Canadian Weed Stocks Might Be Too High

Canadian Weed Stocks Might Be Too High
The Statistic in Tilrays Prospectus That Should Have Marijuana Stock Investors Salivating
Recent marijuana IPO Tilray (TLRY) on Tuesday said a CBD oil that it makes “was successfully imported” into the United Kingdom for a patient with a rare form of epilepsy. That follows a loosening of U.K. medical marijuana laws.

In July, the U.K. decided to allow medical cannabis products prescriptions by this fall. That came after Home Secretary Sajid Javid commissioned a review of U.K. marijuana policies. Javid he launched the review after recent cases “involving sick children made it clear to me that our position on cannabis-related medicinal products was not satisfactory.”

Drawing the most attention was Billy Caldwell, a 12-year-old boy from Northern Ireland with a rare form of epilepsy. Caldwell last year was prescribed cannabis oil, preventing dozens of seizures daily. But customs agents at Londons Heathrow Airport confiscated it in June, and the government barred further prescriptions. Public outrage boiled over when Caldwells seizures resumed.

The Tilray oral solution imported to the United Kingdom contains 100 mg/ml cannabidiol (CBD) and 2mg/ml tetrahydrocannabinol (THC), the same ratio of active cannabinoids Tilray used in the recent clinical trial led by SickKids. This ratio of the active cannabinoids was selected after Tilray conducted extensive research on published data of cannabinoids to treat seizures. Tilray 2:100 was deemed safe and well tolerated in pediatric patients by the researchers.

Tilray said the CBD product is part of a clinical trial testing cannabis medicines for pediatric epilepsy treatment. Tilray is conducting the trial with the Hospital For Sick Children in Toronto.

Full Size Small Preview Thumbnail September 11, 2018 08:00 AM Eastern Daylight Time NANAIMO, British Columbia–(BUSINESS WIRE)–Tilray Inc. (NASDAQ:TLRY), a global leader in cannabis research, production and distribution, announced today that Tilray 2:100, a product produced at Tilrays federally licensed, Good Manufacturing Practice (GMP)-certified facility in Canada, was successfully imported into the United Kingdom, to supply a pediatric patient in need.

Tilray stock jumped 13.4% to finish at 95.79, recouping last weeks losses and hitting a new closing high. Canopy Growth (CGC), another Canadian marijuana producer, slipped 2% in the stock market today. Cronos Group (CRON) dipped 0.9%.

With government-approved compassionate access, the UK-based patient suffering from a rare form of epilepsy, now has reliable access to Tilray 2:100, the product used as the primary medicine in a clinical trial testing the efficacy and tolerability of cannabis-derived medicine as treatment for pediatric epilepsy. The trial was conducted in partnership with The Hospital For Sick Children (SickKids) in Toronto, Canada and published promising results in August.

Even as looming recreational legalization in nations like Canada grabs the publics attention, U.S.-listed marijuana companies say they remain focused on cannabis medical potential.

Canopy Growth CEO Bruce Linton, during a conference call in June, said “The medical portion we speak of, over the next two and three years, is as big, or much bigger than, the recreational portion.”

About Tilray®Tilray is a global pioneer in the research, cultivation, production and distribution of cannabis and cannabinoids currently serving tens of thousands of patients in eleven countries spanning five continents.

Canopy Growths health segment in August received Canadian approval to research CBDs effectiveness to combat anxiety in some animals. Earlier this year, Canadian officials let Canopy Growth begin a Phase 2B trial to evaluate cannabis effectiveness in battling insomnia.

For TilrayMedia:US & CanadaChrissy Roebuck, +1-416-560-5712chrissy.roebuck@tilray.comorUKJustin Doherty, +44 (0)7768-330223jd@hemingtonconsulting.co.ukorInvestors:Katie Turner, +1-646-277-1228Katie.turner@icrinc.com

The company has also filed 39 patent applications in the U.S. related to insomnia, anxiety, fibromyalgia, pain management and other areas, according to a Cowen & Co. research note.

Dealmaking has also sent pot stocks soaring. Major alcohol companies, Big Tobacco, and even pharmaceutical companies are looking to partner with the cannabis industry for a taste of this rapid growth. The biggest tie-up to date involves a $3.8 billion equity investment in Canopy Growth Corp. by Corona and Modelo beer producer Constellation Brands.

But in recent months, no stock has captivated the marijuana investors more than medical cannabis grower Tilray (NASDAQ: TLRY). Whats truly amazing about Tilray is that it hasnt even been a publicly traded company for two months, yet its seemingly risen through the ranks as investors favorite pot stock. Since pricing its shares at $17 on July 18, Tilray has rallied as much as 470%. In fact, at one point, it nearly gave Canopy Growth a run for its money as the largest marijuana stock by market cap.

However, for as incredible as Tilrays move higher has been, its a statistic cited in the companys S-1 prospectus filing with the Securities and Exchange Commission in June that should really have investors salivating with excitement. Among the 164-page prospectus — which doesnt count dozens of extra pages in the appendix containing financial figures galore — on pages 60 and 61, Tilray discusses a handful of factors affecting its business. The very last factor mentioned, “new product innovation,” is where investors will want to pay close attention. As noted in the prospectus:

We believe our success will depend on our ability to continually develop, introduce and expand non-combustible products and brands, which we believe will have higher gross margins compared to combustible products. According to data from Health Canada, over the past six quarters ended December 31, 2017, dried cannabis sales had a compound quarterly growth rate, or CQGR, of 8% and cannabis oils had a CQGR of 39%.

That last sentence there is really important. Over the previous year and a half, leading up to the end of 2017, dried cannabis sales were growing at a sequential quarterly rate of about 8%. Meanwhile, cannabis oils, which focus on a narrower group of patients but have considerably higher margins, grew at a sequential quarterly rate of 39%! 

Back in March, I opined that marijuana stocks that focus on alternative products beyond just the dried flower would put themselves in a better position to succeed over the long term, and it would appear that those doing just that, like Tilray, are liable to be in the best shape.

Why should growers avoid becoming too reliant on dried cannabis, you ask? Though theres little precedence for legalizing recreational marijuana, a handful of examples in the U.S. have shed light on the answer.

In Colorado, Washington, Oregon, and even California, to a lesser extent, weve witnessed a precipitous decline in the per-gram price of cannabis not long after adult-use legalization. Whether its big businesses using their deep pockets to gobble up available cultivation permits or growers simply flooding the market with marijuana in order to take advantage of early-stage euphoria, the per-gram price for dried flower has tended to decline significantly over time. Even with economies of scale working in favor of growers, theyre still going to feel the sting of declining dried cannabis margins.

On the other hand, cannabis oils are targeted at a much narrower pool of consumers, but theres also far less competition and, at this point, no oversupply issues. While its not out of the question that oils could run into supply issues at some point in the future, they are a high-price-point, high-margin product for the time being.

Aside from Tilray, which generated 46% of its second-quarter sales from oils, smaller growers like OrganiGram Holdings (NASDAQOTH: OGRMF) and CannTrust Holdings (NASDAQOTH: CNTTF) are devoting a decent percentage of production to oils.

In a somewhat recent email interview with OrganiGram Holdings CEO Greg Engel, I was told that the company plans to generate half of its medical cannabis sales from higher-margin oils. Though the recreational market is unlikely to see anywhere near the same demand for oil products, the expected expansion of consumption options in 2019 by Canadas Parliament (i.e., edibles, infused beverages, vaporized cartridges, and concentrates) should broaden OrganiGrams high-margin alternative cannabis product options.

Then theres CannTrust, which is in the process of expanding its Niagara greenhouse facility to around 1 million square feet. CannTrust, though its production has been minimal relative to where itll be once at full capacity, has consistently been generating more than half of its sales from cannabis oils. Its focus on hydroponics, as well as its continuous production system, which could counter the lumpy harvesting periods that its competitors could deal with, should allow CannTrust to produce superior margins to those of its peers.

Long story short, if you arent paying attention to cannabis oils, then youre missing the bigger picture.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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