With the U.S. commonwealth of Saipan deciding to make the leap from total prohibition to full-scale legalization, and conservative-minded Thailand also throwing its hat into the medical marijuana ring toward the tail end of 2018, the legal marijuana industry seemed to be on an unstoppable winning streak last year. Most pot stocks, as a result, sailed higher during the first five months of 2019.
However, the uncertainty swirling around the legalization of cannabis at the federal level in the U.S. and the Food and Drug Administration's lack of guidance regarding the safety of cannabidiol (CBD) oils has caused a number of these former highfliers to suddenly cool off. Is this rising tide coming to an end, or is the industry simply taking a much-needed breather?
With this question in mind, we asked three of our Motley Fool contributors which pot stocks they think investors should be keying on this month. They suggested Cronos Group (CRON -0.82%), Canopy Growth (CGC), and GW Pharmaceuticals (GWPH). Here's why these three names are worth watching in June.
A test case
George Budwell (Cronos Group): If marijuana stocks are going to regain their footing this year, Cronos Group is probably going to lead the charge, making it a top cannabis stock to keep an eye on this month. Canada's third-largest pot company by market cap just got a whopping two-notch upgrade from sell to buy from Bank of America's Merrill Lynch following a presentation at an investor luncheon hosted by Consumer Analyst Group of New York earlier this week.
Merrill Lynch abruptly changed its tune after CEO Mike Gorenstein noted at the aforementioned luncheon that Cronos isn't that far off from expanding into the high-value United States CBD market. Cronos' brain trust also highlighted its close partnership with tobacco giant Altria (MO -1.42%) during this informal sit-down. The key point is that Altria's large contract farmer network, enormous supply and commercial infrastructure, and strong ties with various nationwide retailers could translate into a nearly insurmountable competitive barrier for other Canadian pot growers. Cronos and Altria might end up dominating this enormous market.
Wall Street's newfound optimism, though, essentially boils down to a leap of faith. As things stand now, Cronos is well behind its closest peers from a production standpoint, and its domestic sales during the first few quarters since legalization have been near the bottom of the pack among publicly traded companies as a result.
The company's core value proposition hinges on the U.S. ending federal prohibition -- an event with a highly uncertain outlook. Cronos' stock should thus provide investors with a clear line of sight into Wall Street's thinking regarding how the legal landscape is developing inside the United States.
A big month for the biggest player
Keith Speights (Canopy Growth): Most of the big Canadian marijuana producers have already reported their results for the quarter ending March 31. The notable exception is the biggest of them all by market cap, Canopy Growth. Although Canopy hasn't announced the date for its next quarterly update, it should be coming up within the next few weeks.
For now, all we can do is read the tea leaves from how the other major marijuana companies fared. I suspect that Canopy Growth will report quarter-over-quarter sales growth in the general ballpark of the 21% that Aurora Cannabis delivered. But I could be in for a surprise.
Investors will also want to tune in to find out more about Canopy Growth's plans for the U.S. hemp-based CBD market. Canopy is building a large-scale hemp production facility in New York State. Co-CEO Bruce Linton has said in the past that he expects the company will have hemp CBD products on the market by the end of 2019. But it will be interesting to see what impact the regulatory process being undertaken by the FDA will have on those plans.
Last but not least, Canopy will probably give more details on how it's preparing for the launch of the cannabis derivatives market in Canada later this year, which will open the door for cannabis-infused beverages and edibles to be sold in the country. Putting all of this together makes Canopy Growth a marijuana stock you'll really want to watch in June.
Expanding marijuana use in epilepsy
Todd Campbell (GW Pharmaceuticals): After winning FDA approval of its breakthrough marijuana drug Epidiolex for use in epilepsy last year, GW Pharmaceuticals could be about to get another important green light.
Management expects a key advisory group to European regulators will weigh in with an official go/no-go recommendation for Epidiolex this quarter. Epidiolex's ability to reduce seizures in patients with Dravet syndrome and Lennox-Gastaut syndrome (LGS) by 40% or more make a positive recommendation likely. If so, then an official go-ahead in the EU could happen in the third quarter.
Dravet syndrome and LGS are two hard-to-treat forms of epilepsy, and many patients don't respond to existing anti-epileptic medications. Given that patients can endure 50 or more seizures per month, there's a big need for a new option like Epidiolex.
Adding to the likelihood of strong demand if approved is Epidiolex's performance so far in America. Despite only being available since November 2018, U.S. sales have already eclipsed a nine-figure run rate. As of March 31, over 7,600 patients have filled a prescription, and as a result, Epidiolex's net sales were $33.5 million in the first quarter.
Dravet syndrome is particularly rare, but there are between 14,000 to 18,500 patients with LGS in the United States and an additional 23,000 to 31,000 patients with LGS in Europe.
GW Pharmaceuticals' opportunity for growth isn't limited to Dravet syndrome and LGS, either. The company recently reported that Epidiolex can control seizures caused by tumors in tuberous sclerosis complex (TSC). There are about 25,000 TSC patients suffering from treatment-resistant seizures, so an approval in that indication could also be a big driver of future sales. A filing for FDA approval in TSC should happen before the end of 2019.