An interesting way to look at the progress of marijuana’s legalization is through the eyes of potential investors in the emerging financial industry, specifically the news and websites devoted to stocks and investment.
One such site, which has devoted quite a bit of attention to investment in the marijuana industry, is The Motley Fool. Their advice and analysis may be sound—or not—but the fact that they are devoting so much attention to the marijuana industry reveals a lot about how the financial industry assesses marijuana legalization as an investment opportunity.
First, as with all investment options, there is the issue of risk.
The clash between state and federal law remains a significant area of concern, especially the industry’s lack of access to the banking system and “a major tax code disadvantage known as 280E,” which prevents marijuana businesses from deducting business expenses before paying taxes, meaning they must pay taxes on gross rather than net profits.
These factors bias investors in favor of companies whose activities are compatible with federal as well as state law. Three firms are mentioned prominently, GW Pharmaceuticals, Insys Therapeutics and Medical Marijuana Inc.
GW Pharmaceuticals is a well-known firm that sells a cannabis-extract drug Sativex, approved for use for Multiple Sclerosis in several countries and awaiting approval for use in the United States. GW Pharmaceuticals has a market cap of $3 billion, but not because of Sativex but instead from investor optimism about another developmental drug, Epidiolex, a cannabidiol drug showing promise for the treatment of seizures.
According to Motley Fool, “Analysts think that GW Pharmaceuticals will price Epidiolex (assuming it wins regulatory approval) between $30,000 and $60,000 per year. At the low end of that range, the biotech would be looking at annual revenue of more than $700 million in the U.S. If Epidiolex gains approval in Europe, the figure would be significantly higher.”
But there is a problem—the insurance industry would have to pay for the use of the drug by patients, and that might be a price too high for them to accept given the presence of low cost cannabidiol alternatives on the market.
Insys Therapuetics was favorably viewed by Motley Fool in a March 21 article, despite a recent 30 percent drop in the price of their stock.
At the time, Insys had announced a delay in releasing some financial reports and was waiting for the DEA to schedule their new FDA-approved product Syndros (an orally administered version of dronabinol, AKA synthetic THC). Motley Fool estimates the drug could generate $200 million in annual sales, noting that it is already approved for nausea and anorexia. T
he DEA placed Syndros in Schedule II on March 23, disappointing Insys which had hoped for less restrictive Schedule III status. Insys also manufactures Fentanyl, a powerful opioid painkiller, and donated $500,000 to the campaign opposing marijuana’s legalization in Arizona.
Stocks for companies involved in the legal marijuana market face a great deal of uncertainty for investors, according to Motley Fool, and exhibit one is Medical Marijuana, Inc. whose shares have recently lost 20 percent of their value.
“Medical Marijuana Inc. and other marijuana stocks could be headed for a long roller coaster ride,” Motley Fool explained. “Every comment made by the White House and every tweet from President Trump about marijuana holds the potential to cause shares to rise or fall. This could go on for another four years—and potentially longer.”
Despite the risk and uncertainty created by the clash between state and federal law, the stock watchers at Motley Fool remain attentive to weekly developments affecting investors interested in the marijuana industry.
The last few years have seen “major milestones” and overall the “largest marijuana stocks have skyrocketed in the past year.”
From their perspective, the seven “green giants” with large market caps and tremendous recent growth are: GW Pharmaceuticals, Canopy Growth Corp., Aphria, Aurora Cannabis, AXIM Biotechnologies, Corbus Pharmaceuticals and Medical Marijuana Inc.
But here is a cause for concern—all these firms have “an astronomically high price-to-sales ratio,” but “very little in the way of sales.” In other words, “Combined, these seven marijuana stocks with an aggregate valuation of $7 billion have generated a cumulative $61.6 million in sales. That’s a frighteningly bad figure for fundamentally focused investors”
Some of imbalance between capitalization and sales is due to firms like GW Pharmaceuticals that have drugs in development, and the profit potential for these drugs has attracted considerable investment. Overall, though, the marijuana industry, in terms of conventional pharmaceuticals and the still somewhat unconventional industry based on state-level legalization, remains a risky financial proposition.
Risk is risk, but it is also an opportunity for tremendous long-term profits.
The amount of attention devoted to the opportunity presented by the marijuana industry reveals how the market views the future of legalization, and that’s with cautious optimism. The market is hopeful, and confidence is growing. The profit potential in marijuana related investments has become very attractive to investors and becoming more and more attractive every day.
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