The Greatest Story Never Told

We’ve made no bones about our affinity for GW Pharmaceuticals. Let’s discuss.

The U.S. and U.K. commissioned separate but similar studies in the 1990s to help determine whether cannabis had medicinal value; and both found there to be encouraging evidence. The U.S. ignored those findings and continued the War on Drugs; the U.K. helped lay the groundwork for the emergence of GW Pharmaceuticals, which was founded in 1998.

Over the last twenty years, GW has conducted groundbreaking clinical research and importantly, filed for numerous patents in the U.S. and the U.K. They’ve studied CBD, THC, and a wide range of novel cannabinoid molecules in several distinct therapeutic areas, including epilepsy, autism and schizophrenia. In short, they’ve got a massive first-mover advantage studying this frontier science.

As we look at potential catalysts for Federal decriminalization, there are two pathways: legislatively, through efforts such as the STATES ACT; and with the demonstration of medical efficacy, which compels the DEA to reschedule within 90 days. GW’s Epidiolex received FDA approval in June but the early body language suggests that only CBD might be rescheduled, leaving cannabis still on Schedule I.

THC is widely considered the black sheep of the cannabinoid family, but we believe that perception is misplaced and there are two treatments on the horizon that aim to establish that.

Sativex®, a THC-based oromucosal spray for the treatment of MS spasticity, has already received regulatory approval in numerous countries outside the U.S., and we expect an NDA to be filed shortly.

Further along the clinical pathway, and the story to which nobody seems to be paying attention, is glioblastoma, or brain cancer. We believe this indication will emerge as the foundation of GW’s oncology platform and demonstrate the efficacious agility of cannabinoid wellness.

In February 2017, GW announced positive phase two primary endpoints for their GBM trial, which used a 1:1 CBD:THC ratio but couldn’t release secondary endpoints (overall survival) because “too many people were still surviving.” CEO Justin Gover suggested at the time that more information would likely be available in “the coming weeks to months.”

Fast-forward to August 2018, a full seventeen months later, and we’re still waiting. We still haven’t received the secondary endpoints and we believe that’s because there are still ‘too many people surviving.’ Seventeen months. Brain cancer.

While the company intelligently focused on their potential blockbuster epilepsy drug into and through the FDA approval process, they’ve also dropped a few bread crumbs for those paying attention...

Last May, a few months after the Glioma P2 primary endpoints were released, GW hired Dr. Volker Knappertz as their Chief Medical Officer. Dr. Volker received his clinical scientist training and M.D. as well as a doctorate degree in research on glioblastoma from the University at Cologne in Germany. We found this to be an interesting nuance given the street-wide perception of GW purely as an epilepsy platform.

The chasm between perception and reality is where profits are found, and most of the world still views cannabis as a gateway drug and not as legitimate medicine. This dynamic is encapsulated by GW and the fact that only seven Wall Street analysts cover the company and the entire forward revenue stream is modeled on Epidiolex® for the treatment of epilepsy.

Markets

It’s been a cruel summer in the cannabis patch as the excesses of late 2017 continue to unwind. In the almost three decades I’ve been managing risk, I’ve learned to take the good with the bad and to view obstacles as opportunities. Indeed, most great investments require an appropriate quotient of pain as the cost of doing business. Apple had two separate 82% drawdowns before its ascent toward a trillion-dollar market-cap while Amazon had a 94% drawdown before catapulting Jeff Bezos to becoming one of the richest people in the world.[1]

This is not an attempt to rationalize risk as much as to provide perspective. If you believe we’re in the throes of the global adoption of cannabinoid wellness and the artificial impediments to growth are in the process of being abolished, we’re doing exactly what we should be doing: finding great companies and scaling into long-term exposure. We are early, we know, but that’s sort of the point.

Of course, not all markets are created equal; as discussed in last month’s letter, we’re underweight Canada as we perceive better risk-reward dynamics—the proverbial 10-baggers, over time— in the US and Australia. We’ve also added additional early-stage biotech exposure as the FDA guidance regarding the necessary clinical process has been consistent with our core wellness thesis.

There were several events of note in July, including a major announcement by the U.K. government that it sees evidence of the medical benefits of cannabis and that it will be rescheduled by Autumn, paving the way for medical prescriptions. We also saw the first NASDAQ-listed cannabis IPO in Tilray, which was notable for the blue-chip institutional participation, which speaks to the pent-up demand by U.S. investors.

We look forward to the passage of the Farm Bill, which should benefit our hemp-centric exposure. We don’t believe there is enough processing capacity to serve this super-crop, creating opportunities for U.S. first-movers. And, we continue to believe the GOP is politically motivated to remove cannabis as a hot-button issue before the mid-terms, but that is speculation on our part. Either way, mounting clinical evidence will eventually force their hand.

It hasn’t been particularly fun laying-in-wait for an efficient market, but we’ve been using price to our advantage as we layer into the companies we believe will emerge as winners. As we enter August, the BI Global Cannabis Competitive Peers index is 60% off the January highs, and a mere 15% above long-term technical support. There has been a torrent of selling this year, which tossed the babies out with the bathwater; and therein lies the opportunity.

As always, please let us know if you have any questions, thoughts or concerns, and enjoy the rest of your summer.

Todd Harrison
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.

Sources:

[1]  Big Winners and Big Drawdowns, Pension Partners, Aug. 17, 2016, https://pensionpartners.com/big-winners-and-big-drawdowns/?utm_source=ReviveOldPost&utm_medium=social&utm_campaign=ReviveOldPost.

 
todd harrison