It was another incredibly busy week in the cannabis industry – where the only constant is change – including several events that reinforced the importance of rigorous investor due diligence.
On Friday, GW Pharmaceuticals announced that the Committee for Medicinal Products for Human Use (CHMP) recommended approval of the British company’s cannabis-based medicine, Epidiolex.
Epidiolex received U.S. Food and Drug Administration (FDA) approval in June 2018.
Pharmaceutical cannabis products differ from over-the-counter CBD products. For one, pharmaceutical products must go through the rigorous FDA and CHMP approval process in order to be prescribed by doctors and receive reimbursement from health insurers.
GW Pharmaceuticals receiving European approval is a positive first step in a decades-long market opportunity.
However, investors need to frame the opportunities on a case-by-case basis to understand if it’s large and meaningful or small and insignificant.
For example, Epidiolex was approved to treat two very specific forms of epilepsy, Dravet syndrome and Lennox-Gastaut syndrome.
According to GW Pharmaceuticals, there are 3.4 million epilepsy patients in the United States, of which 30,000-50,000 have Lennox-Gastaut syndrome and 15,000-20,000 have Dravet syndrome.
That isn’t a large potential customer base, but based on GW’s reported financials, the annual cost of treatment is roughly $18,500. That implies the U.S. market opportunity is about $700 million to $1 billion. The European market could be just as large.
That is a very large opportunity for a company that just posted first-quarter total revenues of $33.5 million.
Bruce Linton takes on European opportunities
Former Canopy Growth co-CEO Bruce Linton predicted that European marijuana markets will accelerate rapidly in the coming years, in part because of the socialized medical programs already in place there. Linton made his prediction as part of his keynote address at the National Cannabis Industry Association’s Cannabis Business Summit earlier this week in San Jose, California.
Those programs will help medical marijuana obtain regulatory approvals to establish country-specific medical marijuana frameworks.
As noted earlier, there were several items this week that highlighted the need for comprehensive investor due diligence. Here is a quick overview of the critical elements you need to consider in cannabis:
- Know the management team.
The CEO of CannTrust was fired after it was revealed the company had unlicensed, illegal grow rooms hidden behind false walls. CannTrust stock has dropped roughly 50% since the illegal grow allegations first surfaced.
Investing in the cannabis industry requires investors to fully understand a company’s business plan and management’s strategic vision to grow the firm. It also requires trust that management will execute that vision.
- Understand state-specific regulatory conditions and how they affect your investments.
A new Washington state law has marijuana cultivators concerned about potential cross-pollination from hemp growers, which could prove disastrous to their bottom line if it occurs – potentially costing tens of thousands of dollars in damages.
Hemp fields with both male and female plants could send pollen into marijuana fields and cause flowering female plants to seed, which would make the MJ flower unattractive to retail stores and less valuable for extraction.
Now would be a good time to check if any of your investments have outdoor grow facilities in Washington state and figure out if there are safeguards in place to protect from this possibility.
The above are examples of due diligence items we will cover in-depth as we expand and enhance our Investor Intelligence offering over the coming months.