Cannabis went crazy in 2018.
Billion-dollar acquisitions by international food and beverage giants like Constellation Brands (STZ.NYSE) as well as Canada and California’s legalization of recreational marijuana drove retail investors frothing with FOMO to create one of the biggest market bubbles since the dot com bust.
‘Grow it and they will smoke,’ was the idea of the day as Canadian LPs snapped up huge parcels of property to cultivate monster cannabis crops in order to service the oncoming wave of medicinal patients and recreational users that some market analysts promised would be there.
What transpired was something that no one had clearly thought through.
Early cannabis sector pundits assumed that once the government turned out weed, folks who had scored their Maui Wowie from the bowling alley would drop that habit like a hot potato.
According to Statscan, Canada’s parallel black market charges almost 50% less per gram of cannabis then dispensaries selling government weed. Where’s the incentive to change?
Many Canadian LPs are burning product like there’s no tomorrow as a growing marijuana glut stymies our domestic market:
For every kilogram of legal marijuana consumed by Canadian cannabis connoisseurs, almost eight kilograms of cannabis plants and waste are composted, burned or destroyed by the country’s growers.
There’s too much, it’s too low-quality and no one is smoking it, at least not at the rate market research firms like BDS Analytics optimistically estimated.
Now that institutional investors are stepping into the fray, the short selling has already begun.
IIROC’s latest Consolidated Short Position Report shows spilled blood across the legal cannabis sector.
Even larger legitimate growers like Supreme Cannabis Company (FIRE.T) are feeling the pinch with over three million shares controlled by short sellers who snapped up 600,000 of those shares in the last month.
The rush is on.
This doesn’t mean Supreme is a bad company, it seems to be doing better than most other LPs in terms of performance, but the sector as a whole teeters on the edge of correction because most everybody, analysts and investors included, failed to see the industry for what it was.
In today’s market, cultivating cannabis as a single source of revenue is a losing proposition.
Also the marijuana gluts in Colorado and Oregon prove that making cool vapes and mind-blowing shatters won’t create the legal cannabis market juggernaut everyone predicted.
This doesn’t mean that legal cannabis is dying, it will remain a sizable and sustainable market, but it likely won’t measure up to projections.
Considering the massive size of the global health care market, the real money in cannabis will be made in the clinical development and application of cannabis-based therapeutics.
Not health and wellness products like chapstick and skin creams, but pharmaceutical-grade cannabinoid solutions clinically tested to treat such things as epilepsy, depression and other neurological disorders.
Then you have the market for treating those unfortunate souls who got hooked on opioids which is estimated to be worth $4.8 billion by 2027.
There’s also the treatment of depression and anxiety which is expected to be an $18.3 billion market by 2025, not to mention the global non-opioid pain patch market, which cannabis could play a big part in, is expected to be worth $5.0 billion by 2025.
That makes an accessible market for clinical cannabis derivatives of just over $136 billion and that’s just scratching the surface.
Suddenly, the recreational pot market doesn’t shine so bright against its clinical counterpart.
As such, industry players like Veritas Pharma (VRT.C) are building the science to support claims about the health benefits of medical cannabis.
Through its research and development arm, Cannevert Therapeutics, Veritas is creating a therapeutic product pipeline for dealing with acute pain, chronic pain, sleep disorders, opioid harm reduction and palliative care.
Veritas runs on a lean-and-mean philosophy and isn’t tipping the scales when it comes to market cap.
The Canadian cannabis science research and development firm comes in at $9,239,623 on a tight share count of just over 12 million shares after a share consolidation in February.
The year started quickly for Veritas with Puerto Rican partnerships, processing facility acquisitions and, at the end of February, the company enrolled its first adult volunteer in the clinical trial of its flagship product, CTRL-X, which is designed to treat acute pain.
Under the control of interim CEO, Peter McFadden, Veritas intends to move forward on 2019’s initial success, executing on the company’s growth strategy while continuing the clinical trail of CTRL-X.
The legal cannabis market will normalize and investment opportunities still exist, but they are getting harder to find as LPs struggle to justify their valuations.
In the end, the long-term profit potential of cannabis lies in science, not cultivation alone.
Flowers are a throwback to dreads, beads and peace-nicks, pills and companies like Veritas are the future of pot.
Full disclosure: Supreme Cannabis Company is an Equity.Guru marketing client.