GW Pharma deal to spur cannabis speculation – Investors Chronicle

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In the aftermath of last year’s US Presidential Election, when the numbers started going Joe Biden’s way, the share price of Aurora Cannabis Inc (TSX: ACB) leapt from C$5.82 (£3.31) to C$14.65 in the space of just five days. The market was reacting to the prospect of legislative change under the incoming Biden administration, specifically the decriminalisation of marijuana use as part of a federal statute.

The chances of reform in this area increased significantly when it became clear that the Democrats had wrested control of Congress following Georgia’s Senate runoffs. In the months leading up to November’s election, the party agreed on a policy platform that would reschedule marijuana through executive action, but also quash any previous convictions for anyone charged with marijuana-specific offenses (the latter move would require Presidential assent).

That might seem radical on the face of it, particularly given that Biden had lent support to previous administrations that had taken a much harder line on the drug. Yet poll after poll has reflected public support for decriminalisation, which many see as a central plank of criminal justice reform in the US, thereby guaranteeing bipartisan support. Some states are even moving forward with plans to decriminalise possession of Class A drugs (heroin, cocaine etc) for personal use. At any rate, the practice of incarcerating people for related (non-violent) offences seems somewhat perverse considering the societal costs of addiction to prescription opioids in the US.

It may be that any prospective move by the executive and US lawmakers will have to take a back seat to the pandemic, but a gulf now exists between Washington and most state governments on the issue, anyway. Cannabis is currently classified as a Schedule I drug at the federal level, meaning that it is potentially open to abuse by users, yet is deemed to have no significant therapeutic benefits from a clinical perspective. There is enough anecdotal evidence to bring the latter determination into question, and most US states have either legalised marijuana for medical purposes, or decriminalised it for recreational use. Full commercial exploitation, however, rests on the decision of federal legislators.

Multinationals like Altria Group Inc (NYSE: MO) have already made indirect forays into the market, and you would be sitting pretty if you own shares in GW Pharmaceuticals (NASDAQ: GWPH), after Irish biopharmaceutical company Jazz Pharmaceuticals successfully pitched a $7.2bn (£5.25bn) offer (at a sizeable premium) for the Cambridge-based developer of cannabinoid-based medicines.

News of the deal would also have played well with shareholders in newly listed MGC Pharmaceuticals (MXC), another developer of cannabis-derived medicines. MGC’s London listing was significantly oversubscribed, while shares in Kanabo, a producer of vaporised marijana pods and inhalors, saw its shares double on its recent debut. But investors would do well to avoid getting caught up in the hype over the widespread commercialisation of the cannabis industry. Liberalisation could give way to an erratic and unpredictable period for participants. Any progress on the legislative front would almost certainly reduce barriers to entry, which could rapidly give way to an overcrowded field. As things stand, there are stringent controls in place for growers. Logic dictates that any relaxation will draw in capital and encourage start-ups across the industry.

It is worth noting that Aurora’s share price pulled back sharply in the early part of February, after second quarter cash profits landed in negative territory, while the gross margin narrowed. Hopefully, these will be temporary effects, but the company is already operating in an oversupplied Canadian market, and opportunities could be fleeting if markets are liberalised south of the border.

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