The Medical Cannabis Investment Landscape
The cannabis industry has been one of the most active markets to watch over the last few years. In fact, there has been a significant increase in investments, transactions and the number of publicly traded cannabis companies. This trend is expected to continue in 2019.
Cannabis is a family of plants with two primary classifications, Indica and Sativa. Despite the two falling under one cannabis family, they are widely different in their biological makeup and effects. The main psychoactive part of cannabis is tetrahydrocannabinol (THC), one of 483 known compounds in the plant including at least 65 other cannabinoids. Cannabis can be used by smoking, vaporizing, within food, or as an extract. Although marijuana can fall into either family, marijuana is linked to having psychoactive effects on the user because of its THC component-heavy makeup. On the other hand, hemp does not provide psychoactive effects because of its main component, cannabidiol (CBD) and while marijuana can contain anywhere from 15 percent to 40 percent of THC concentration, hemp normally contains less than 0.3 percent. In fact, it is the heavy THC concentration within marijuana which caused international organizations to put restrictions on the plant, making it one of the most enforced drugs worldwide. However, due to ongoing research and studies, positive results are leading countries to reconsider the cannabis plant. In particular, most countries are looking to adopt a cannabis legislation for medical applications.
Overall, the combination of the accelerating recreational and medical sectors is set to cause the greater cannabis industry to witness sizeable growth in the near future. According to data compiled by Grand View Research, the global legal marijuana market is expected to reach USD 146.4 Billion by 2025, exhibiting a CAGR of 34.6 percent. The medical market accounts for the largest share of the overall cannabis industry, but the US and Canada are expected to gradually shift the market from medical to recreational. Currently, the recreational market has a very limited geographic reach due to legal restrictions, when compared to the medical sector. While the two markets are perceived very differently, one cannabis-based product is still thriving in both: CBD.
Specifically, within the CBD marketplace, CBD hemp oil accounts for the largest share of the market because of its healthcare associated benefits. According to data compiled by Transparency Market Research, the global CBD hemp oil market was valued at USD 950 Million in 2017 and is expected to surpass USD 2.5 Billion by 2026. Additionally, the market is also expected to register a CAGR of 11 percent from 2018 to 2026. CBD oil is mainly being used for medical applications, but the increasing usage of oil in forms of spray, vape, and tinctures is expected to propel the entire industry.
CBD is primarily marketed as a health and therapeutic product, which ultimately led the US Food and Drug Administration (FDA) approval of Epidiolex, a CBD-based drug developed and marketed by GW Pharmaceuticals (https://www.gwpharm.com, Nasdaq: GWPH) to treat seizures associated with Lennox-Gastaut syndrome or Dravet syndrome in patients 2 years of age and older. Epidiolex was launched in the US market on November 1, 2018 following development from IND to FDA approval in just over four years. While the biggest barrier to the CBD market is currently the lack of clinical trials and research, Epidiolex was well studied. The product went through extensive testing from four Phase 3 placebo-controlled trials demonstrating efficacy and acceptable safety profile, is designated as Schedule V by the Drug Enforcement Agency (DEA) and has extensive “real-world” long-term experience from compassionate use program and open-label extension studies.
While the FDA has only approved Epidiolex to date, studies have suggested that CBD is also effective in suppressing symptoms associated with cancer, chronic pain, Alzheimer’s, anxiety, depression, and many other medical conditions. CBD-based products are very versatile since they can potentially treat many conditions in different medical fields. Additionally, CBD requires a lower dosage and less frequent use when compared to traditional, medically-prescribed treatments such as opioids. Studies have shown that cannabis, in general, has significantly fewer side effects when compared to regulated and approved treatments currently within the market.
Investments and Transactions
The cannabis sector was dominated by merger and acquisition (M&A) activity throughout 2018, according to a market report from Viridian Capital Advisors (https://www.viridianca.com). The report demonstrated that M&A activity increased 108 percent in 2018 compared to 2017. A total of 321 business transactions took place in the entire cannabis sector last year. The cannabis advisory and investment firm indicates that most of the activity took place in the Canadian markets, with a particular focus on Ontario and British Columbia. The report also shows that the top states for these transactions in the US were California, Massachusetts, New York, Illinois and Arizona.
The spike in capital flowing into marijuana businesses in the last 12-15 months was driven by legislative changes both at the national level in Canada and at the state level in certain US states. The growing public support for legalization may begin to show up in legislation in 2019 as lawmakers consider a bill to allow marijuana companies to access FDIC-backed bank accounts. The US surgeon general has also indicated that the federal government may move toward rescheduling cannabis to permit more medical research. As public support for legalization grows, there is expected to be shifts in investor confidence which may entice big strategic players to make bets on cannabis products.
The value of venture capital deals in the US marijuana industry nearly doubled in 2018 compared to 2017, according to data from Pitchbook, and private equity investments in cannabis increased by more than 33 percent. The number of deals seen in PE and VC also increased over prior periods. The increased number of deal and values are also associated with increased median post-money valuations and median deal sizes (i.e., more money is coming into the market). Some of the largest VC and PE deals in 2018 went to American cannabis companies in the healthcare sector, including Verano Holdings, Surterra, and Cura Cannabis Solutions, as legal medical marijuana markets expanded.
This year will likely be a proving year as companies that have received investments in prior years will need to deliver results in the early part of 2019 if they hope to be in a position to raise more money going forward. Even given 2018’s growth, 2019 looks to be even bigger as far as the expected number of investments and acquisitions in the US market. Larger pools of capital, public and private, are starting to get comfortable with the fact that the US market will become the largest cannabis market in the world. Like any risky investment, investors need to conduct significant due diligence and focus on companies that have an attractive value proposition and are led by a management team that operate in the best interests of shareholders.
David H. Crean, Ph.D., is a Managing Director for Objective Capital Partners, a leading investment banking advisory firm whose Principals have collectively engaged in more than 500 successful transactions serving the transaction needs of growth stage and mid-size companies. Services include M&A sale transactions, partnering/ licensing, equity and debt capital raises, valuation and comprehensive advisory services. Additional information on Objective Capital Partners is available at www.objectivecp.com.
This article is provided for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. Securities and investment banking services are offered through BA Securities, LLC Member FINRA, SIPC. David H. Crean is a Registered Representative for BA Securities. Objective Capital Partners and BA Securities are separate and unaffiliated entities. While the information provided herein is believed to be accurate and reliable, Objective Capital Partners and BA Securities, LLC makes no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person.
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