With leading recent estimates clocking the 2016 North American legal cannabis market between $6.7 and $7.2 billion, the only thing more impressive about the industry is the growth projections. Research estimates a whopping compound annual sales growth rate of 25 percent through 2021. This stupendous growth, driven by more and more states adopting medical and even recreational legislation, has combined with the fact that the FDA has not yet approved any drug product containing or derived from botanical marijuana to create a perfect storm for cannabis biotechs like Vancouver-based InMed Pharmaceuticals, Inc. (CSE: IN) (OTCQB: IMLFF) (IMLFF Profile) and GW Pharmaceuticals (NASDAQ: GWPH). Medical marijuana has among the highest values in the broader marijuana space, and as with any burgeoning industry, savvy investors are looking for evidence of the market’s core value. A look at the operations of Canopy Growth Corp. (TSX: WEED) (OTC: TWMJF), Aphria, Inc. (TSX: APH) (OTC: APHQF) and Aurora Cannabis (TSX: ACB) (OTC: ACBFF) provides insight into various niches within the marijuana industry to help identify why cannabis biotechs are the value sweet spot.
Despite its incredible potential, the success of medicinal marijuana’s success in the U.S. is crimped by cultivation capabilities. Due to the notoriously stringent regulatory environment in the U.S., much of the research and even plant cultivation has historically been done outside the country, with Israel rapidly evolving into the premier cannabis research and development location on earth, as the nation’s scientists and producers chase what will potentially be a $50 billion global market by 2025. Second only to Israel in this regard is Canada, where top growers are benefitting from Access to Cannabis for Medical Purposes Regulations (ACMPR) that allow commercially licensed production. This limited participation market has been very good for Canadian growers that have achieved licensing, with only 58 participants to date. However, the real value of the industry lies in the biotechs using cannabinoids extracted from the cannabis plant to develop their drug candidates and potentially change the entire future landscape of the medical marijuana industry.
Evidence of the value of cannabis biotechs is revealed in the Bloomberg Intelligence Global Cannabis Competitive Peers Index (http://nnw.fm/8bZ6k), which shows the collective market cap of cannabis bio-pharma at $5.6 billion, outpacing the valuation of cannabis producers at $3.4 billion. While current cannabis drug development is handicapped by the expensive industry standard “grow-harvest-extract-purify” process, GW Pharmaceuticals’ ability to jump from $8 a share to more than $120 a share following news of its new drug, is a prime example of the types of gains cannabis biotechs can achieve, and what makes them dominate the Bloomberg index.
As noted in the Bloomberg piece, InMed Pharmaceuticals, Inc. (CSE: IN) (OTCQB: IMLFF) could become a major breakout player, differentiating itself from leading developers like GW Pharmaceuticals with biosynthetic offerings and two key drug indications. This is a key advantage for InMed, which has a market cap of $34 million, but to better understand this advantage and valuation potential, it pays to examine the underlying market dynamics in greater detail.
There are more than 90 cannabinoids that have been isolated from cannabis, each affecting the body’s cannabinoid receptors and responsible for unique pharmacological effects. Because these cannabinoids are so small in size, isolating these compounds in usable volume requires the cultivation of large quantities of cannabis, currently some cannabinoid compounds are found in such small volumes in the plant they are not commercially viable for study in drug development.
InMed Pharmaceuticals, however, enjoys the unique benefit of developing a cannabinoid biosynthesis process to provide access to the entire suite of all 90 plus naturally-occurring cannabinoids (not just THC or cannabidiol). Rather than having to rely on outside cultivators in Israel or Canada, InMed uses its proprietary, high-yield biosynthesis process capable of manufacturing pharmaceutical grade, bio-identical cannabinoids in the lab.
Diseases such as the primary targets of InMed’s current drug development pipeline, like glaucoma, which the company is targeting the root cause of via INM-085. Designed as a topical formulation which facilitates absorption by the eye, the proprietary, polymer-based INM-085 is a novel, multi-target, multi-mechanism package of cannabinoids focused on relieving the intra-ocular pressure build up which leads to optic nerve damage in glaucoma patients. INM-085 simultaneously provides key neuroprotectant properties that help optic nerve tissues and retinal ganglion cells survive adverse conditions. Glaucoma therapeutics was a $5.7 billion market only two years ago, with projections of a 3.4 percent CAGR through 2024, and the broader ophthalmic drug market is on-track to top $30 billion by 2020.
Another disease currently targeted by InMed’s development pipeline is epidermolysis bullosa (EB), a connective tissue disorder characterized by the absence of certain proteins in the skin, and currently classed as an orphan disease for which there remains significant unmet medical need. INM-750 is just as novel as INM-085, utilizing a broad-spectrum approach to modulate levels of the key protein responsible for protecting epithelial (skin) cells from damage and stress, known as keratin. In addition, INM-750 was specifically designed to alleviate associated symptoms like inflammation, itching, pain, while promoting wound healing, and skin cell regeneration. INM-750 is on target for clinical trials as early as next year and the global market for EB and glaucoma combined is easily over $6 billion.
These target markets are just the tip of the iceberg, in terms of market opportunity. With a valuation of $3.4 billion, GW Pharmaceuticals (NASDAQ: GWPH) may be the frontrunner in the search for cannabis-based therapeutics, but small biotechs like InMed (CSE: IN.c) (OTC: IMLFF) are demonstrating the vast potential of cannabis therapies and their value in the broader medical industry.
GW Pharmaceuticals has been in the cannabinoid research game since the late 90s and has become one of the most talked about developers of plant-derived cannabinoid therapeutics today. Widely known for bringing the world’s first plant-derived cannabinoid prescription drug (Sativex) to market for spasticity in multiple sclerosis patients, GW Pharmaceuticals markets the drug in 29 countries outside the U.S. and is currently in phase 3 pivotal trials for Epidolex, which has been granted both Orphan Drug Designation and Fast Track Designation by the FDA. The company also famously decided to keep its entire plant production footprint in the UK last year, despite driving hard toward sizeable U.S. markets with Epidolex, and migrating its shares from London markets exclusively to the Nasdaq exchange.
The success and valuation of Canada’s medical marijuana growers, cultivators and producers sheds light on increasing global demand and necessity for high-volume, high-quality plants for medicinal purposes.
Canopy Growth’s (TSX: WEED) (OTC: TWMJF) is among leaders on the production side of the marijuana industry, with a market cap of $1.4 billion (CAD) as of September 11. The company’s Bedrocan brand is billed as the epitome of medical-grade cannabis due to decades of selection and refinement. Enabling the company to produce consistent, standardized whole bud cannabis strains, as well as see those strains become used extensively by clinical researchers across seven European countries. With a production footprint of over half a million square feet, Canopy Growth is one of the biggest growers in Canada. The company recently moved to further solidify its expansion in New Brunswick with the acquisition of ACMPR applicant Spot Therapeutics, which when licensed will produce roughly 8,800 pounds a year, and when fully expanded will provide around 100,000 square feet of production space. The company also expanded its Smiths Falls and our Bowmanville South footprints last quarter by 33% and 200% respectively.
Currently valued at $831.5 million (CAD), Aphria, Inc. (TSX: APH) (OTC: APHQF) is one of the lowest cost producers in Canada and was the first publicly licensed producer to go cash flow positive from operations. The recent announcement of a $25 million investment in order to effectively gain a strategic U.S. presence via one of only seven licensees in the entire state of Florida is a big move for the company, which will operate in the U.S. under the Aphria USA brand. A big move, but with nearly 21 million people in Florida and many of them elderly, this market could be a real goldmine for Aphria, as it represents some 14 percent of the total U.S. medical cannabis market, valued at over $1.1 billion.
Aurora Cannabis, Inc. (TSX: ACB) (OTC: ACBFF) surpassed 19,000 active registered patients in the company’s first 20 months after initial product sales and has over 55,000 square feet in Alberta at its state-of-the-art production facility. Aurora is also currently in the process of tacking on an additional 840,000 square feet across two other sites in Canada. The company owns a 19.9% stake in the first Australian company licensed to cultivate and conduct research on medical cannabis, Cann Group Limited. As well as owning a leading Germany-based wholesale importer, exporter, and distributor of medical cannabis, known as Pedanios. Pedanios even recently passed the first stage of the tender application process in Germany to become a licensed medical cannabis producer, which will further expand the company’s presence in the EU. Aurora’s market cap is $969.0 million (CAD)
As investors find their footing in the global marijuana industry, the potential for cannabis biotechs is reaching unprecedented proportions thanks to the innovations and drug development capabilities of companies like InMed and behemoths like GW Pharmaceuticals.
For more on IMLFF please visit: InMed Pharmaceuticals, Inc. (CSE: IN) (OTCQB: IMLFF)
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