Cannabis stocks have been flying high in 2019, with some names like Cronos Group (Cronos Group Stock Quote, Chart TSX:CRON) and Village Farms (Village Farms Stock Quote, Chart TSX:VFF) more than doubling in value since the start of the year. A cautious investor might ask if the market is showing signs of a bubble.
Definitely, says Raymond James analyst David Novak, who argues that cannabis’s claims, especially when it comes to the medical market, are way overblown.
The hype is palpable in the pot sector, with major players such as Canopy Growth CEO Bruce Linton claiming that not only will the recreational market for cannabis be huge —in smokable, drinkable and edible forms— but that Big Pharma should be shaking in its boots when it comes to the potential application of marijuana to treat a whole variety of ailments.
“I think [pharmaceutical companies] are terrified,” claimed Linton, “and they should be because this is an ingredient that we as humans can actually respond to without the same level of health disruption and risk as many of the pharmaceuticals.”
It’s that kind of optimism which bears no backing in the scientific literature, according to Novak, whose report entitled ‘Navigating the Smoke And Mirrors of the Cannabis Sector’ looks at the clinical evidence on cannabis’ potential therapeutic benefits and finds that the potential applications, according to the science so far, are limited to three: chemo-induced nausea, chronic pain and muscle spasticity in multiple sclerosis.
“Everything beyond that including glaucoma, brain cancer and so on is simply not supported by the scientific data generated to date,” says Novak, in conversation with BNN Bloomberg on Monday. “So when a licensed producer comes to you and tells you that they’re running a big clinical trial in traumatic brain injury, I think you need to take that claim with a grain of salt because we believe that the probability of failure is going to be significantly high. In reality, when you look at some of the claims they’re making, some of them are no better than Big Tobacco.”
Novak says that many of the current projections concerning the eventual size of the medical and wellness markets for cannabis and its derivatives like CBD are much too high, as well, arguing that as the recreational market becomes more established, users who once relied on a medical prescription to get their pot will slide over to the adult-use retail market.
“We’ve seen this in the US during prohibition when you could essentially get a prescription for alcohol. The same thing is going to happen to marijuana,” he says. “We looked at the prescription base to date and we’ve noticed that there has been a significant decline in consumption in the medical market once legalization hit, and we believe that this is because many patients who sought out a medical prescription for marijuana were doing so for recreational purposes.”
Even on the eventual size of the combined rec and medical markets, Novak is skeptical that current shortages in Canadian retail outlets are reflective of a supply issue. In fact, there will very soon be a huge glut, if, that is, cannabis companies really come through on their cultivation projections.
“We see [the cannabis market] growing from 750 metric tonnes to 1,000 metric tonnes by 2021,” says Novak. “We also looked at the disclosed production capacity across all of the Canadian LPs, and that production capacity is expected to reach 2,500 metric tonnes or greater — supply is actually going to eclipse domestic demand by two and a half times if not more by next year.”
“The constraints that you’re seeing are not because of supply but rather because the LPs are very new and somewhat amateur, and they’re running into quality control and logistics issues,” he says.