In the 1960s and 70s, pot smokers were warned that marijuana could cause schizophrenia, among other mental disorders. Today, it’s lawmakers and government officials who exhibit symptoms of that condition. On August 11, 2016, the Drug Enforcement Administration (DEA) announced that it would allow more research into marijuana, and would expand the number of sites that can grow cannabis for research. At the same time, the agency rejected requests from several sectors, including The Epilepsy Foundation, that it relax the classification of cannabis from Schedule 1, as a dangerous, highly addictive drug with no medical use. Bummer, man.
Today, 25 states have a medical or recreational cannabis program, which amounts to a $7 billion annual industry. Among the remaining 25 states, about 14 have passed an “incredibly limited, narrow subset of allowance of a cannabis program,” according to Bob Morgan, a healthcare lawyer at Much Shelist, who was appointed the first statewide project coordinator by the Governor of Illinois to develop and implement a regulatory framework for the use of cannabis by eligible patients. He oversaw five state agencies creating program rules and fees, laboratory testing and database systems, and a selection process for licensed dispensary facilities and cultivation centers. He advises hospitals and healthcare providers about the potential impact of DEA registration on employment policies and more.
“The short version [of the DEA’s decision] is, if you are a researcher in the U.S. who wants to do research that involves marijuana on humans, you generally have to go through the National Institute on Drug Abuse and HHS to get access to a limited supply of marijuana,” Morgan said.
The cannabis program is far from the 1960s version, however, and in states such as Georgia, a patient with terminal cancer must register with the state to get a card that certifies them as a medical marijuana patient and allows them to legally possess a small amount of marijuana. But it doesn’t create any network for that patient to buy, grow or process marijuana in the state of Georgia, Morgan said. “So they have to get it from out of state.” Crossing state lines puts them in risk of criminal prosecution, obviously.
“The state-by-state regulation has artificially limited the scale of the types of businesses we see in the cannabis space,” Morgan said. “It is not uncommon today for M&A transactions of $1 million to $2 million for a dispensary. It is very uncommon to see anything in excess of $10 million.”
Those relatively low entry stakes, coupled with federal restrictions that limit cannabis business owners’ access to the banking system, mean most companies in the field are listed as pink sheets. One recent deal involved the merger of MediJane Holdings Inc. (OTCQB: MJMD), a wholesaler and product distribution company, and Phoenix Life Sciences, a privately held manufacturer and marketer of transdermal patches and sublingual sprays using cannabinoid and other plant extracts. Phoenix was formed in March 2016, and both companies are located in Greenwood Village, Colorado.
From an investor’s standpoint, Morgan agrees that there is a much higher risk profile being involved in this business. “But there’s also a much greater expansion and upper trajectory of the market, unlike almost any other market today,” he said.
First, think long term. Getting in and out quickly will not pay off, Morgan said, “though there are some real opportunities to invest in a company that is successful and is going to be more successful.” It depends on the state, on the type of business, and on the investment terms which are similar to other investments outside of cannabis. “But yet, there’s this early stage, state-by-state determination,” he added.
For example, a cultivator in Illinois has evaluations of $40 million to $50 million for one facility, Morgan said, “but that’s speculative evaluation based on where the market’s headed, as opposed to where it is at this moment.”
Post Election Highs?
The looming presidential election has more than a few healthcare markets drawing in breath before November 8th. Both candidates have addressed the medical marijuana issue, Morgan said, and both candidates will allow each state to continue to figure this medical issue out, democratically. “As a general matter, I think everyone assumes that it’s going to be more status quo and upward trajectory, and continue to be a state-by-state basis for the next few years.”
In November, California is likely to pass a recreational use law, which would dramatically change the industry in terms of scale, Morgan noted. “Their medical market is already larger than Colorado’s recreational market, to give you a sense of scale, just because of the population.”
Medical research on cannabis has been carried out for many years in Israel, Germany, the Netherlands, the United Kingdom and other countries. The United States is just approaching a more sophisticated understanding of the efficacy of cannabis, but because of FDA involvement and the limited number of suppliers, studies could stretch five to eight years to get through the FDA approvals.
Step by Step, State by State
There is no list of “top five” medical marijuana companies, according to Morgan, because everything still depends on state-level laws and regulations. Consolidation has hit the markets in states that have passed recreational-use laws. Colorado is a recreational use state, but in Denver alone, there are approximately 300 cannabis businesses, compared with 450 a few years ago, Morgan said. “And of those 300, there are about 10 companies [combined] that own about 30% to 40% of the market.”
Billion-dollar institutional investors are playing in this market, Morgan said, including libertarian Peter Thiel, who created a $75 million fund. Significant for the cannabis market, but peanuts for a billionaire. Some New York-based funds have reached the $100 million mark.
Think of licenses to grow and dispense cannabis as a casino license, and you begin to understand the nature of the competition for the limited number given out by the states. “The application competition is very fierce, and those that are successful across multiple states very quickly stand out,” Morgan said. □