A Case Study in the Risks of Marijuana Biotech
Regular readers of MJINews hardly need to be persuaded that the growth of the legal marijuana market has made a number of entrepreneurs and their investors a lot of money. It will yet do more of the same. In another five years the industry could show total revenues of $35 billion, if all 50 states and Washington, D.C., legalize retail marijuana.
But … there is no profit without risk, and it is well for those who would invest in this field, either capital or entrepreneurial energy or both, that they recognize the risk.
The valuation reversal suffered by Abattis Bioceuticals (OTCQX: ATTBF), a Vancouver-based biotech company aspiring to compete in the entire marijuana industry supply chain from seed to consumer sale, illustrates that point of risk vividly. For a brief period in mid-July 2014, ATTBF traded at between $0.60 and $0.70 per share. Less than a year later it is trading at roughly $0.05. This doesn’t look life a temporary valley either. This nickel-per-share valuation has come about as a consequence of a steady decline: no easy fix looks to be in sight.
The fall-off looks even more dramatic if one goes back four months further than those July trades. The company’s all-time peak price, $2.21 per share, was its close for March 21, 2014, and that price came about on the optimism engendered when the company formed a partnership with the quality-assurance laboratory Phytalab.
The relationship went further the following month, when ATTBF acquired a controlling interest in Phytalab. There was a lot of talk about “synergy,” as there always is, but the results over time have proven disappointing to many investors.
In June 2014, Abattis claimed that it was in the late stages of the MMPR licensing process. That is, it was near a medical marijuana producer license under Canadian law.
The decline in value since those halcyon days has something to do with the departure of a former Abattis director, Nick Brusatore, who defected to chair the board of a competitor, Affinor Growers. In October 2014, Abattis filed a lawsuit against Brusatore, Affinor, and two former employees of Phytalab allegedly poached by Affinor.
In the opinion of one careful observer of the industry, Alan Brochstein, “The litigation consumed much of management’s focus” in a critical period, until finally it could be resolved, in April 2015.
Turnovers and Regulatory Risk
Also, aside from the Affinor matter, there has been turnover in key posts: seldom a good sign. Abattis’ chief executive, Mike Withrow, resigned in January 2015, to be replaced by William Fleming. Jaouad Fichtali, appointed as Chief Technology Officer effective November 14, 2014, only lasted two months in that position. The company announced in January that Fichtali was moving to the post of “Extraction Advisor,” and that the CTO position would remain open because the board no longer believed that the role of such an officer is vital at this stage.
The departure of key individuals is a perennial risk for startups. So, especially for tech-oriented firms, is the leakage of proprietary information, whether because those people have gone over to the competition or just because those still on board talk carelessly.
Yet another risk: unfavorable regulatory attention. Abattis’ claim about the MMPR licensing process drew fire from the British Columbia Securities Commission. On January 28, 2015, Abattis issued a press release “to clarify its disclosures” as a consequence of a review by BCSC, to the effect that its acquisition of a license remained very speculative. This retreat may not have been disastrous news in itself, but it could hardly have helped investor confidence.
Some of the ups and mostly downs of Abattis’ stock price of late may simply be a reflection of the old adage, “buy on the rumor, sell on the news.” September 8, 2014, was the day Abattis announced the receipt of its cannabis lab certification in Washington state. For a time while this certification was still “rumor,” those who believed in its truth were bidding the price up. As soon as it was news, given that by then its value had been discounted, some took it as a signal to take their profits and pull out.
The stock price fall isn’t merely an index of trouble, it is a cause of trouble. “Last year they were fortunate: they were able to finance themselves through the exercise of options and warrants,” Brochstein said. “But with the fall in the stock price, that means of financing is no longer available, and they have had to look for private placements.”