What’s behind the booming profit potential of legal marijuana? Let me start by paraphrasing something I heard a physician say in a televised interview during the early days of some US states allowing medicinal use.
When asked if marijuana could have medicinal value, he responded:
“For patients who have terminal conditions like cancer or AIDS, if marijuana eases their suffering, it would basically be barbaric to deny it to them.”
“Do I believe that some of the compounds present in marijuana plants could someday be the basis of clinically tested, FDA-approved pharmaceutical products in the future? Absolutely. Most drug compounds are derivations of plant compounds and there’s no reason to believe that the marijuana plant might not also be valuable in that respect.”
“Would I advise a patient to light a plant on fire and inhale the combustants in unknown dosage in an attempt to cure an illness? Absolutely not, because that’s simply not the way that the medical community administers any medicine. We demand much more precision than that.”
Those words were prescient, because although some of the early “medicinal” use was a thinly veiled attempt to make recreational use less illegal, marijuana has become the basis for drug compounds that promise to improve the health outcomes of patients and produce profits for the companies who produce them.
Where to Invest – THC or CBD?
There is a crucial distinction to be made between Tetrahydrocannabinol (THC) and Cannabidiol (CBD), the two primary active compounds in marijuana. (There are as many as 100 more cannabinoid compounds also sometimes present in the plant, based on the strain.)
THC is psychoactive and makes users feel high. CBD is not psychoactive and has no significant effect on mood or perception.
While some medical users also seek benefits from THC, it’s CBD that has shown the most promise in the development of drugs.
There are whole families who have moved to states where marijuana is legal in order to procure medicines that help their children. Specifically in the case of children who have certain forms of epilepsy that cause dozens of painful seizures daily, some strains of marijuana offer nearly immediate relief. These people quit their jobs, sold the house, pulled up the stakes and moved to Colorado to get drugs made from Cannabidiol – also known as “CBD”, a non-intoxicating compound in marijuana – because they have been able to reduce or eliminate the seizures, even when other medicines and surgery could not.
Surely you can imagine that political beliefs about marijuana legalization get thrown right out of the window when someone is forced to helplessly watch their child or grandchild endure a painful seizure and relief is potentially within reach.
This is exactly the type of apolitical momentum that might make legitimate marijuana medicines more accessible, even independent of the laws about recreational use. In fact, the US Farm Bill, signed in December 2018, fully legalized the production of hemp – a variant of the cannabis plant that has significant industrial and textile uses and contains extremely small amounts of the THC but can be harvested for CDB to make non-psychoactive drugs for both the pharmaceutical industry and the over-the-counter health and wellness industry. (More on this later...)
Ready for the Pot Stock “Gold Rush”?
Legalized marijuana, with almost unimaginable profit potential, has won a clean sweep of 6 election referendums. This trend covers all of Canada, down through 36 states plus D.C. New York and Mexico are poised to follow. Federal legislation is about to be proposed that could really open the U.S. floodgates, triggering the creation of new companies and causing many existing stocks to blast off.
Global sales are predicted to skyrocket from $19 billion in 2020 to an expected $73.6 billion by 2027.¹
Zacks recently closed a +147.0% marijuana trade, and is currently riding several triple-digit gains that should still have a long way to run.² Plus, new stocks are being lined up that could rival or surpass these performances.
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Nixon’s Marijuana Legacy
Under the Controlled Substances Act, all substances with the potential for addiction or abuse are placed into one of five “schedules” according to a combination of its potential legitimate uses and relative danger. Schedule 1 drugs have been deemed to have a high potential for abuse or dependency and no recognized medical applications. Marijuana is included in Schedule 1, along with LSD and heroin. In comparison, cocaine and opioids are Schedule 2 substances - not necessarily because anyone thinks they’re less dangerous than marijuana, but because they do have recognized medical value.
Alcohol and tobacco were both intentionally left off of the controlled substances schedule - despite their potential for abuse/harm and lack of medical value - presumably because of the political influence of established industries.
It’s widely believed (and supported by recordings of oval office conversations that became part of the Watergate scandal) that President Nixon lobbied for making marijuana a Schedule 1 drug with the explicit intention of harming groups that were not supportive of his politics and policies. In 1970 when the Controlled Substances Act was signed into law, anti-war protestors and minority groups were among the most common users of marijuana and Nixon took the opportunity to make their drug of choice as illegal as possible.
Recently, one of the biggest ongoing criticisms of marijuana prohibition is that minorities have been incarcerated for possession or use at a disproportionate rate based on demographics and use patterns. In a sense, the Nixon policy has remained stubbornly ingrained in present day law-enforcement.
CBD, the Farm Bill, the FDA and 7-11
The Farm Bill signed in late 2018 broadly legalized the production and sale of hemp, which is defined as containing less than 0.3% THC but can be rich in CBD. It also de-schedules CBD, paving the way for large-scale research and development.
This is great news for companies hoping to develop, test and sell CBD-based pharmaceuticals in the US, but it also creates a confusing situation in which products can now be sold virtually anywhere that contain CBD, promising all sorts of health and wellness benefits.
This is an important distinction. The investment opportunities are likely to be in true pharmaceutical research in which companies perform rigorous testing in controlled trials and report the results to the FDA for approval as a prescription drug, not in outfits that sell CBD products of uncertain strength and purity over the counter at convenience stores and make dubious claims about weight-loss, wrinkle reduction, etc.
It’s not impossible that some of these purveyors will be able to turn a profit – gullibility is a powerful force and snake oil salesmen do profit sometimes – but it’s not where we are going to focus our investment research efforts.
The US FDA has issued warning letters to companies selling CBD in ways that violate the Federal Food, Drug and Cosmetic Act (FD&C Act) and also published a revised Consumer Update detailing safety concerns about CBD more broadly.
The agency specifically took aim at the idea that CBD “can’t hurt,” and that it is therefore appropriate to add it indiscriminately to food, beverage and topical products. They also point out that there may be significant questions about the safety of the products currently available, some of which have been found to be contaminated with pesticides and heavy metals.
While progress toward full legalization of marijuana in the US will have significant impact on companies who grow and sell it for recreational purposes, the floodgates are already open for the development of legitimate marijuana-based medicine.
There’s a big difference between CBD creams, gels and edible products and the sort of rigorous scientific research that goes into multi-stage clinical trials.
Currently, there remains only one US listed company that has an FDA approved drug with CBD as the main active ingredient – GW Pharmaceuticals (GWPH). GW’s Epilepsy drug Epidiolex received the lowest possible Schedule 5 classification from the DEA and GW has several other cannabinoid-based drugs in the R&D pipeline, including compounds for Multiple Sclerosis and Autism. GWPH recently got FDA approval for additional indications and also has reported promising clinical trial data in studies of its other compound Sativex – which has already been approved for Multiple Sclerosis in the UK.
Epidiolex has generated countless headlines like this one from Time magazine: “My 10-year old Daughter Takes the First FDA-Approved Marijuana Drug. It’s Changed Our Lives.”
That’s powerful stuff!
GW also received approval for Epidyolex (same drug, slightly different name) in the European Union and a favorable ruling from the United Kingdom’s National Institute of Health and Care Excellence regarding the cost and efficacy of the drug, paving the way for routine reimbursement from the National Health Service.
The success of Epidiolex and the strength of the GWPH pipeline attracted the attention of mainstream pharmaceutical companies and in February of 2021, it was announced that Jazz Pharmaceuticals (JAZZ) would purchase the company for $7.2 billion, sending GWPH shares up 45% overnight.
Another pharmaceutical company – Zynerba (ZYNE) – is developing cannabinoid-based transdermal therapeutics for a wide range of conditions, including Autism Spectrum disorder.
Precision dosage is especially important for cannabinoid drugs. Obviously, smoking is a poor delivery method that can present considerably more problems than it might be expected to solve. Oral applications are much better, but because of the complicated nature of the human digestive metabolism, achieving and maintaining the desired concentration in a patient’s bloodstream can be difficult.
Delivery through the skin promises to be the best way for researchers to test and physicians to prescribe and administer the cannabinoid compounds that provide patients with the best results.
There are also tiny biotechnology companies in the very early stages of research into treating and curing diseases with compounds found in cannabis. San Diego-based Artelo Biosciences (ARTL) recently had promising results with a proprietary CBD/TMP “co-crystal” that may slow growth of some cancerous cells.
Artelo share price more than doubled early in 2021, yet with a market capitalization of less than $40 million, the company remains extremely inexpensive relative to the potential contained in its pipeline.
Companies like that are likely to be the acquisition targets of tomorrow. The potential market is enormous!
One of the most exciting pharmaceutical applications of cannabis is the development of replacements for deadly opioids in relieving pain. The Centers for Disease Control (CDC) estimates that 470,000 Americans died between 1999 and 2018 from opioid overdoses. The State of Oklahoma was awarded a $572 million judgement as plaintiff in a lawsuit against Johnson and Johnson (JNJ) because of its role in manufacturing components for the drugs that are blamed for taking the lives of 6,000 Oklahoma citizens and uprooting the lives of many more who require extensive social services at the expense of the state.
Pharmaceutical manufacturers face thousands of lawsuits from individuals and municipalities because of their role in producing and distributing addictive and deadly opioids. The cost of judgements and settlements could eventually stretch into hundreds of billions of dollars.
New research is finding that CBD formulations can be as effective at relieving pain symptoms as opioid drugs, but with considerably less risk. Because it does not produce a perceptible psychoactive effect, CBD has a low potential for abuse. More importantly, even at high doses, it causes no acute health issues - no fatal overdoses have ever been reported.
Though some consumers may use the current crop of recreational and medicinal cannabis products for pain, the real growth is likely to happen in pharmaceutical products that have been clinically tested for safety and efficacy and sold by prescription.
There are several big companies who are increasingly feeling a need to replace opioid drugs - from a lost revenue perspective as well as to improve public opinion. It’s easy to see how a small pharma company with a cannabis-based replacement that has been approved by the FDA (or looks likely to be approved soon) would be very attractive as an acquisition target.
The success of drugs like Epidiolex is just the tip of the iceberg. Research into all the ways that compounds from the cannabis plant can be turned into effective and safe pharmaceuticals is really just beginning. Lab work and clinical trials with patients take time, but investors should expect a large number of new pharmacological compounds to be introduced in the coming months and years.
How to Pursue the Big Profits
At Zacks we're monitoring medical and political developments very closely as well as tracking individual stocks.
This space looks to EXPLODE from $19 billion in 2020 to $73.6 billion by 2027.¹ Yet only a few growers, pharmaceuticals, financial firms, suppliers - both established and start-ups - are the true innovators and offer exceptional profit potential.
So if you don't want to devote the constant attention and painstaking analysis to find these often little-known tickers, we can find them for you.
You're invited to take part in the portfolio service I'm directing, Zacks Marijuana Innovators.
Our approach is responsible and vigilant but we look for aggressive growth. Recently, it closed a +147.0% trade.
Plus, it has uncovered pot stocks that have shot up +118.4%, +124.4%, +124.9%, +144.8%, +172.9%, even +300.9% in as little as 4 months.² And all of these could have a long way to run.
I’ll alert you what and when to buy and when to sell. I'll also brief you on breaking market news that directly affects your investments.
Our choices have been limited over the past few years because of the legal status of cannabis in the US, but the elections brought a clean sweep of 6 pot referendums in 5 states. With federal legislation about to be introduced, many US-listed companies are bound to emerge and current stocks could skyrocket.
I’m confident there will be dozens of new opportunities to analyze in the near future.
This is your chance to follow the live buys and sells inside Marijuana Innovators and you can among the first to get in on our latest buys.
But we can’t let everyone in, so your chance to gain access must end this weekend.
See Zacks' Marijuana Trades Now >>
Zacks Stock Strategist
David Borun is Zacks' Cannabis Stock Strategist. He applies 20 years of trading expertise plus concentrated industry study to the direction of our unique portfolio service, Zacks Marijuana Innovators.
¹ Grand View Research
² As of 3/1/2021. The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.
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