At least four states posted record cannabis sales in June and July, Illinois, Maryland, Massachusetts and Missouri.
These sales trends and ongoing legalization around the world are why global cannabis sales will hit $104 billion a year by 2030, says a recent report from Vantage Market Research. That would represent an annual growth of 26% a year from 2023 to 2030.
Despite these positive trends, cannabis stocks are being held back by delays in reform efforts in Washington, D.C.
Politicians and a former drug regulator recently predicted that will change over the next six months. They expect progress on federal reform in that timeframe (see below for details).
However, because of the frustration inherent in waiting for federal reform, I continue to look beyond pure-play cannabis companies to other businesses with cannabis exposure, in finance and now biotech. I’m favoring names where insiders are buying. Here’s more detail on a new cannabis portfolio I am creating.
The Cannabis Insider Portfolio
Federal progress on favorable banking reform and de-scheduling will be huge catalysts that are likely to happen at some point.
But because the wait is frustrating, it makes sense to continue to look beyond pure-play cannabis companies, to businesses that have exposure to the group but do not touch the plant.
I’m going to favor names that have solid insider buy signals, meaning corporate insiders are buying their company stock in size. I will track the performance of the Cannabis Insider portfolio in the full issue of Cabot Cannabis Investor.
I’ve already introduced two names on this theme, Chicago Atlantic Real Estate Finance (REFI) and AFC Gamma (AFCG). These are investment companies that finance businesses in the cannabis space. The first operates in the Chicago area, where cannabis sales have been growing rapidly, since legalization was relatively recent.
AFC Gamma is a real estate investment trust (REIT) that can fund cannabis ventures anywhere in the U.S. “As states continue to legalize cannabis for medical and adult-use, an increasing number of companies operating in the cannabis industry need financing,” says the company. AFCG started off as a cannabis-only lender, but it expanded into the rest of commercial real estate to find more lending opportunities.
These companies pay dividend and distribution yields of 12% to 14%, and this will be the primary source of return. However, capital appreciation is also possible.
Now I want to introduce a third Cannabis Insider Portfolio name, this time in biotech. Numerous studies show that excessive cannabis use, particularly of the more potent strains now available, can cause schizophrenia. This probably happens most often in people with a genetic predisposition to the illness. As more states legalize, cannabis usage grows, and companies develop more potent strains, the incidence of schizophrenia is likely to increase. Thus, a biotech company developing a promising therapy for schizophrenia checks the box as a cannabis-related business.
Cerevel Therapeutics (CERE)
Inside the brain, neurotransmitters constantly tweak the circuitry in a very complex network of receptors and synapses. In healthy people, these neurotransmitters help maintain relative stability in emotions. But not everybody is so lucky.
Disruptions in levels of transmitters like dopamine, gamma-aminobutyric acid and acetylcholine, among others, create mental and physical issues like the tremors in Parkinson’s disease, epilepsy, anxiety, schizophrenia, psychosis and substance abuse. This often happens because of defects in the structures that receive or send the transmitters.
Recent advancements in chemistry, genomics and proteomics (the study of how proteins are used as signaling mechanisms in the body) provide tools to help understand the neural networks that underlie these diseases. That means researchers think they also have a better understanding of how tweak neural networks to “cure” these ailments.
This is where Cerevel comes in. The company has seven clinical-stage therapeutic candidates that it thinks can tweak receptors in the brain to treat neurological disorders, including Parkinson’s disease, epilepsy, schizophrenia and substance abuse.
The company has two Phase III trials for Parkinson’s disease; three phase II trials for epilepsy, dementia-related apathy, and schizophrenia; two Phase I trials for panic disorder and major depressive disorder; and pre-clinical studies of potential therapies for major depressive disorder, schizophrenia and Parkinson’s.
But it’s the potential schizophrenia therapy that concerns us the most, as cannabis investors. This one is called Emraclidine. This is an allosteric modulator. In biotechnology, allosteric modulation is the regulation of enzymes by attaching molecules to the site that an enzyme normally parks in. Emraclidine targets a receptor in the brain called muscarinic acetylcholine 4, or M4.
One of the leading theories on schizophrenia is that too much dopamine in certain brain regions causes psychotic symptoms. Emraclidine may balance dopamine levels in the region of the brain primarily responsible for psychotic symptoms. In a Phase I safety trial, Cerevel found evidence confirming that Emraclidine may treat schizophrenia. In June 2022, the company started two Phase II clinical trials in schizophrenia, known as the EMPOWER trials.
However, the trials just hit a speed bump, sparking a selloff in the stock. In late July Cerevel said that due slower-than-expected enrollment in the U.S. and delays in the startup of some clinical sites outside the U.S., data for both EMPOWER trials won’t read out until the second half of 2024.
The stock fell in response. But this is not a game-changer. It only delays progress. For me, this means the related stock weakness on the news is buyable. Insiders agree. The CEO and the chief business officer just bought a sizeable $2.5 million worth of stock at 23-24.
What to Do Now
Consider buying this stock at current levels, for the potential schizophrenia therapy, but also the other central nervous system disorder drugs. This stock has done well since it first hit my radar system for identifying promising biotech names in November 2020 at 10 a share. It now trades for 21.75. But it looks buyable again now, given the large insider purchasing response to the stock pullback, and the potential of the science here. The company reports cash of $825.1 million which it says can fund operations “into 2025,” suggesting no imminent, dilutive capital raise.
Otherwise, continue to add to exposure on days when the group is down a lot, with purchase of portfolio companies and exchange-traded funds like ETF AdvisorShares Pure US Cannabis (MSOS) or the leveraged version, AdvisorShares MSOS 2x Daily ETF (MSOX).
Now here’s a roundup of the most important cannabis sector and portfolio company news from the past two weeks.
Cannabis News from Around the World
* A former top Food and Drug Administration (FDA) official predicts the Biden administration will reschedule cannabis this year or in early 2024. Attorney Howard Sklamberg made the forecast in an interview with Green Market Report. Sklamberg held a variety of regulatory, compliance and enforcement roles at FDA from 2010 to 2017. He now works at the law firm Arnold & Porter, where he advises clients on FDA compliance and enforcement matters.
* Senate Majority Leader Chuck Schumer (D-NY) July 28 said lawmakers are “making good progress” in bipartisan negotiations on a banking reform that would favor the cannabis sector. He says advancing the bill will be a priority for a “very, very productive fall in the Senate.” The Secure and Fair Enforcement (SAFE) Banking Act would help the sector by allowing banks to serve cannabis companies, meaning dispensaries would no longer have to operate in cash only. “We’re making good progress on SAFE Banking, which, as you know, has always been a priority for me,” he said. “So, there’s a lot to do when we get back.” Progress on this bill in the autumn would be a significant catalyst for cannabis stocks.
* Verano (VRNOF) CEO George Archos said in his company’s August 8 earnings call that the troubling downward price spirals for retail and wholesale cannabis are levelling off. “While some markets like such as Pennsylvania and Ohio continue to experience some pressure, we were very pleased to see that, on average, across our portfolio, prices seem to have mostly stabilized.” This is good news for the sector, which has been plagued by year-over-year price declines of 30% or more. If the trend continues, which seems possible because so much supply has been removed and capital is scarce to create more, it will improve investor sentiment towards cannabis stocks. Both Green Thumb (GTBIF) and Trulieve (TCNNF), however, said in their earnings calls that price compression continues.
* Illinois’ July marijuana sales broke 2023 records, topping $140 million. That was the highest monthly amount for the year, and the second highest monthly total since marijuana became legal for recreational use back in 2020. The figure does not include medical cannabis sales, reported separately by a different agency.
* Maryland booked $87 million in cannabis sales in first month of legal recreational use sales in July. That includes both medical and recreational sales. June sales, for medical use only, were $42.7 million.
* Global, legal-market cannabis sales will hit $104 billion a year by 2030, says a recent report from Vantage Market Research. That would represent an annual growth of 26% a year from 2023 to 2030. Global, legal sales were $16.1 billion in 2022. The group cites increased legalization, changing attitudes towards cannabis, medical benefits, and growth in tax revenue and sector jobs, as factors driving the sales growth. Pew Research Center says 91% of adults in the U.S. support the legalization of marijuana for medical or recreational use.
* Florida Attorney General Ashley Moody said in a brief filed with the Florida Supreme Court that a proposed referendum on legalizing adult-use cannabis “misleads” voters to benefit Trulieve (TCNNF), the main funder of the referendum signature drive, and the state’s largest cannabis company. Trulieve defended the ballot language, saying it is clear, and that it “without a doubt covers one and only one subject,” a requirement in Florida.
* Israel’s Health Ministry recently published guidelines on its medical cannabis reform, which will make it easier for patients to have access to marijuana. The new rules take effect in December. Under the new rules, patients suffering from cancer, Crohn’s disease, dementia, autism, multiple sclerosis and HIV, and terminally ill patients will no longer have to obtain a medical use license. Instead, they can just get prescriptions from their doctors.
* A recent study found cannabis is associated with reduced opioid cravings among people who use the pain killers without a prescription. The results, based on surveys of 205 people who use cannabis and opioids without a prescription, suggest cannabis could play a role in reducing opioid abuse. “Increasing the accessibility of cannabis products for therapeutic use may be a useful supplementary strategy to mitigate exposure to unregulated opioids and associated harm,” concluded the study. The government-funded study was carried out by the British Columbia Centre on Substance Use and UCLA. It was published in the International Journal of Drug Policy. The National Institutes of Health (NIH) in the U.S. and the Canadian Institutes of Health Research (CIHR) helped fund the study.
* Former Minnesota Governor Jesse Ventura says he plans to launch his own cannabis brand. Minnesota just legalized recreational-use sales. Ventura says he wants to be the “first major politician in America” to have a cannabis brand. Ventura is a registered medical cannabis patient in the state. He says he typically vapes cannabis to treat neuropathy in his feet, a condition that causes numbness and tingling, and post-traumatic stress.
* The U.S. Senate, on July 31, approved a defense bill that includes provisions to bar intelligence agencies from denying security clearances due to marijuana use. The Secret Service, the Bureau of Alcohol, Tobacco, Firearms and Explosives, and the FBI have all recently watered-down rules that blocked applicants based on cannabis use.
* Colorado just cleared the way for online cannabis sales. The change gives consumers a new way to order cannabis, but they still have to pick it up from the retailer.
Portfolio Company Updates
Cresco Labs (CRLBF)
Cresco Labs (CRLBF) and Columbia Care (CCHW) agreed to terminate their merger agreement.
Cresco also opened its 32nd Florida dispensary in Palm Bay, on August 7. The company is positioning ahead of possible legalization of recreational use of cannabis there. The issue may get put to voters in the 2024 election. The Florida Supreme Court is examining the referendum language to rule on whether it is legal.
Cronos Group (CRON)
Cronos announced August 8 that second-quarter sales fell 17.7% year over year to $18.9 million. The company cited increased competition and a slowdown in medical licenses in Israel and higher taxes in Canada. The company also exited its U.S. hemp-derived CBD operations.
It reported a net loss of $5.7 million, which was an $11.9 million improvement over the year before.
Cronos reported $841 million in cash against a market cap of $666 million, which means at the current stock price you get the business for free, and then some. “Having the best balance sheet in the industry allows us to be patient and selective with our growth initiatives, and you will continue to see a methodical approach to growth,” said CEO Mike Gorenstein. “We will continue to push forward on new market growth opportunities and expand our portfolio of borderless products to be ready for new markets as they open.”
Cronos opted to discontinue guidance, citing “turbulent market conditions.” However, two international catalysts like ahead. Regulatory reform in Israel will increase medical-use license accessibility in December 2023. For certain medical conditions, patients will no longer be required to obtain a license from the health ministry. Doctors will be able to directly prescribe cannabis to those patients. Cronos also signed an agreement with a medical cannabis distributor in Germany, positioning itself ahead of liberalization of that market around the turn of the year. Germany has decided to re-schedule cannabis, no longer labeling medical cannabis as a narcotic.
The company announced it will sell a fermentation plant in Winnipeg, Canada. The move could save as much as $15 million in 2024 expenses. Its Spinach brand continued to hold the number one market share position in edibles in Canada.
Green Thumb (GTBIF)
Green Thumb announced August 8 that second-quarter sales declined 1% year over year to $252 million. The company cited price compression, offset by growth in New Jersey, Virginia and Connecticut and new store openings.
Green Thumb opened six RISE dispensaries in Pennsylvania, Virginia, Minnesota and Nevada. Second-quarter comparable sales (stores open at least 12 months) decreased 3.3% versus the prior year on a base of 76 stores.
The company reported second-quarter net income of $13 million or five cents per share.
First-half revenue increased 1% to $501 million year-over-year. Operating cash flow came in at $18 million for the quarter, and $93 million for the first six months of the year. It ended the quarter with $149 million in cash against debt of $290 million.
“This cash flow gives us the confidence to continue to play offense,” said CEO Ben Kovler. “We believe our cash flow generation, coupled with a strong balance sheet is one of our most significant competitive advantages. Right now, expensive capital is a problem for most industries, but it is especially deadly for the cannabis sector, which is blocked from traditional capital sources and saddled with a punitive tax structure.”
After the quarter closed, the company opened another RISE dispensary in Las Vegas in early August.
Tilray Brands (TLRY)
Tilray announced August 7 that it plans to buy eight beer and beverage brands from Anheuser-Busch (BUD).
The purchase, expected to close this year, would triple the size of its beer business to twelve million cases a year in sales, from four million. It would make Tilray the fifth largest craft beer business in the U.S., up from number nine.
The brands it will be buying are: Shock Top, Breckenridge Brewery, Blue Point Brewing Company, 10 Barrel Brewing Company, Redhook Brewery, Widmer Brothers Brewing, Square Mile Cider Company, and HiBall Energy.
Tilray currently owns SweetWater Brewing Company, Montauk Brewing Company, Alpine Beer Company and Green Flash Brewing Company.
Tilray eventually hopes to leverage its consumer brand experience and distribution network to include THC products after cannabis becomes legal at the federal level in the U.S.
Trulieve (TCNNF)
Trulieve, on August 9, reported a 10% year-over-year revenue decline to $282 million. That was a 1% increase compared to the prior quarter. The company cited increased traffic as a factor in the sequential gain, offset by price compression. Unit sales increased 9% sequentially to 11.6 million.
Maryland dispensary traffic increased 200% in July because of the legalization of recreational use there on July 1.
Trulieve finished the quarter with 183 dispensaries, up 11% year over year, and over 4 million square feet of cultivation and processing capacity. About a third of its dispensaries were outside of Florida.
The company reported a net loss of $404 million, or $15 million after excluding non-recurring charges, and asset impairments. The company ended the quarter with $160 million in cash against $1 billion in debt. Operating cash flow came it at $98 million year to date.
Verano (VRNOF)
Verano announced on August 8 that second-quarter sales increased 4.7% to $234 million. The company cited strength in retail and wholesale adult-use sales in New Jersey and Connecticut, slightly offset by retail declines in Pennsylvania and Arizona.
Net loss expanded to $13 million from $9.2 million, linked to higher interest and tax payments.
During the quarter, the company expanded its retail footprint by opening three MÜV dispensaries in Florida, taking its store count there to 70. It also opened dispensaries in Pennsylvania, Connecticut and West Virginia.
Operating cash flow came in at $24 million, and free cash flow was $16 million. The company tightened 2023 free cash flow projections to a range of $65 million to $75 million, raising the low end of the range up from $50 million previously. The company reported cash of $103 million against debt of $420 million.
Third-quarter sales will benefit from the legalization of recreational-use sales in Maryland, where Verano has four Zen Leaf dispensaries.
