Survive and Thrive
As bitcoin, equities and cannabis surged higher last December, we titled our monthly letter to investors “Don’t Confuse Brains with a Bull Market.” As we’ve shared with many of you in the past, our thesis should take several years to evolve as the foundational constructs of the cannabis industry take root and the eventual banking reforms allow for Wall Street adoption and institutional participation.
Twelve months and nine separate 20% drawdowns later, as those conditional elements took shape, the BIoomberg Global Cannabis Competitive Peers Index finished the year 54% lower. The worldwide cannabis complex was cut in half, not once but twice, over the course of 2018, with year-end tax-loss selling and thin holiday ranks exacerbating the decline into year-end.
While we would have preferred a better outcome for 2018, we are not panicked. Given where we are in the cannabis investing lifecycle and the catalysts on the horizon, we will continue to view volatility as a necessary evil and an eventual opportunity. We are confident that the revenues of our portfolio companies will scale and the clinical trials for our biotech holdings will read through over the next two years.
The companies in our portfolio fall within several categories as the bifurcation of cannabis and hemp evolves, with beverages, nutraceuticals and consumer packaged goods on one side and efficacy-driven solutions, as they emerge, on the other. A high-level overview of some of these sectors follows:
CBD / Hemp Brands
The passage of the Farm Bill should result in the better banking relationships for the CBD consumer brands, solidification of distribution agreements, and a broadening of the investable audiences with stateside listings. Elixinol, Charlotte’s Web, Phividia and 1933 Industries are among the portfolio holdings we believe will benefit from this emerging consumer trend.
U.S. Multi-State Operators (MSOs)
Most U.S. Multi-State Operators, armed with limited licenses in this emerging oligopoly, were cut in half since they came public and we used that weakness to reduce the fund’s cost basis and build a robust nationwide footprint. These companies, which include Cresco Labs, Acreage Holdings and Harvest Health & Recreation, trade at substantial discounts to the valuations of their Canadian contemporaries and represent some of our best near-term opportunities.
The biotech sector, as measured by the S&P Biotech ETF, fell 36% from October into late December, and our exposure was not immune. GW Pharmaceuticals, following the FDA’s approval of Epidiolex in September, declined 50% in to year-end, while Corbus Pharmaceuticals lost 40% over that same period. In total, we enter 2019 with fourteen biotech positions around the globe.
We also have accumulated exposure in the laboratory space, as well as packaging & supplies, ahead of expected U.S. listings, and Australian cultivation, which we believe will emerge as the service station to the Southern Hemisphere.
Below is a geographic breakdown, though by no means a comprehensive analysis, of what we believe is in store for the cannabis industry in the near term.
Rhode Island: In December, Governor Gina Raimondo said, “…we’re a tiny island sitting in-between Massachusetts and Connecticut, and I’m not sure it is practical to say we’re not going to legalize and regulate…I’m still trying to figure out [cannabis], but I’m more open to it than I ever have been.”
New York: Governor Andrew Cuomo, during a speech to the New York City Bar Association, said, “Legalizing the drug would help end needless and unjust criminal convictions for possession, which have disproportionately affected minority communities…Let's legalize the adult use of recreational marijuana once and for all.”
New Jersey: Governor Phil Murphy made cannabis adult use legislation a top priority for his administration and New Jersey. A joint committee of the Senate and Assembly approved the proposed legislation in November, paving the way for a vote on the floor by the State Senate and Assembly. Governor Murphy signaled his desire to sign the legislation once the issues on taxes and minimum wage for the state are addressed.
Connecticut: Governor-elect Ned Lamont said in November that he would work with lawmakers in 2019 to enact legislation to regulate the retail distribution of marijuana to adults.
Illinois: Governor-elect JB Pritzker has been outspoken in his belief that legalizing cannabis in 2019 is a top priority, and powerful Illinois House Speaker Mike Madigan supports Pritzker’s proposal. When lawmakers reconvene in January for the first legislative session of the new year, State Senator Steans and State Representative Cassidy plan to introduce new legislation aimed at full legalization.
North Carolina: State Representative Kelly Alexander is making a push to legalize marijuana for medical use and legislation is expected to be introduced in 2019. An Elon University poll last year found that 80% of the state’s population favors a plan to legalize medicinal marijuana and 45% support legalization of recreational cannabis.
Pennsylvania: Governor Tom Wolf recently tweeted, “More and more states are successfully implementing marijuana legalization, and we need to keep learning from their efforts…I think it is time for Pennsylvania to take a serious and honest look at recreational marijuana.”
Vermont: Although Vermont has legalized cannabis possession, there is still no regulatory framework for the commercialization and distribution of legal adult use cannabis. Governor Scott made it clear that he would veto any bill that included commercial cultivation and sales if it were sent to him in 2018, setting the stage for a legislative push to create a regulated cannabis industry in 2019.
New Hampshire: A commission study on taxing and regulating cannabis has been ongoing since Fall 2017 and they will issue a report later this year. The House of Representatives voted, in January 2018, to approve a bill legalizing possession and cultivation for adults, but it later fell short after some representatives advocated waiting until the commission finishes its work.
Minnesota: Governor-elect Tim Walz has said, “Prohibition doesn’t work. Legalization of marijuana would allow law enforcement to divert resources elsewhere, and taxes from cannabis sales would raise money for new spending initiatives.” The new Democratic House majority will likely take votes on the issue as soon as 2019 or 2020.
Virginia: Decriminalizing marijuana was one of Governor Ralph Northam’s campaign promises, as he cited potential health benefits and racial injustice. The state Senate voted 40-0 in favor of medical marijuana in early 2018.
Maryland: Many have been predicting a 2020 ballot measure to legalize adult-use cannabis in Maryland. Proposals to legalize recreational marijuana will come up during the next General Assembly, lawmakers said in December.
Washington DC: DC voted to legalize adult use cannabis in 2014 although the Republican controlled House voted in 2015 to prevent the D.C. government from spending tax dollars on this initiative. With Democratic control of the House of Representatives, the District’s path to fully legalized recreational marijuana may again open.
New Zealand – In December 2018, the government announced a nationwide, binding referendum on the legality of cannabis for personal use, set to be held as part of the 2020 election. Sativex has been approved for use within the country, though it is not currently being subsidized.
Mexico – Overwhelmingly positive medicinal legalization vote in April 2017; legalized for non-commercial recreational use on October 31, 2018. “I think cartels will lose 40 per cent of their income with [marijuana] legal here and in the US” – Vicente Fox, former President of Mexico.
Australia – Legalized medicinally on February 24, 2016. Bills have been introduced to legalize recreational cannabis, but the country is still working through the politics.
Ireland – Legalized for small-scale medicinal use for specific applications. Also, after Canada legalized cannabis, Ireland placed an expert group in charge of examining the systems in international jurisdictions in which cannabis has been decriminalized for recreational use.
Thailand – Medical cannabis was legalized on December 26, 2018, making Thailand the first Southeast Asian country to legalize medicinal cannabis.
South Korea – On November 28, 2018, medicinal cannabis was partially legalized and importation will be allowed in early 2019.
South Africa – In September 2018, the Constitutional Court in Johannesburg issued a stated ruling that:
An adult person may, [sic] use or be in possession of cannabis in private for his or her personal consumption in private. The use, including smoking, of cannabis in public or in the presence of children or in the presence of non-consenting adult persons is not permitted. The use or possession of cannabis in private other than by an adult for his or her personal consumption is not permitted. The cultivation of cannabis by an adult in a private place for his or her personal consumption in private is no longer a criminal offense.
The South African government has been given a period of 24 months to implement the landmark ruling.
Philippines – A bill to legalize medicinal cannabis has been filed during the 17th Congress of the Philippines and is currently under referendum.
Luxembourg – A coalition released a 250-page policy document in December that provides details on the government’s plans to introduce recreational legalization into the country.
International / United Nations:
On March 14-15, 2019, the UN Commission on Narcotic Drugs will issue its decision on whether to deschedule cannabis and its extracts. The WHO recommendation for organic cannabis scheduling has been sealed since its submission to the UN in December 2018.
Upcoming Clinical Trial Updates / Data Expected by Indication:
Acne – Phase 2 data – Q4 2019
Autism – Phase 1 update – Q2/Q3 2019
Cancer (brain/breast/pancreatic) – Preclinical update – Q1 2019
Epidermolysis Bullosa – Pre-IND meeting – Q1 2019
Glioblastoma – Phase 2 secondary end-points – 2019
Graft vs Host disease – Phase 2 data – Q2 2019
Insomnia – Phase 2 update – Q2/Q3 2019
Opioid reduction – Phase 1 update – Q2/Q3 2019
Psoriasis – Phase 1b trials – Q1 2019 and Q2 2019
Tuberous Sclerosis – Phase 3 data – 1H 2019
Ulcerative Colitis/Irritable Bowel Syndrome/Narcotic Bowel Syndrome – Phase 1 – Q2 2019
Looking Ahead to 2019
While we generally do not comment on mid-month performance, the initial weeks of 2019 were much kinder to our portfolio as tax-loss selling abated and investors have been re-initiating risk. We would like to take this opportunity to wish you a healthy and happy New Year and as always, please don’t hesitate to contact us with any questions.
Chief Investment Officer
CB1 Capital Management
Disclosure: CB1 Capital Management may have positions in any securities mentioned. The mention of specific securities on this website is not a recommendation to buy or sell such securities. There is no guarantee that any of the securities mentioned on this website have been, currently are, or in the future will be, owned by CB1 Capital Management in its clients’ accounts nor that any of such securities have been, or will be, profitable.