Range Expansion

The demand for global cannabis exposure continued into September as a point of recognition seemingly swept through society. Those who’ve followed the space for a few years have seen similar waves of strength before one thing or another took the air out of the rally. However, with Coca-Cola publicly announcing that it is considering the cannabis beverage market[1] and the DEA rescheduling a plant-derived, FDA-approved treatment for the first time, those four dangerous words keep repeating in our minds, “this time is different.”

“Different,” for cannabis, would mean a round trip back to its medicinal roots. Before the Federal ban in 1937, the American Medical Association prescribed cannabis for migraines, addiction, cramps, pain, insomnia, inflammation, and even cranky babies! But some of the country’s elite believed that their business interests would be threatened and found politicians to do their bidding and both “marijuana” and hemp were outlawed, demonized and used to effect pernicious societal agendas.[2]

While this indeed is a full-circle moment for cannabis, that circle is far from complete. There is the matter of Federal decriminalization which remains in place, despite a 25% reduction in opioid-related deaths in cannabis-friendly states, the potential for substantial increases in tax revenue and job growth, and long-overdue reductions in crime rates and prison populations that would result. Far too many people have needlessly suffered, and the human impact will be substantial once decriminalization occurs.

We are excited as we look ahead, and our vision became more clear through the lens of our largest position, GW Pharmaceuticals. The FDA approved their lead drug, Epidiolex™, for the treatment of rare forms of childhood epilepsy in June and at the end of September, the DEA moved the drug from Schedule I, which denotes the most dangerous narcotic, to Schedule V, which is reserved for the least dangerous, least harmful and least addictive types of drugs on the market.[3]

Other cannabis biotech companies stirred last month as well. Corbus Pharmaceuticals, another one of our top holdings, awoke from a two-year slumber the morning of September 20, rallying 62% in a single session after announcing the acquisition of a large portfolio of preclinical cannabinoid drugs and patents. At September 30, 23% of the Corbus public float was short and the average price target provided by the five Wall Street analysts who cover the stock was $24.40, compared with a $7.55 closing price that day. It may be too early to tell if this is GW 2.0 but it’s most certainly in the running.

As the secular bull market in cannabis evolves, the biotech arena should assume an increasingly large role in the sector. This may coincide with a more rigorous lens being applied to Canadian LPs as we move from the concept phase, which has ample shock absorbers, to the execution phase, which tends to exhibit a more biting judgement. While we’ll look to re-establish exposure in the Canadian majors as a function of time and price, we remained underweight Canada entering the fourth quarter.

Finally, we increased our Australian exposure last month, consistent with our view of global capital flows. As segments of the cannabis market become more saturated with investors, the relative edge for investors tends to flow ‘downstream.’ This is a large reason that we’ve been overweight U.S. operators, which have no institutional holders or coverage, and have maintained a healthy weighting of biotech; the crowds just haven’t found them yet. The same is true for our Australian cannabis companies, which generally continue to trade in the bottom third of their 2018 price ranges.

Market Outlook

We were pleased when the last week of September passed without cannabis news dominating the U.N. headlines. This was one of the two potential pain points we had circled into year-end, with the other coming up on October 17. That’s the effective date for Canada’s legalization of adult use cannabis, and the date that our neighbors to the North will be in contravention of two U.N. drug treaties, as we’ve discussed previously. Whether that “matters” remains to be seen, but the fact that nobody seems particularly concerned has raised our antennae.

We continue to anticipate passage of the U.S. Farm Bill and the legalization of full-spectrum hemp oil, which is what we expect the commercial name will be for the cannabinoid formerly known as CBD. The consumer hemp market should be robust as society begins to better understand the wellness attributes of the compound.

Aside from the obvious focus on Canada, other potential catalysts include New Jersey legislative action as the Garden State moves toward legalization promised by its new governor. This should have huge implications for New York (which added ‘pain’ to the list of qualifying medical conditions last month) and the entire Eastern seaboard, as a new revenue generator takes root. We’ll also watch for continued posturing ahead of the midterm elections, where four states have cannabis on the ballot.

One dynamic we continue to monitor is the bevy of U.S. cannabis operators coming to the public markets to raise capital. This started a few weeks ago and if our inbox is any indication, will continue for the foreseeable future. We welcome the additional liquidity but there’s no way to tell if – or where – the point of near-term saturation will arrive. Accordingly, we remain focused on finding solid companies with strong management and an aligned vision; and we’ll trust the market to sort the rest out.

As always, please let us know if you have any questions or comments, and thanks as always for your continued support.

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.


[1]  Skerritt, Jen and Giammona, Craig. Sept. 23, 2018. Coca-Cola Is Eyeing a Possible Entry Into the Cannabis Market. Retrieved from http://time.com/5404095/coca-cola-cannabis-market-cbd-drinks/#.

[2]  Little, Becky. Aug. 4, 2017, Why the U.S. Made Marijuana Illegal. Retrieved from https://www.history.com/news/why-the-u-s-made-marijuana-illegal.

[3]  “Schedule” is the relevant schedule to the Controlled Substances Act, 21 U.S.C. ch. 13 ss 801 et seq., which classifies drugs into one of five Schedules based on the drug’s potential for abuse, its accepted medical application(s) in the United States, and its safety and potential for addiction.

todd harrison