What the Five Largest Cannabis Stocks Can Tell Us
The early leaders in market cap (the total value of publicly-traded equity) in an expanding industry like cannabis can tell us a lot. These companies have a lot of advantages by being on this perch, but also some responsibilities.
They have access to cheap capital—for as long as decent stock prices give it to them. Second, they have the most exposure, the greatest likelihood of being mentioned or referenced in the press (like so).
This list is by no means meant to be a blueprint for setting up a basket of investments, but investors can learn a lot about the state of the industry by looking at the companies the investing masses have currently placed at the top of the heap.
Because none of these companies are standing on the legs of their fundamentals; with one exception, these companies have zero net earnings to offer shareholders. Cash burn rates are high at a few of them, and key components of the business model and value proposition have yet to be launched and/or proven.
So if we can’t go off fundamentals, we can only go off the bets made by other investors, the business models themselves and the precedents of leadership and vision being set by the people currently running these companies.
So with that in mind, let’s take a look at the five largest market caps in the cannabis space (as of January 26th).
GW Pharmaceuticals (NASDAQ: GWPH)
Market Cap: $1.49 billion
2014 Performance: 86%
Trailing 3 Mo. Performance: -19%
The U.K.-based pharmaceutical firm currently has a market cap just shy of $1.5 billion. Most of that value is comprised of strong investor expectations for the company’s Sativex and Epidiolex drugs. Sativex, the first drug derived from plant-based cannabinoids, has already been approved or launched in more than 25 countries outside the U.S. for treatment of multiple sclerosis. But it’s currently generating less than $8 million in sales annually worldwide, not enough to justify a $1.5 billion market cap on its own.
Sativex’s long term revenue potential took a hit last month when the company released new clinical data showing that the drug failed to meet its primary efficacy endpoint in the management of pain for advanced cancer patients. However, Sativex is still in the midst of two additional Phase III human trials that could allow them to file an application for FDA approval in the U.S.
By the end of this year investors are expecting to see Phase III data for Epidiolex in the treatment of severe epilepsy. The drug has received orphan designation from the FDA for two severe syndromes, as well as fast track designation for Dravet Syndrome. If GW can prove that Epidiolex is a viable treatment option over currently approved alternatives, the drug has the potential to be a blockbuster (over $1 billion in annual sales).
In addition, GW has a strong and growing intellectual property portfolio in the area of cannabinoids, and several promising compounds in Phase I and II testing.
Insys Therapeutics (NASDAQ: INSY)
Market Cap: $1.71 billion
2014 Performance: 61%
Trailing 3 Mo. Performance: 29%
Insys belongs here with an asterisk of sorts, seeing as they are a pharmaceutical company that makes synthetic cannabis compounds—nothing is derived from the actual plant. On the plus side, Insys is producing said synthetics under the accepting eye of the federal government and the DEA, right here in the United States.
The company’s largest-selling drug, Subsys, prescribed for treatment of advanced pain associated with cancer, has been causing investors some concern in the past year as news was released about potentially improper prescription writing by a small group of doctors.
Despite multiple Phase III trials expected to be under way this year for sublingual sprays and pharmaceutical-grade CBD, investors are wary of what appears to be some issues with controls within the company’s management.
Maybe because of said fears, Insys is the rare case of a cannabis-centric stock that has a respectable earnings multiple. INYS trades for less than 35x trailing earnings, and revenue has been growing rapidly due to higher sales of Subsys.
Cara Therapeutics (NASDAQ: CARA)
Market Cap: $250 million
2014 Performance: -17% (Went public Feb 2014)
Trailing 3 Mo. Performance: 36%
A newly-added member of the Nasdaq Biotech Index, Cara Therapeutics is taking a novel approach to drug discovery within the cannabis compound universe. It is currently just a clinical-stage company (no approved products), but its discovery platform is based on targeting what are known as kappa opioid receptors and cannabinoid receptors for use in treating pain and inflammation.
CR845, the company’s latest-stage compound, is for pain management in post-op patients. CR845 is scheduled to begin Phase III trials sometime in 2015, and early data results confirm the company’s assertion that CR845 provides efficacy with a much lower risk of “getting high” and addiction than currently used opiates like oxycodone and hydrocodone, both of which are Schedule II drugs.
If CR845 can bring the market a viable alternative to some very dangerous (yet highly prescribed) opiates, then the substantial equity valuation will be justified. But until then, investors should consider Insys like they would any other startup, and know they are assuming a high level of risk.
Medbox (OTC: MDBX)
Market Cap: $148 million
2014 Performance: -52%
Trailing 3 Mo. Performance: -39%
Medbox has been a quagmire for investors in the past year. After peaking out at north of $90 per share in early 2013, Medbox shares trade for less than $5 today. Medbox gave us a business model that seemed to offer a lot of promise—vending machines for medicine distribution that would allow for safe transmittal of sensitive products while tightly controlling access and personal information.
But an investor looking through the recent news flow will see little other than red flags, like the announcement on December 30 (in a press release not published on the company’s investor relations page) that they would be “amending and restating” financial results for the fiscal year ending 2013, the last two quarters of 2013 and the first three quarters of 2014 due to improper accounting practices.
Needless to say, this is not good. It’s never good when a company press release contains phrases like “federal grand jury subpoena” and “the situation permits Medbox’s existing lenders to trigger default remedies but they have deferred taking action pending discussions on refinancing the company.”
Once a darling stock, Medbox is quickly joining the ranks of cautionary tales—one that investors can learn from. At the current rate the value of Medbox’s equity is dissipating, in three months it won’t be big enough to make this list, or even a list of the top 10 market cap stocks. There are cash burn concerns, the costs to bring in outside auditors and restate financials will not be cheap, any type of “refinancing” is bound to be incredibly dilutive to current shareholders. Meanwhile, meaningful revenues are nowhere to be found on the income sheet.
Cannabis Sativa Inc (OTC: CBDS)
Market Cap: $128 million
2014 Performance: 585%
Trailing 3 Mo. Performance: -3%
Cannabis Sativa has been an interesting case study for the modern marketing of a cannabis company, but as yet there are little to no revenues to speak of. The company has certainly made some splashes in the past year, including bringing in former governor of New Mexico (and 2012 Libertarian Party nominee for President) Gary Johnson as CEO. The company is featuring him prominently in its public front, and Johnson has been a very outspoken proponent of legalization for some time. He has been on record saying things like “Conceivably, in 20 years, 20%-plus of pharmaceuticals will end up being cannabis-based.”
Cannabis Sativa has a couple businesses under its roof, which at present appears to be a disparate grouping. The company plans to market a “hi” branded cannabis lozenge in 2015, while its Wild Earth Naturals subsidiary sells CBD-infused beauty and skin care products. There is also a lottery ticket of sorts in the company’s ongoing patent application for a “super strain” of cannabis brought in with the addition of Steve Kubby and Kush, Inc., in 2014.
But to date, nobody has been able to obtain a patent for a strain of cannabis, so investors should take a wait-and-see approach to assessing potential intellectual property in the realm of individual strains.
Several things jump out when looking over this group. Even though legal cannabis businesses generated over $2 billion in sales last year, almost none of that was generated by the companies in this group, or by any publicly-traded company for that matter. Until the federal government’s barriers are removed or contained in a predictable way, investors should count on this trend continuing.
Pharmaceuticals is obviously a place where some value is being created, which makes sense considering that the vast majority of legal users in the United States are doing so for approved medical reasons.
And ancillary businesses should figure to rise up the ranks of future iterations of this list, as more states come online with recreational and medicinal usage legislation.
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