Note: This article is part of Morningstar Canada's Cannabis Week Special Report
It was a fateful day in November 2016 when Canopy Growth Corporation was crowned the first “cannabis unicorn”, reaching a billion-dollar valuation after soaring nearly 400% in the preceding year. What followed was a deluge of mainstream media coverage, and some soul-searching among average investors weighing whether they were ready to jump on the profit bandwagon or sit on the sidelines.
Many investors choosing to pass on the opportunity cited unrealistic valuations, retirement goal incompatibilities, and--particularly relevant to the sector--a mismatch with personal values. The industry is built around a drug with a cloudy net societal benefit at best, after all.
So, is cannabis an ESG-friendly holding? Is the recreational side of the market ready to say that it has sustainable qualities? Or are medicinal-focused cannabis holdings, with their “take as needed” products more of a responsible way to reap the rewards of the growing industry?
“It’s too early to tell,” says Mark Noble, senior vice president, ETF Strategy at Horizons ETFs, known for its wide-reaching portfolio of cannabis exchange-traded fund products. Speaking on the cannabis industry as a whole, which he notes is led by players involved in both the recreational and medicinal sides of the market: “Nobody knows the impact that the industry is going to have on the environment, social, and governance practices.”
Noble suggests investors focused on environmental, social, and governance practices should evaluate opportunities on a “case by case” basis and use a screen for stocks that goes beyond minimum thresholds for responsible corporate behaviour.
In the meantime, to get a head start on identifying ESG-friendly approaches, we spoke to research, investment, and corporate leaders in cannabis who are focused on a health and wellness approach, to hear their case for the societal benefits of cannabinoid consumption.
Not just pot
Far from the stereotypically simple “weed”, “grass”, or “pot” label, this plant has a potential treasure trove of biological benefits beneath the microscope. “There are 100-120 cannabinoids in a given plant, all working together,” Susan Murch, a professor at the University of British Columbia and federally designated Canada Research Chair, says.
There are positive ways plant chemistry affects human health, Murch says, citing plant-derived melatonin and St John’s wort and their effects she’s observed on sleep, circadian rhythms, and neurological disorders. In fact, there around 30,000 distinct chemicals found in plants, making up 78%-90% of modern medicines.
Following the removal of regulatory hurdles around cannabis research, Murch is applying more than 25 years of experience researching plant chemistry and its effects on human health towards the discovery of “poly-molecular drugs” that could supplement or be a substitute for relatively simple single-molecule drugs currently on offer.
Teaming up with Pacific Rim Brands to investigate the development of cannabis-infused beverages, she’s seeking what she believes is the necessary responsible route to cannabinoid consumables.
“It needs to be consistent and stable,” says Murch, unsatisfied with the crude, unpredictable, and unproven concoctions of cannabis edibles and drinks currently on offer. Mulling the idea of a new medicine that makes the most of the plant’s potential, she states that, “This is going to require some really solid science—and will require significant resources and time [up to two years],” to get right.
Murch had been approached by many companies to help formulate a dependable dosing of cannabis consumables, but she appreciated Pacific Rim’s patient and careful approach, as well as its commitment to safety.
Kevin Letun, CEO at Pacific Rim Brands, says consumer trust is paramount when it comes to cannabis consumables. “We’re taking a bottom-up approach—limited marketing, branding and advertising until we get the dosage and safety right.”
“Cannabis has a data problem,” says Letun, and someone needs to validate the loosely applied claims of benefits on cannabis product packaging to date. He echoes Murch’s optimism around the potential societal benefits of the plant, citing that it’s not hard to highlight the relative safety of cannabis in comparison to alcohol from a recreational perspective.
From a medicinal perspective, both Letun and Murch remain optimistic about the prospects of complex cannabis offering improved treatment of ailments from pain to neurological disorders.
“Companies have made a lot of money, but have they solved the problems of patients?” asks Murch, “The long-term use of opioids [to treat pain] present issues and they become less effective over time.” She adds that doctors are more comfortable with absolutes, and although the drugs currently on offer come from only 100-150 years of research around western medicine, they’re simple and standardized enough to garner physician confidence.
In comes CBD
Synthesize it if you want the near-term confidence of the medical community, says Eden Rahim, portfolio manager of the Next Edge Bio-Tech Plus Fund at Next Edge Capital. He adds, don’t be fooled by the major cannabis companies dabbling in extracts in the hope of a medical application, saying, “There are just a lot of farmers out there.”
According to Rahim, there are already decades of research around the medical efficacy of non-psychoactive cannabinoid CBD or cannabidiol, and trials happening now for the treatment of ailments from pain to muscle spasticity.
“Health Canada prefers pure compounds,” says Rahim. “The minute you reach 10 [parts per million] of THC [the psychoactive cannabinoid tetrahydrocannabinol], you get a black box warning on your product.” Responsible investors may want to avoid the dreaded black box.
From an ESG investment perspective, Rahim is more comfortable investing in Canadian CBD “pioneers and scientists” with extensive biosynthesis and clinical experience under their belts to ensure purity and efficacy, such InMed Pharmaceuticals [IN]. Another option is Cardiol Therapeutics [CRDL], with its “completely pure synthesized CBD—and clinical research with the University of Alberta into how it can restore blood flow for stroke victims.”
“If Canopy saw the writing on the wall, they’d be buying these companies,” says Rahim.
Rahim also points out that if you’re using an ESG-oriented approach to investment, you might want to consider the carbon footprint of organically derived cannabis compounds versus synthetic compounds. “What’s the carbon footprint of all these fields?”
Rahim says investors should be ready for a “total disruption” from CBD in the biopharma space as investment ramps up and clinical research results begin to flow following a major head start. He sees game-changing commercial clinical applications for THC coming much later.
Taking on THC
There is one particularly brave pioneer that looks to check the boxes above: biosynthesis, consistency, clinical and toxicology studies, with THC.
If THC-based medicines are far in the frontier, Tetra-Bio Pharma [TBP] hopes to be there first. With a wide pipeline of potential treatments in the fields of dermatology, oncology, pain, and ophthalmology, it has seen studies succeed through Health Canada trials thanks to a commitment to manufacturing quality that goes above and beyond what is required, says CEO and chief scientific officer Guy Chamberland.
As a THC frontrunner, Tetra has already faced trial challenges and been put through an ESG test. The company opted to suspend one clinical study (which has since resumed) into an organic cannabinoid pain treatment due to the identification of impurities. To their credit, they notified regulators within 24 hours of the discovery, as well as patients, and took six months to redesign their quality program before recommencing.
“We use both synthetics and organics—but we’re pushing more with synthetics,” says Chamberland.
Tetra has also pioneered through less-charted territory with regulators, having to carefully communicate and educate around a “blend of controlled substance regulations, science, and drug abuse” conversations, says Chamberland, often pointing to the legacy of opioids to strengthen their arguments. “There’s no way regulators should assume THC is the same as opioids,” adds Chamberland. “[The FDA and Health Canada] hit us with that question every time.”
But the challenges are worth it for Chamberland, who cites the failures of current pain treatments and analgesics around long-term efficacy, side-effects, addiction and sometimes death. “It’s pretty sad, actually.”
Chamberland adds that Tetra has already demonstrated “a relatively low level of side effects when THC and CBD were administered [together] in a 1:1 ratio—this is not the case when THC or CBD is given alone. In both the THC or CBD alone cases, many side effects are similar to other analgesics.”
Among the ailments that cannabinoid researchers hope to treat, the public health benefit, demand, and opioid crisis make pain relief a priority and potentially massive ESG-compatible profit driver. It remains “the holy grail” for the medical marijuana industry, says Noble.
