What the Heck Happened Last Week at Tilray? And its implications for “medicinal” cannabis companies.

What Tilray’s IPO means for “medicinal” cannabis companies?

Tilray, Inc. describes itself as “a global pioneer in the research, cultivation, production, and distribution of medical cannabis and cannabinoids.” However, last week’s events make a pretty good case that Tilray (Nasdaq: TLRY) is not a pharmaceutical company after all despite being branded as one by companies like Yahoo Finance.

This is very good news for “medicinal” cannabis companies.

Last week, with unusually high trading volume on Wednesday, September 19, 2018, Tilray’s shares at one point reached a dizzying high of nearly $300 per share, before closing the week at around $120 per share, making Tilray one of the most highly valued cannabis companies in the world. Less than three months earlier, Tilray completed its IPO at a public offering price of $17 per share. The Company currently has a market cap of approximately $11 billion, even though it is losing money and has revenues of less than $10 million per quarter.

So what happened? Several commentators have pointed to Tilray’s September 19 press release announcing that the FDA had approved the import of Tilray’s “pharmaceutical-grade medical cannabis product” for clinical testing at UC San Diego in essential tremors (“ET”). Personally, having been an executive at three publicly traded life science companies for almost 15 years, I am unpersuaded that the press release had much to do with Tilray’s meteoric stock run up.  I note for example:

  • Tilray’s high trading volumes and stock run-up began at the end of August.
  • Since this Summer, most publicly traded “medicinal” cannabis companies, like Canopy Growth Corp (NYSE: CGC) and Aphria, Inc. (TSX: APH), have experienced considerable stock appreciation.  Tellingly, one Cannabis-specific index tracked by New Cannabis Ventures, the Canadian Cannabis LP Index, which consists of Canopy Growth, Aurora Cannabis, the Cronos Group, The Green Organic Dutchman Holdings, and similar companies, has nearly doubled in value over the past 3 months.
  • Also, Tilray’s study at UC San Diego’s Center for Medicinal Cannabis Research (the “CMCR”) appears not to be a statistically powered “blinded” study, which would be needed to scientifically prove the effectiveness of cannabis as a treatment for ET. Even though Tilray claims to have Phase 2 and Phase 3 studies underway in Canada and Australia in various diseases and disorders such as epilepsy and Dravet Syndrome, the CMCR study is likely to be an “investigator sponsored” study in relatively few patients, producing anecdotal information at best. Moreover, as a medical condition for study, essential tremors is a “bad target” for drug development, which frequently costs more than $1 billion in research costs per drug under development, because ET (1) is not fatal, (2) is already treated by beta blockers, like propranolol and atenolol, as well as anticonvulsants, like primidone, and (3) afflicts just around 200,000 people in the United States (approximately 3% of the population), so not a lot of people.
  • On top of this, it’s important to keep in mind that the news itself was just approval to import the cannabis for testing, not an approval to sell it. When the FDA approved Epidiolex in June 2018 as the first cannabis-derived therapeutic (for seizures associated with Lennox-Gadtaut syndrome and Dravet syndrome), the manufacturer of Epidiolex, GW Pharmaceuticals (Nasdaq: GWPH), experienced a stock drop and the GWPH stock price has been largely flatlined ever since. So it is hard to believe Tilray’s news was worth its gain in market value on September 19 of approximately $5.5 billion.

All this leads me to conclude that Tilray is not really seen by investors as a life science company, despite what people may say. As additional proof, consider some “pharmaceutical” company comparisons (these are the “peer” companies offered up by Charles Schwab):

Company Market Cap EPS Last Reported Quarterly Revenues Profit Margins

Tilray, Inc.

$11B

-$0.27

$9.74 M

-80%

Nektar Therapeutics (Nasdaq:NKTR)

$10B

$4.89

$1.1 B

65%

Dr. Reddy’s Laboratories Ltd. (NYSEL RDY)

$2B

$1.26

$555 M

10%

Jazz Pharmaceuticals (Nasdaq:JAZZ)

$10B

$4.55

$500.5 M

15%

Taro Pharmaceuticals (NYSE:TARO)

$4B

$5.64

$154 M

34%

Bausch Health (NYSE:BHC)

$9B

-$7.45

$2.1 B

-30%

 

Dozens of other pharmaceutical companies tell the same story. To me, a better comparator for Tilray is its Canadian cousin Canopy Growth, which develops therapeutics through a wholly-owned subsidiary, Canopy Health Innovations:

 

Company

Market Cap

EPS Last Reported Quarterly Revenues

Profit Margins

Tilray, Inc. (TLRY)

$11B

-$0.27

$9.74 M

-80%

Canopy Growth Corp (CGC)

$11B

-$0.71

$20.1 M

-154%

 

Both Tilray and Canopy Growth have modest revenues, are losing money hand over fist, with essentially no clinically proven drugs on the market, and yet have considerably higher market caps than established drug developers with several drugs already on market and over a billion dollars in revenue each.

Bottom line: Investors do not value medicinal cannabis companies like pharmaceutical companies and this is good news for the cannabis industry. Medical cannabis companies seem to occupy a much more privileged position. For example, unlike traditional drug developers, few people in the cannabis space seem preoccupied with toxicology results. There is no active debate about whether cannabis causes cancer or birth defects. And it is already generally accepted that cannabis can help treat patients with everything from PTSD (being clinically tested by Canopy Growth) to nausea induced by cancer (being clinically tested by Tilray).

Consequently, the dramatic price increases of Canadian cannabis companies like Tilray seem to have much more to do with Canada’s decision this summer to legalize recreational cannabis consumption in October 2018 (see the Cannabis Act (C-45), which passed in June 2018) then hitting drug development milestones such as the initiation or completion of clinical studies. This is all very good news for companies like Tilray because local, state and federal governments continue to roll forward globally with plans to legalize the cultivation and consumption of cannabis. So it seems investors have found in cannabis considerable up-side potential, like pharma and biotech, but without the downside risks and costs of clinical development.

Regardless of whether medicinal cannabis companies deliver operationally, by becoming profitable enough to justify their remarkable valuations, the stock ride for now promises to be an exciting one.

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