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Posted by Nawan Butt on Feb 3rd, 2021

Cannabis sector next move on the pharma side?

Foresight into the proliferation of the cannabis industry is becoming clearer, in part due to the recent tide of change from US elections. The sector is still in the early phase of its growth to becoming a more mainstream Consumer and Healthcare category but we’re seeing validation of this change as operators re-structure and consolidate in anticipation of upcoming reform. Where the initial focus had been on US medical proliferation, the announcement of Jazz Pharmaceuticals acquiring GW Pharmaceuticals, attention could quickly shift to the pharmaceutical cannabinoid side of this emerging theme.

GW Pharmaceuticals PLC is a UK based company that made history by getting the first FDA approved drug derived from cannabis. Their drug, Epidiolex has changed the lives of many living with epilepsy, and they are building out a platform looking at other areas. When they started most global pharma companies were hesitant to work with this plant ignoring centuries of evidence there were some health benefits. As times are changing and attitudes adjusting, more and more companies are getting involved with the sector. Today could be a notable turning point as a more traditional pharma company, JAZZ pharma, has agreed to purchase GW Pharma for over $7B. We don’t think this is the last deal we will see in the sector.

GW Pharma is the global leader in developing and commercializing a cannabis derived drug platform which has achieved regulatory approval in multiple jurisdictions in Europe and North America. Their current products, derived directly from the cannabis plant, address a broad range of diseases including the treatment of seizures associates with Lennox-Gastaut Syndrome (LGS), Dravet Syndrome and Tuberous Sclerosis Complex (TSC), all of which are rare diseases characterized by severe early onset epilepsy. In addition to their achievements with regulators, GW Pharma has a deep pipeline of cannabis-derived drugs as well as highly specialized manufacturing expertise combined with over two decades of pioneering cannabinoid science experience. The company’s first two products were rapidly scaled, achieving approximately US$510 million in annual sales within two years of launch.

The acquisition provides validation for an emerging industry and we expect other major pharmaceuticals to now be provoked into exploring the significant promise shown by cannabinoid science. Big pharma has long watched from the sidelines as independent juniors bear the burden of initial exploration into cannabinoids. The pipelines which have now been developed, combined with this transaction, could potentially start a race to amass IP for big Pharma and re-rate the companies in the cannabinoid pharmaceuticals vertical.

The Medical Cannabis and Wellness UCITS ETF is Europe’s first ETF focused on cannabis and cannabis derived products. The fund trades in London under CBDX and in Germany as CBSX. The fund has four main verticals; medical cannabis, CBD wellness, ancillary services and pharmaceutical cannabinoids within which companies such as GW Pharma have been core positions. Today’s events should draw attention to other companies doing work in this sector and the opportunities they are exploring.

The Purpose Marijuana Opportunities Fund (MJJ) is focused on the broad theme of global cannabis proliferation. The concept is to use the learnings of the Canadian cannabis experiment and applying it on an international scale as additional jurisdictions and use-cases for cannabis come online. Currently, the most attractive opportunity lies in US cannabis reform, as potential market size could be six times larger than status quo. The fund remains focused on the US opportunity but is also involved in pharmaceutical cannabinoids in US and Canada, which could come in vogue given the GW Pharma transaction. As the proliferation becomes wider, an active global strategy continues to be the most attractive way to access the growth.

— Nawan Butt, CFA is one of the portfolio managers of Purpose Marijuana Opportunities Fund.

All data sourced from Bloomberg unless otherwise noted.
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Nawan Butt, CFA

Nawan has spent 5 years with Purpose developing a deep understanding of client needs with the product team before applying his skills sets in portfolio management starting in 2018. Nawan combines in depth fundamental research with quantitative overlays in contribution to the security selection processes for the firm. Working closely with the CIO, Nawan is also responsible for the implementation of asset allocation across multiple mandates. Nawan earned his MSc in Finance from Simon Fraser University and is a CFA charterholder.