria will substantially reduce their COGS as the fixed costs will be spread across a larger facility and that will make them the lowest cost producer by a wide margin
    • Greenhouse growing is usually cheaper than indoor growing and the fact that Leamington is one of the sunniest parts of Canada allows Aphria to use natural sunlight more than any other greenhouse grower
  • Strong Balance Sheet & Profitability
    • Aphria has a fortress balance sheet that will enable them to self-fund growth without the need to tap into the capital markets for some time
    • This provides investors with the peace of mind that they will not be heavily diluted which could significantly hamper ROI for investors in the future
    • Another essential differentiating factor is the fact that Aphria was the 1st publicly traded company in the Canadian market to report a quarter of being cash flow positive
    • This will enable Aphria to grow their business organically through their operating cash flow and it demonstrates management’s prudent approach to building Aphria with the market
    • Aphria grew revenue 32% quarter over quarter, while lowering COGS, which in turn increased Gross Margins by 500 basis points quarter over quarter
    • EBITDA for the 3rd quarter was $423,350, translating into a 15.8% EBITDA margin that has the potential to reach 30%-40% as Aphria scales up production
    • As of April 2016, Aphria has $14 million in cash and working capital totaling $17.7 million
    • Aphria has $0 in long-term debt and only $1.6 million in current liabilities
    • Aphria may want to go into the capital markets if they believe it is prudent to accelerate growth for the incoming recreational market but it seems unlikely with all the cash they can generate from exercising all the outstanding warrants and options
      • If Aphria exercised all the outstanding options/warrants, it would bring in approximately $36 million
      • The weighted price of all the options/warrants is near the current market price, which shows management’s strong commitment to serving shareholders

Canopy Growth Corp (TSXV: CGC)

  • Most diversified of Canadian publicly-traded marijuana producers
  • In 2015 closed $14.4 million prospectus financing that included no warrants, making it the most non-dilutive capital raise in the marijuana space across the board
  • One of the larger Canadian marijuana stocks, Canopy holds producers Tweed and Bedrocan under its umbrella as the result of a merger
  • Near the end of May, Bedrocan stated that it would begin offering same-day delivery services in Toronto
  • Canopy Growth also announced it would be expanding into Australia as well through a partnership with AusCann Group Holdings
  • At the start of June, Canopy announced it had received conditional approval to list on the Toronto Stock Exchange
  • Prior to Tweed and Bedrocan merger
  • Tweed Marijuana
    • Had a market cap of $111-million
    • Tweed is licensed, few companies can make that claim
    • It also has a facility that meets Health Canada’s strict security and quality demands
    • Tweed’s production facility is located in the old Hershey factory in Smith Falls, Ontario
    • Tweed stumbled somewhat trying to get its first batches to market, highlighting the challenges of this business
  • Bedrocan Canada
    • Best in class, thanks to its long experience and scientific expertise
    • Subsidiary of Dutch company Bedrocan BV, which runs the 13-year-old Dutch medicinal marijuana program
    • The only company in the world that can export marijuana internationally
    • Bedrocan BV is also the sole supplier to Germany, Finland, Italy and Norway
    • Bedrocan’s CEO, Marc Wayne, is Chair of the Canadian Medical Cannabis Industry Association
    • Bedrocan was invited by Health Canada to advise the government on the Canadian program

Mettrum (TSXV:MT)

  • One of the first medical cannabis producers in Canada to be licensed under MMPR
  • It operates three facilities in Ontario
  • Mettrum Originals, a wholly owned subsidiary of Mettrum, is Canada’s pioneer hemp producer and distributor under the Industrial Hemp Regulations (Canada) issued pursuant to the Controlled Drugs and Substances Act (Canada)
  • Mettrum is managed by a team of dedicated professionals with decades of combined experience in the agri-pharma, pharmaceutical, distribution and technology industries
  • Their initiatives led to the creation of two industry firsts
    • The Mettrum SpectrumTM , a medical cannabis classification system that categorizes cannabis products based on their strength, terpene profile and cannabinoid profile
    • The cannabis electronic medical records (CEMR) application
  • The company recently launched the Mettrum Registry Research Program (MRRP), a Canadian SHIELD ethics review board approved study that will systematically gather data on up to six thousand Canadian patients that have been prescribed medical cannabis
  • Mettrum Health is a vertically integrated provider of cannabis products
  • For those who choose cannabis for their health, Mettrum’s “Live Your Way” campaign is a commitment to provide ongoing access to all things cannabis
    • Dried flower
    • Oil extracts
    • Healthy line of hemp based functional foods, Mettrum OriginalsTM
  • Mettrum is well-positioned with existing available capacity to service a retail cannabis market
    • Currently, Mettrum is licensed to produce 3,550 kilograms per year with a current production capacity of 6,000 kilograms
    • The company can expand its production capacity to 12,000 kilograms per year within its existing facilities at a low capital cost
    • In addition, the company can expand its capacity to more than 26,000 kg per year on its existing properties
  • Mettrum plans to pursue an aggressive retail strategy pending new legislation at the Federal level
  • On May 9, the company received an amendment to its license allowing it to both produce and sell medical cannabis and extracts. “This latest milestone is significant as we can now transition our distribution hub from our original facility at Bennett Road North, to our largest facility down the road. We continue to advance our business plan…these latest amendments will contribute to our continually improving operational efficiency and margins,” said Michael Haines, CEO of Mettrum

OrganiGram (TSXV:OGI)

  • As its name suggests, OrganiGram specializes in producing organically grown medical marijuana
  • The company is licensed under MMPR, and has a production facility located in Moncton, New Brunswick
  • Organigram also added 6 growing rooms bringing its annual production capacity to over 3,100 kilograms, which will be brought up to 7,500 kg per year when its phase 6 and 7 ramp-up adds an additional 12 growing rooms. Organigram reported an all-in cash cost per gram of $1.91 and a gross margin of 63 per cent.
  • On June 2, Organigram closed a $10 million bought deal financing and announced the appointment of Peter Amirault to the company’s board of directors