Jazz Pharmaceuticals’ $7.2 billion takeover of medical cannabinoid giant and cannabis ETF staple GW Pharmaceuticals is a sign of things to come.
Increased legalization is leading traditional pharmaceutical companies to enter the medical cannabis sector.
This is the view of Purpose Investments and Rize ETF, the asset managers behind two European domiciled ETFs that hold GW Pharmaceuticals stock among their largest positions.
Jazz’s agreed takeover of GW at a 50% premium to its closing share price prior to the announcement has led to strong gains for both the Purpose-managed Medical Cannabis and Wellness UCITS ETF (CBDX LN), which is issued in partnership with HANetf, and Rize ETF’s Rize Medical Cannabis and Life Sciences UCITS ETF (FLWR LN).
Prior to the bid, GW stock constituted about 14% of each fund.
UK-based GW made history in 2018 by being the first company to receive FDA approval for a cannabinoid-based therapy, Epidiolex, which is used to treat seizures in patients with epilepsy.
The firm’s takeover is among the largest deals to be struck for a medical cannabis company and may highlight a trend of more traditional pharma companies making a move into the sector.
Nawan Butt, Portfolio Manager at Purpose Investments, commented: “When GW Pharmaceuticals started, most global pharma companies were hesitant to do 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. We don’t think this is the last deal we will see in the sector. Today’s events should draw attention to other companies doing work in this sector and the opportunities they are exploring.”
Rahul Bhushan, co-Founder of Rize ETF, added: “The acquisition of GW Pharmaceuticals by Jazz Pharmaceuticals serves to validate the global nature of the medical cannabis phenomenon. Indeed, here we have an Ireland-domiciled pharmaceutical company acquiring a Cambridge-based medical cannabis company. This should further dispel the commonly misconceived notion that cannabis is somehow just a North American story.
“GW Pharmaceuticals is a company that has gone from less than $20m in revenues in 2018, to getting Epidiolex approved for distribution by the FDA in July 2018, to $208m and $488m in revenues in 2019 and 2020. They have beat revenue estimates every single quarter since February 2019. And yet, they only have one FDA-approved, cannabinoid-derived medicine which they market only in the US, UK, and France.
“There is no doubt that “Big Pharma” has recognized the value of cannabinoid-based medicines. This is a plant that will over time serve a medicinal purpose globally, and there will be hundreds of medicines for hundreds of indications. Will we see more acquisitions in the future? We believe it’s inevitable.”
Growing legalization
Following a couple of years of lackluster performance, cannabis stocks have been rallying in recent months as the outcome of the US election has potentially laid out a smoother route to legalization across the world’s largest cannabis market.
Between 4 November 2020 and 3 February 2021, the Medical Cannabis and Wellness UCITS ETF (CBDX LN) soared 64.8%, while the Rize Medical Cannabis and Life Sciences UCITS ETF (FLWR LN) notched up a gain of 52.5%. These compare to a return of 6.1% for the SPDR S&P 500 ETF (SPY US) over the same period.
US states are reportedly under pressure to legalize cannabis in order to prevent a flight of tax revenue to newly legal states. Five additional states — New Jersey, Arizona, Montana, South Dakota, and Mississippi — voted on Election Day to legalize cannabis in some form. As the legalization momentum grows across states, the possibility increases that the government will roll back restrictions on a national level.
Indeed, in December, the House passed the MORE act which would remove cannabis from the list of controlled substances on a national level. With the Republican Party failing to retain control of the Senate in December run-off elections, Democrats are now seen as having an easier path to passing pro-cannabis legislation.
Purpose’s Butt added: “One of the sectors that benefited the most from the US election results was cannabis. The sector is still in the early phase of its growth to becoming a more mainstream Consumer and Healthcare category and, with the Democrats in power, we expect the move towards legalization in the US to speed up. With this reality becoming more widely appreciated, we have seen many of the US recreational focused cannabis names do extremely well over the past month. But now the focus of the sector could switch to the medical side.”
Rize ETF’s Bhushan said: “We believe the investment proposition around cannabis has always been clear. In recent years, the global medical cannabis industry has been buoyed by powerful tailwinds, including favourable legislation, rising social acceptance, a flurry of public and private investment, and a proven range of therapeutic applications. Today, there are nearly 70 countries around the world with some kind of legal medical cannabis programme. Compare that with ten less than a decade ago. The medical cannabis movement is going global, and rapidly.
“This is a sector that is burgeoning, especially now on the back of the Biden Administration’s favourable stance with regard to decriminalization/legalization and the UN vote in December.”
The ETFs
The Medical Cannabis and Wellness UCITS ETF tracks the Medical Cannabis and Wellness Equity Index, which consists of publicly listed companies conducting legal business activities in the medical cannabis, hemp and CBD industry. The fund comes with an expense ratio of 0.80% and is listed on London Stock Exchange in US dollars (CBDX LN) and pound sterling (CBDP LN), on Xetra in euros (CBSX GY), and on SIX Swiss Exchange in Swiss francs (CBDX SW).
The Rize Medical Cannabis and Life Sciences UCITS ETF is linked to the Foxberry Medical Cannabis & Life Sciences Index which covers medical cannabis firms globally across four sectors: biotechnology/pharma, agriculture tech, hemp & CBD, and big pharma. The fund comes with an expense ratio of 0.65% and is listed on LSE in US dollars (FLWR LN) and pound sterling (FLWG LN), on Xetra in euros (BLUM GY), and on SIX Swiss Exchange in Swiss francs (FLWR SW).