Shake-Up in Big Weed

One of the marijuana industry’s pioneers was just ousted from Canopy Growth. What comes next?

Todd Campbell
Todd Campbell
Jul 12, 2019 at 2:25PM
Health Care

In this week's episode of Industry Focus: Healthcare, Foolish analysts Shannon Jones and Todd Campbell catch listeners up on some recent healthcare developments. First: Marijuana industry pioneer and co-CEO of Canopy Growth (NYSE:CGC) Bruce Linton is co-CEO no more. Listen in to find out why Canopy showed him the door, what comes next for Canopy and Linton, and some insights that investors can glean from this departure.

Then the hosts look at some exciting developments in the gene therapy world -- data from three companies presenting at the International Society on Thrombosis and Haemostasis Congress in Australia that could mean big things for hemophilia patients.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on July 10, 2019.

Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Wednesday, July the 10th, and we're talking healthcare. I'm your host, Shannon Jones. I am joined once again by all-around good guy healthcare guru, Todd Campbell. Todd, we missed you. The people missed you. So glad to have you back on the show.

Todd Campbell: It's great to be back. I love to do hands-on research. I figure I might as well go get this crazy eye surgery and see what this eye surgery is all about, see if there's any stock investing tips. Unfortunately, no, there weren't. [laughs]

Jones: [laughs] No stock ideas? It was all for naught, Todd!

Campbell: It was all for naught! Well, I don't know, I do have a lens from Bausch + Lomb now sewn into the back of my eyes, so maybe I should be paying more attention to them.

Jones: [laughs] Well, so glad to have you back, especially for this week, because we've got a lot to catch up on. First and foremost, we're going to be going into some news that came out of the marijuana industry and also giving some updates in the gene therapy space as it relates to hemophilia. So glad to have you back on the show, Todd.


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Let's kick things off with the news heard round the marijuana world. Really can't underscore just how big of a development came out of Canopy Growth on July the 3rd. This was the half day of trading right before the stock market was closed on July the 4th, by the way --

Campbell: [laughs] Don't you love how they do that?

Jones: I love how they do that. I was literally driving in the car on the way to North Carolina, and my phone started going off. And I was like, "You've got to be kidding me, no way." But the news heard around the world is that Bruce Linton, co-CEO, is no longer CEO of Canopy Growth. Todd, there's a lot more to this story than meets the eye. Probably one of the more fascinating developments that I've seen. Really unexpected for a lot of people that have been following this space.

Campbell: Truly surprising, but maybe as we dive deeper into the story, we'll realize that we shouldn't be as surprised, perhaps, that this has happened. I think what made it so surprising is that Linton was one of the more vocal and successful advocates for the legalization of marijuana and the creation of marijuana markets and the mainstreaming, if you will, of legalization and it as a business opportunity that should be considered by investors. He was vocal, he was at the forefront, and he took a very small, fledgling company, Canopy Growth, operating out of a very small, old Hershey chocolate factory, and turned it into the biggest publicly traded marijuana stock on the planet, and the largest in terms of sales of the marijuana growers. A very successful entrepreneur. Like you said, surprising and interesting.

Shannon, we'll dive right into it. Why? [laughs] Why did they get rid of Linton, right? If I'm just raving about how he was so important to the industry and such a pioneer, why would they get rid of him? And I think that when you dig into the story, you realize that a lot of it has to come from this cutting-edge deal he made with Constellation Brands, which of course is the beer, wine, and spirits giant behind Svedka vodka and Corona, Corona Light, and Corona Extra, and the way that changed once that deal got put in place, the makeup of the board of directors, and ostensibly shifted the goals of this company, from where it was before as an emerging marijuana company to where it could be in the future as a maturing marijuana company.

Jones: What was interesting to me about this -- you mentioned Constellation. Of course, they gained four, I think, of the seven board seats with the $4 billion deal that was made. They now have the potential to own more than 50% of the company moving forward if you include the Warrens. So really, a lot of the control went over to Constellation Brands because of that deal. Bruce Linton was really the key player that brought this deal into play. And now, it's Constellation that ultimately gave him the boot. Of course, Bruce Linton, he's a pretty aggressive player. I think if you're any of the other major Canadian producers, you probably got the news and you're thinking, "Thank goodness this guy is out because he's killing us." But at the same time, you mentioned how passionate he was about the industry, being an advocate. Canopy Growth is the bellwether of the entire industry right now because of Bruce Linton and his work and with him being the face of the industry.

They did have a bad quarter, which we'll get into in a second. But I think for a lot of investors that have been watching this space, having someone like Bruce Linton on your side, really driving and moving and trying to expand globally, certainly a good thing. I think for Constellation, though, I know there was a question that was thrown out to the Constellation Brands CEO about, is this a financial issue, is this a more strategic issue? He seemed to back away from it being a financial issue. I've got some question marks on that because they came off of a bad quarter, Todd.

Campbell: Very, very bad quarter. And what is the corporate line? The Constellation CEO is not going to go on there and say, "He was horrible! We had to get rid of him because we were losing money left and right!" He's not going to say that. You think about boilerplate, just look at the press release announcing that Linton was gone. "He's stepping aside."

Jones: "He's stepping down." The terminology... [laughs]

Campbell: [laughs] "Stepping down." I mean, it's kind of disingenuous when you see that, because it makes you think as an investor, "He's choosing to spend more time with his family," or, "He's obviously been foot on the gas for four years, and now he just wants to ease back, he still owns a truckload of shares so he'll still end up benefiting from Canopy Growth in the future." So, it's a little misleading to investors to say, "step down." And I think Linton didn't like that. He went on to CNBC that morning, and said, "Hey, just to be clear, I'm not stepping down. I was terminated." If you get chance, listeners, go and watch that interview. It was a very intriguing interview. He struck a very realistic tone, a very mature tone for someone who's built this baby up into this crazy successful company, and has now been asked to say, "Bye!" I don't even know if they actually said anything in the press release about him serving as a consultant, which oftentimes, when you're easing somebody out, you do. I don't think I saw any mention of that.

He said on the interview, quote-unquote, here, "I really think, at the end of the day, sometimes entrepreneurs are entrepreneurs because they're not super employable. And I would say I probably don't have a resume because I like creating businesses and driving them. You don't always mesh well with everyone in the playpen. And I think probably, what they're doing will probably be a better decision." I mean, that's a very realistic tone. It's a logical tone. And granted, however millions of shares he has, he doesn't want the stock to tumble on his exit. But I think what he's saying there is, "Yeah, I'm a foot-on-the-gas entrepreneur. You need to be that way at the start of a company, to build the company in to something that can take a leadership position." But the skill set that an entrepreneur like Linton brings to the table isn't necessarily the same skill set that you need to take the company to that next level as you're looking to expand out of Canada into a much larger playpen. Now you're talking global operations, European operations, moving into the U.S.

So, I think there's that component to it. And, then, in the back of your mind, like you said, it wasn't the financials, says the CEO of Constellation Brands, but he was obviously not happy about the fact that he took a $0.20 hit to his earnings last quarter because of that $174 million operating loss that Canopy Growth reported in the quarter, which was a massive, massive loss.

Jones: And that loss was punctuated, because right at the end of the quarter, there was some, I guess you could say scrutiny related to the massive amount of share-based compensation that was paid out. I think it was about a third of the losses that they saw in that particular quarter. That was more than many of the major ones -- you're talking about Tilray, Aurora, Cronos combined, just in terms of share-based compensation. Bruce Linton was very much of the opinion, "I'm going to pay my employees 1.5 times their salary in shares to make sure they're aligned with the business." He even came out and said, "If I hadn't done that, the losses would have been even wider." And this was before he was terminated.

I think what you'll see with Constellation Brands, what I suspect will happen, they'll bring in someone with some industry experience, probably on the consumer packaged goods side, someone that is experienced in management, to help take Canopy from start-up to mature, growing global company, as you mentioned. It'll be very telling in who they bring in. Right now, co-CEO Mark Zekulin is serving as the interim CEO, but they have said that they are starting a search to look for a new CEO.

Bruce Linton, on the other hand, I watched that CNBC interview. He was asked, "What are you going to do now?" I would not be surprised if he started a new company. He said he's not going to be doing it in Canada. But if he started a new company in the U.S. to get ahead of U.S. legalization, of the shares that he still owns with Canopy, I think it's 18 million shares right now, of those shares, he said he's going to be holding on at least until the U.S. legalizes marijuana here. So he's pretty bullish about that happening. I could easily see him back up on the scene sooner rather than later in the U.S. with a brand new company.

Campbell: What's really fascinating, Shannon -- I know you're going to figure out where I'm going with this -- to me in that conversation is, someone actually had the nerve to say, "So, what do you think as far as investments?" [laughs] "Now that you're not affiliated with Canopy Growth anymore, what do you think are savvy buys? Here you are, the ultimate industry insider." And he said, unsurprisingly, Canopy Growth. He owns a ton of it, he's not going to say, "Yeah, sell it all!" He also mentioned Canopy Rivers, which is the U.S. investment arm of Canopy Growth that was spun out. And then he mentioned OrganiGram, which could be the very biggest takeaway for all of our listeners here at The Motley Fool. Take very close look at OrganiGram. If someone like Bruce Linton is saying, "This is one of the best operators out there," and you want to try and have a diversified portfolio of marijuana stocks across a few different of these players, maybe OrganiGram is one to think about adding to a portfolio alongside Canopy Growth.

Shannon, this news took the market by surprise. Shares are trading at a discount, probably 20% off the high, $40 a share now on Canopy Growth. So, theoretically, you could buy Canopy Growth on sale, you could buy OrganiGram on sale.

Jones: Yeah, I think that's a very smart play. OrganiGram right now, one of the most efficient operators in the Canadian space. They've really cornered a particular section of the market in Canada as well. That was a huge takeaway coming out of that interview.

I think there's going to be so much, we'll have to wait and see what happens with Canopy Growth moving forward. I do think you'll have a very different company that's not going to be as aggressive without Bruce Linton behind the helm. But ultimately, I'm really curious to see where Bruce Linton ends up next. We'll be sure to keep all of our listeners up to date as soon as we find out.

But with that, let's shift gears. Let's talk about gene therapy, Todd. We got some news coming out of the ISTH conference, also known as the International Society on Thrombosis and Haemostasis Congress in Australia. Specifically, we got key updates in the race to get a gene therapy to market for hemophilia.

Todd, before we dive into the updates, though, can we give everybody a brief overview of what hemophilia actually is?

Campbell: You have hemophilia A and hemophilia B. Both of those diseases are characterized by an inability to produce a particular clotting factor. In the case of hemophilia A, it's clotting factor 8. In hemophilia B, it's clotting factor 9. There are about 300,000 hemophilia A patients in the world. About half of those have severe or moderate disease, so 150,000 require significant intervention, usually in the form of prophylactic infusions of that missing factor 8. There are about 30,000 hemophilia B patients. Most of those patients do require some amount of infusions.

The real risk to these patients is that left untreated, if they cut themselves, they fall, they have a break, they start bleeding, their blood can't clot. It's obviously a very emergent situation, if they have to have surgery, all of these things come into play. So, the goal -- over the past decade or so, there's been some pretty big advances -- the goal has been, let's figure out better ways to improve quality of life by allowing patients to have fewer infusions of these missing clotting factors. But because those infusions have to happen so often, Shannon, it's a very expensive disease, and it's prime, as a result, to be disrupted by a gene therapy.

I want to say that you're talking about a half a million dollars for some of these drugs per year. If you have a situation that's emergent, then you can easily surpass a million in these indications. So the ability to come up with a one-and-done-type gene therapy that restores natively, in vivo, the production of those factors is, it's potentially a huge advance for payers, for patients, for the entire system.

Jones: It's so encouraging to see and to hear about updates from multiple companies going after these one-and-done type of treatments. Granted, there's some questions about how durable the responses for some of these treatments right now being studied. But just to know that we're at a place where potentially, a patient could have a one-and-done gene therapy is just tremendous.

Let's dive in with the first company, Sangamo Therapeutics (NASDAQ:SGMO), that's ticker symbol SGMO. They're partnered with Pfizer. A bit behind the competition, in terms of where they're at in their clinical trials. But they did give some updates in the conference related to their Phase I-II trial. Todd, what did we see there?

Campbell: Sangamo has been such a battle ground stock. I'm sure investors who are listening have very strong opinions on both the bull side and the bear side of this. I guess we'll try and keep it to just the facts of what we're seeing within this gene therapy and the update that they provided at the conference.

They've just started dosing a few of these patients with their SP-525 for severe hemophilia A, so that's the larger of the two patient populations that we were talking about. We're trying to restore factor 8 production in these patients. Two patients that were treated at the 3e13 dose. I'm just going to say 3e13 dose. They achieved normal sustained factor 8 production levels, that's great, with no reporting bleeding events, and no need for factor infusions after 24 weeks following that dose. Two additional patients have also been treated. They're showing comparable results so far to those first two patients. So the idea here is, SP-525 restores what's considered to be normal production, and potentially eliminating or significantly reducing average bleed. So it certainly puts it in contention, but as you said, a little further behind another industry player that had some interesting data as well.

Jones: Yeah. Still early. And this is just, for many of these companies, a very small subset of patients that we're looking at. But looking at the dosing plus lack of bleeding events, it does seem promising, particularly at 24 weeks. And now that Pfizer has former FDA Commissioner Scott Gottlieb on its board, [laughs] I'd say prospects look even more promising for Sangamo right now, too.

Campbell: Yeah, that's a great point. The addition of Gottlieb to the board did spark a lot of interest in saying, "What does this mean? Could Sangamo eventually be an acquisition target of Pfizer?" I don't know. It's too early to say that. You have to get way further into the trials and test more people, and get multiyear data, at least a year's worth of data before you can draw those conclusions. If you look at BioMarin (NASDAQ:BMRN),who put out data at the conference as well, they were able to provide information all the way out to three years postdosing.

So, like you mentioned earlier in the program, you said durability is an issue. And with gene therapies, that's part of the pricing structure. We know we're going to save you a half a million dollars a year on the prophylactic treatments, so how do we price that drug? Do we price it at three years' worth of treatments and say, "Okay, give us $1.5 million"? Or do we say, "If you're going to live 30 years... " How do you price that? And I think it's going to come down to durability, like we saw with bluebird bio when they launched their drug. They said, "We're going to charge $1.8 million, but we'll spread it over X number of years, as long as the drug is working." Maybe we'll see a similar thing with these gene therapies in hemophilia, where they say, "As long as it's working, you keep paying us over a certain period of time some big number." This is a $5 billion market, so there's a lot of money up for grabs for these companies.

And BioMarin, they're likely to be the first to market, Shannon.

Jones: Yeah, they're likely to be the first to market with their lead drug, valrox, also for hemophilia A. We talked about this on the show, I believe back in May, Todd. You and I broke down what we're seeing. But as you mentioned, even in May, it was a mixed bag of results because there were some questions about durability. Pretty impressive response rates, but just how durable were those response rates? So, for a lot of these companies, you talked about pricing becoming a factor of durability. When you look at the landscape in the field, when you add in more competition with similar efficacy, it is going to be about durability, and that's going to further put pressure on pricing moving forward, too. So, to see a company like BioMarin, ticker symbol BMRN, ahead of the field, likely to be the first, you do have to be very, very mindful of the durable response effect that we're seeing.

Campbell: Yeah. What BioMarin said is, they will file for FDA and EU approval of valrox in the fourth quarter of this year, which means that you could get a decision, if they expedite it, as soon as June or July. It depends on the timing, obviously, for when they file it. Six to 10 months after that is when you get the FDA to weigh in on it. In seven patients, 86% were bleed free for three years. To me, that's pretty impressive. Even though you're showing lower levels of factor expression in these patients, general thinking among clinicians is that if you're expressing at 12% or so, then you're fine, you're probably not going to need a lot of infusions to stop the tremendous risk for bleeds.

So, let's watch the duration. They're going to file at the end of the year. If they win approval, potential to significantly capture a lot of this money. We'll also have to see, we didn't get an update from Spark Therapeutics, which is being acquired by Roche. They also have a hemophilia A gene therapy that's put up similar results so far. So, this is a horse race. You've got a few different players. Each of their viral vectors, the way they engineer them, are a little bit different. It'll be interesting, too, Shannon to see whether or not, can you follow one of these up with another one? Let's say the durability wanes, and you're no longer paying for this BioMarin drug. And Sangamo's comes to market. Well, can we try Sangamo's in these patients? So, there could be room for multiple players.

Jones: Totally agree, could be room for multiple players. That brings us to our third company update. That is uniQure (NASDAQ:QURE), QURE. A bit of a bumpy road for this gene therapy player over the years. For our listeners who are not aware, this was actually the company that created and launched the first gene therapy, Glybera, back in 2012. But due to some commercial issues -- mainly that $1 million price tag that was on it -- it never really got off the ground. But uniQure has come back around, is focused on hemophilia. They've got a couple of other programs, too, but hemophilia is really where they are targeting their lead product AMT-061. That's their next gen. And then they've got AMT-060 that they're building off of. What did we see in terms of results there, Todd?

Campbell: This one is actually for hemophilia B. The other two were updates for hemophilia A. This is hemophilia B, so a smaller patient population. Like I said, about 30,000 people that could theoretically benefit from it. They updated the Phase IIB trial. Three patients. They achieved factor 9 activity of 45% average at the 36-week mark. Again, above 12%, probably a pretty good result. As a result, there were no bleeding events, there was no need for infusion in any of these patients. That's great. That's what you would want to see. Gold star on that.

They also updated Phase I/II for that prior-generation drug, the AMT-060, and showed that over the past 12 months, from baseline, there had been an 83% reduction in bleeding events. Obviously, you've got patients responding to that first gen. The idea is that 061, the second gen, will be better, and maybe improve upon that, maybe get that into the 90% range. We have to wait and see.

There's a Phase III trial that started enrolling patients earlier this year of 061. So, we're going to want, as investors, to keep an eye out for any interim data that gets released sometime in the next 12 months from that trial. That will be our best clue for whether or not uniQure is in great shape here in that indication.

It doesn't have it all alone, though, because Spark Therapeutics is also -- again, being acquired by Roche -- developing its own hemophilia B gene therapy as well.

Jones: This company also made headlines, I believe it was in June, for potential buyout rumors. Apparently, the company was exploring a sale. Earlier this year, with Roche and Spark announcing their acquisition, I think it brought renewed focus into this space. A lot of analysts believing that this is the next company to be acquired by one of the major biopharma players that is looking to beef up its gene therapy plays. We'll have to wait and see there. Of course, I mentioned they've got trials for Huntington's disease that they've started and congestive heart failure as well. So, yeah, a lot to look at here. It'll be really interesting to watch.

Campbell: In a sidebar, too, because we were talking about the acquisition, and you're starting to say, hey, what's going to happen from here, probably going to want to take a look at some of these other players that are marketing the prophylactic infusion medications at this point. Again, $5 billion. These companies do not want to give that up. So they are probably the ones who are going to be most eager to step in and buy these smaller clinical-stage companies.

Jones: Great point. A lot to look forward to, a lot to keep our listeners up to date on. Again, if you take a step back, it's amazing to see how far we've come with gene therapy, especially in hemophilia. Really exciting 2020 up ahead.

But for you and I, Todd, that'll do it for this week's Industry Focus. I want to thank all of our listeners for tuning in. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is being mixed by Austin Morgan. For Todd Campbell, I'm Shannon Jones. Thanks for listening and Fool on!