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Up in smoke: the SRI case for marijuana

Up in smoke: the SRI case for marijuana

Marijuana’s hip image is changing into something altogether more pedestrian thanks to its rising profile in medicine. Extracts of cannabis have been recommended for anorexia, pain relief and epilepsy. As the substance swaps the streets for the pharmacy shelves, some investors spy an opportunity.

In 2016 the medical marijuana market posted revenues of $6.3 billion, up from 30% the previous year. In 2017, two marijuana-focused ETFs were launched comprising stocks such as British firm GW Pharmaceuticals and Canada-based medical cannabis group Canopy Growth Corporation.

Active managers are also seeing growth potential and say this is more than just a fad. Tom Dobell, who runs the £3.2 billion (€3.6 billion) M&G Recovery fund, has GW Pharmaceuticals as his portfolio’s largest holding out of 79 stocks. The firm makes up 4.5% of the fund and Dobell spotted the stock’s potential early on.

‘GW Pharma is refining cannabis to make drugs for specialist applications such as childhood epilepsy. We have been involved with this business since December 2002 and have backed the company to tackle numerous obstacles along the way,’ Dobell says.

‘2016 was a particularly important year with the drug Epidiolex, which has had three positive phase-three trials where the results have been very successful. The company is in the process of filing for an NDA [New Drug Application] in mid-2017.’

While the financial case is compelling, marijuana can exacerbate mental health problems and increase the risk of heart attacks and strokes. So can investors back cannabis for medical use with a clear conscience?

Smoke screened

German company Ökoworld has SRI criteria that is stricter than most other asset managers. Only around 300 firms globally measure up and its fund managers have to choose from this restricted universe.

In June this year GW Pharmaceuticals passed all of Ökoworld’s tests. The company has been on Ökoworld’s watch list since 2004, but only now are the investment firm’s fund managers allowed to invest in it.

Sebastian Leins, deputy head of sustainability research at Ökoworld, emphasises the need to distinguish between cannabis the street drug and cannabinoids, which are extracted from cannabis plants for medicinal purposes.

He says the latter is strictly controlled, only available on prescription and has to pass safety regulations set by the FDA in the US. GW Pharmaceuticals even grows its own marijuana to ensure a pure supply.

‘The company is producing it in a very strictly controlled process and its greenhouses are guarded. The firm knows that if anything goes wrong, it will have big problems with the authorities so it has taken steps to prevent this,’ Leins says.

‘The product that GW Pharmaceuticals produces is not related to drug addiction. It uses the cannabinoids from the plants and puts this in medicines to treat spasticity due to multiple sclerosis. Patients are glad to have something that helps them.’

Leins says that conventional medicines are available for multiple sclerosis, but they can have side effects, and other more dangerous drugs are licensed for medical use.

‘With every pharmaceutical product, there is a risk of addiction or side effects. If you take too much aspirin or too much paracetamol it can kill your liver. In the US, there is more cancer of the liver caused by paracetamol than by alcohol.

‘It is the same as using morphine, which is related to heroine. The same chemists who invented heroine created morphine but we are not allowed to buy morphine on the street,’ Leins says.

High street prices

While Ökoworld has approved GW Pharmaceuticals from an ethical perspective, the managers at the investment firm have yet to incorporate the stock in their fund. Christophe Eggmann (pictured), who manages the GAM Multistock - Health Innovation Eq strategy, has been exploring the topic but has not found a compelling financial proposition in the sector.

‘We looked at GW Pharmaceuticals. It is an interesting space but we decided against investing because of valuations. We also met with another company, Zynerba Pharmaceuticals, which delivers medicine through a patch or gel,’ he says.

‘The clinical data that we have seen so far is pretty compelling. It has been successful in a number of cases and using cannabis is validated by this data. The question is the price of the stock. At the time we looked at it, it was already pretty expensive.’

Eggmann says that if the price of GW Pharmaceuticals fell, he may look again at its investment prospects as he is happy with the stock from an ethical perspective.

While the financial case for medical marijuana has divided investor opinion, in some parts of Europe it is still illegal to possess cannabis. However, Leins believes views are changing and more companies are developing medicines containing cannabinoids, but for specific uses.

‘I’m not sure cannabis will be legalised in Europe in the next 10 or 15 years but they are allowing it for therapeutic use in medicine. There is a very special focus on damage in the nerves and there will only be about five diseases where it can be applied. It is unlikely to be used like a standard pain reliever like aspirin or paracetamol,’ he says.

This article originally appeared in the July/August edition of Citywire Selector magazine.

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