Medical Marijuana Update: What the February injunction hearing will bring

The Canadian dot.bong investor world is on tenterhooks leading into a very important February date. That’s when a judge will decide whether to allow grow license holders under the old MMAR system to keep growing their own medicinal weed (due to a lack of affordable commercial product), or will tell them to get with the program and just pony up some doughbucks at Mettrum (TSX:V.MT, Stock Forum), Organigram (TSX:V.OGI, Stock Forum), Tweed (TSX:V.TWD, Stock Forum), Bedrocan (TSX:V.BED, Stock Forum), Aphria (TSX:V.APH, Stock Forum), Tilray, etc etc for their medicine.

For the retail investor base, ‘the February issue’ has been giving people reason to keep their powder dry for some time, which has certainly contributed to falling stock prices. Not helping has been the lack of available product from licensed producers, the higher than desirable prices for what’s out there, ongoing quality control issues, slow to get started revenues, and Health Canada’s achingly slow, often changed without warning, and bizarrely petty licensing regulations.

If the courts allow the MMAR growers to continue growing, the markets worry it will hurt the licensed producers by opening up a big grey market. In actuality, it already has, which is why Health Canada wanted to end the program.

And if the courts rule with Health Canada that commercial growers are a workable alternative, the markets worry those MMAR folks, who are mostly on disability and/or low income, will just keep growing and sell their stuff on the black market (you can sample their product currently at just about every one of the 50+ unregulated, un-background checked, largely gang-owned dispensaries in the City of Vancouver). The thinking goes, this would hurt the licensed producers’ bottom line.

Medicinal cannabis is the only health product around that the government is forcing consumers to smoke rather than ingest. And it’s definitely the only industry I can think of where companies are asked to make heavy seven-figure investments in facilities before they’re even told if they’ll be allowed to do business. And then, when you are allowed to do business, you have to do so without being allowed to advertise yourself to the public.

I mean, it’s almost as if the government of Canada would really prefer that the medical marijuana industry would go away.



But it’s not going away. And that’s the big takeaway from every CEO I’ve asked about the February injunction hearing. The other big takeaway is… the court decision just doesn’t matter.

“If you love craft beer,” Bedrocan CEO Marcy Wayne explained to me a few months back, “you can get all the gear and the ingredients and brew your own and good luck to you. But nobody at Budweiser looks at that niche and worries it will hurt their bottom line. It’s just more work than most people want to go through. The number of people who want to get the equipment and the compost and the lights and water it every day and fertilize it and deal with mold and… if that’s you, have fun with it. But most people would much rather get their medicine in the mail, at a good price with industry-leading quality control and consistency, and they want to know that it will work for their ailment. So no, the injunction doesn’t worry us at all.”

Other executives have echoed Wayne’s remarks.

Organigram boss Denis Arsenault told me a similar story last month, comparing people who choose to cure themselves with home remedies to those who go pick up a bottle of Advil.

“We’re talking medicine here,” he said. “If you just want to get high, then you’re not in our market anyway, so go grow whatever you want. While this market is medicinally based, our job is to make our product better than what you can grow at home, and make the process of getting it easier than turning your basement into a growhouse. Whatever happens with the injunction, we’ll be doing our job for our patients.”

Supreme Pharmaceuticals (CSE:C.SL, Stock Forum) President John “T-1000” Fowler is more interested in the MMAR growers, which is why that company plans to offer shake at a price as low as $2 per gram option when it receives its soon-hoped for MMPR approval. The company has 340k+ sq. ft of grow space and will look to make growing your own weed about as appealing as doing your own dental surgery, by offering product at every price point.

Fowler is no opponent of the injunction, reasoning that people should be able to access inexpensive medicine, but that most medicines are inexpensive because the government health insurance programs subsidize them. Health Canada doesn't do that... yet.

So what does it mean to the casual investor if, as the leaders in the ganjasphere suggest, the February injunction hearing amounts to nothing?

“It means this is the time to get into the market,” says Craig Engelsman, CEO of Inexco Mining (CSE:C.IMC, Stock Forum), which is working through the process of taking over Worldwide Marijuana.

You may not know Worldwide from a hole in the wall, but the operation is overseen by Retired Royal Canadian Navy Commander Robert Marsh, who was Deputy Chief of Staff Operational Readiness for the West Coast fleet.

That’s some pretty heavy operational credentials, but he has weed experience as well; Before taking over as CEO and President of Worldwide, Commander Marsh was a Health Canada liaison under the old MMAR system, helping doctors and patients navigate what was a ground-breaking program.

A military approach to medicinal cannabis may be a fresh approach, considering how many companies have stumbled early. Yet Inexco, which is trade halted at $0.45 having spiked right before a financing halt, is raising money at just $0.25 currently with 23m shares outstanding at the end of the raise.

On pure short term numbers and likelihood of volatility when trading resumes (shortly after the financing closes), that’s about as attractive a proposition as an accredited investor is going to find in the weed space in the short term.

Matica Enterprises (CSE:C.MMJ, Stock Forum) is also loading the cannon for investors looking to jump aboard in the short term, announcing a four-way asset spin-off as it looks to focus on its final inspection before (hopefully) their MMPR approval. Investors as of January 15 will get loaded up with free shares in the new listings.

It’s not only the soon-to-be MMPR holders that are presenting value right now. Organigram recently announced the closing of a financing, the purchase of its two-building 5.5 acre facility, and a Farm Credit Canada loan intended to lock in the deal without dilution of the stock. The deal blows out their grow space to 75k sq. ft and takes them to a 15,000 kilogram capacity at full build out. The company also has an off-take deal of sorts with Trauma Healing Centres, which is looking to open a national chain of PTSD clinics – with that disorder being the only one where medical marijuana is acceptable as a treatment by insurance providers.

The recent raise is all about growth, lowering operating costs in the long term, and locking down their facility. Revenue is coming in. Product is going out, with four strains currently available. How they’ll help you is a bit of a mystery, being as Health Canada has demanded all LPs remove references to what certain strains are good for from their websites (bright move, bureaucrats), but the fact remains that Organigram has lined up everything it should, right on deadline.

Yet the share price is under $0.60 with a $29m market cap, despite having debuted with an $0.84 financing that opened trading at $2.14 back in late August.

Bedrocan’s market cap is now $51.9m, with a share price that disappointed on debut but has been slowly rising for three months now as the firm lays out its plan to be the legitimacy play of the sector.

T-Bird Pharma (TSX:V.TPI, Stock Forum), which had to deal with Health Canada removing their right to sell as they navigated a slow-moving zoning issue (now sorted) has a share price that sits below the value of the shell it RTOed into September. The right to sell issue is expected to be remedied any day now, as I’m told by industry insiders that Health Canada has visited the facility for re-inspection, which makes the 52-week low share price a thing of beauty for investors.

Tweed, once the front runner in the space, has been the case study in what can go wrong with the pioneer of a new and vastly over-regulated industry since it debuted around a year ago. Yet it has recently announced revenue numbers that point to the corner having been well and truly turned, with little to no response from investors and the stock still within stumbling distance of the annual low.

Their corporate update from two days ago pointed to December revenues that, they say, dwarfed the revenue numbers from the entire previous quarter. Of course, the company spends more every month to get product actually out the door than most, and we’ve no idea if that revenue increase will cover the vig, but over 300k per month in revs puts the company close to the magic $1m per quarter that is the psychological point where investors no longer have the meat sweats every time they look at their portfolio.

Even crapped out old Enertopia (CSE:C.TOP, Stock Forum), once a $70m market cap industry darling before slumping 93% to just $5m last month, has grown 36% over the last two weeks – tax loss selling season be damned. That may be fueled by increasing buzz around Lexaria (CSE:C.LXX, Stock Forum), C.TOP’s joint venture partner, which dropped 91% itself over the last six months but had been tracking upwards consistently through the last few months, good for a 113% increase over that period.

Take a look at InMed (formerly Cannabis Technologies) (CSE:C.IN, Stock Forum), a company that I have said all year was a great low risk, high upside, proto-biotech play with a brainstrust that I used to call, when it was anchored into the Affinor Growers set-up, the ‘Murderers Row of Big Brains’.

When it ran from $0.65 down to $0.30 in the absence of news, I bought in. When it hit $0.20, I bought more because it was just too low not to. It’s $0.12 right now. I’m still buying.

Wildflower (CSE:C.SUN, Stock Forum) is another stock that has bottomed out in Q4 and ranks highly on the oversold scale. Though admittedly the company had faced issues with NIMBY neighbours on one of its two MMPR application locations, it's rapidly working through a deal that will see it get back on track with a third venue nearby that will either add to or replace the disputed site. A $0.20 stock back in October, before 'the troubles', Wildflower now sits at the $0.07 mark, primed for bouncy times once that new deal is finalized.

At the other end of the market cap spectrum, two of the big new players on the scene, Mettrum and Aphria, have barely had a downward day since they listed a month back. Neither has had much of a chance yet to make public missteps, so they’re good ‘clean slate’ stocks that serve as bellwethers of the sector. Clearly, if all one has to show is a large, approved MMPR grow facility and lots of potential, the market is bullish.

The arrival of Pharmacan (TSX:V.MJN, Stock Forum), a smallball weed play aggregator, onto the public markets in late December is not coincidental. Pharmacan has pieces of several plays and gives retail folks who would like a piece of, say, Whistler Medical Marijuana, a means of getting in. Pharmacan stock hasn’t exactly risen in the few weeks it has been around (debuting in tax loss season will stymie things a tad for any company), but the fact they listed with a $30m market cap when, realistically, a lot of its holdings are extremely minor in size, points yet again to a general desire to get an anchor in the weed market just before it creaks back into growth mode.

If the above is making you think now might be the moment before the medical marijuana sector gets real again, I’m with you. Like just about anyone with an interest in the sector for the last six months or so, my portfolio is more red than green. But I’m holding, and not in the sense that I have a few grams in my jeans pocket.

I still think, long term, grow plays will find themselves in a price and consumer war that will make it hard for some to survive, but that will bring a rash of mergers and acquisitions that will only keep share prices up, if not drive them higher.

Bottom line: If you wait for February, you’re going to have missed the boat. All aboard.

INDUSTRY UPDATES:

Satori Resources (TSX:V.BUD, Stock Forum) is cleaning house. Looks like the fertilizer play may be about to be jettisoned as the cannabis oil – sorry, greenhouse construction – play takes root.

Affinor Growers (CSE:C.AFI, Stock Forum) has been hurting hard of late, and wasn’t helped when President Nick Brusatore added to the ongoing Affinor/Abattis lawsuit mess by announcing he was suing Abattis for defamation. The release isn’t so easy to find – it’s not on the Affinor website, nor on Stockhouse, but it hasn’t sent stock prices up. Affinor was at $0.26 on January 2. It’s $0.17 today.

Chlormet Technologies (CSE:C.PUF, Stock Forum).. I get a lot of people asking me about this stock. I’d give you an answer if I had one. Ditto Umbral (CSE:C.UMB, Stock Forum), which is pimped hard at me every day by people on Twitter as it went down, down, down for the last three months, only to spike 57% today on no news and low volume.

Green and Hill Enterprises (OTO:GHIL, Stock Forum) boss Ross Rebagliati is active on his Twitter feed. Which is nice, since the market cap of his company is currently $202,280. Down from $400,000,000 on March 31 last year. But hey, up 100% from yesterday.

Also worth noting: If you sold this 1BR Whistler condo, you could buy the entire company outright. Ross apparently has real estate experience – call him and do a deal.

--Chris Parry
https://www.twitter.com/chrisparry

FULL DISCLOSURE: Bedrocan, Inexco, InMed, Wildflower, Supreme and T-Bird are Stockhouse Publishing marketing clients. The author has served as a consultant for Organigram and owns stock in the company. The author's consulting partner is contracted with Matica and their partnership owns stock in that company.