Epidiolex Set for FDA Approval, Cannabis M&A Heats Up

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Earlier this month, an FDA Advisory Panel voted unanimously to recommend that the FDA formally approve first ever cannabis-based drug, Epidiolex. Manufactured by GW Pharma (GWPH), Epidiolex is already approved in the U.K. for treating seizures in children who suffer from epilepsy as the result of Lennox-Gastaut syndrome and Dravet syndrome. The drug has proven to be so effective, industry insiders believe the FDA will be hard-pressed to override the advisory panel’s recommendation. Epidiolex’ pending approval sets the stage for a dramatic shift in cannabis drug policy in the U.S.

Currently, the Drug Enforcement Administration (DEA), classifies cannabis as a Schedule I drug, meaning it has no medical benefit and is highly subject to abuse. To provide some frame of reference, oxycodone and cocaine are Schedule II drugs, meaning that according to the DEA, are less dangerous than cannabis.

If the FDA formally approves Epodiolex, it would call into question the Schedule I status of cannabis, and while the DEA is under no obligation to reschedule the drug, it too would be hard pressed to disregard the FDA’s findings as it relates to the medical benefits of Epidiolex.

Although the outcome is far from certain, the general consensus is that the FDA will approve Epidiolex before the end of June, and that cannabis will be rescheduled by the DEA within 90 days (which would be the statutory deadline for doing so).

In anticipation of this likely outcome, consolidation in the cannabis industry is heating up. Big players are jockeying for position in the U.S. and Canadian markets, as a roll-up strategy appears to be the method of choice for gaining market share.

Earlier this week, Aurora Cannabis (ACBFF) agreed to acquire competitor MedReleaf in an all stock deal worth $2.5 billion (USD). The deal is the largest ever in the cannabis space, and Aurora stated that the company will continue to look for other acquisition opportunities. Over the past two years, Aurora has made 15 acquisitions or strategic investments.

It is expected that Canadian companies like Aurora will begin to encroach on the U.S. market, as federal regulation begins to loosen

Another Canadian cannabis company, Canopy Growth, has filed for a listing with the New York Stock Exchange. (NYSE). If successful, Canopy would be the first pure-play cannabis company  listed on the NYSE. Canopy is expected to begin trading later this month under the symbol CGC. Constellation Brands (STZ) owns a 10% stake in Canopy, and wholly owns Corona (CRON), a fund that deploys capital in the cannabis space.

Industry experts anticipate that once cannabis becomes federally legal, large U.S. multinationals like Constellation, will become more aggressive in acquiring or investing in cannabis companies.

That means U.S. cannabis companies could become particularly attractive targets to larger companies up north.

Our favorite in the space remains GB Sciences (GBLX), who stands to be a direct beneficiary of medical cannabis approval. The reason is that GB Sciences has perfected a proprietary tissue propagation technique that enables the company to breed genetic twins from mother plants, as opposed to just growing offspring. Plants are living things, and like all living things, offspring are genetically different from their parents. A slight genetic variation from mother to daughter plant might not be too significant for recreational cannabis use, but medicine must be exact every time.

The ability to produce virtually identical twins, means that GB Sciences has the capacity to grow cannabis it a consistency and purity that will be required by the FDA for medical grade medicine. Nobody else in North America has that capacity.

As bigger players look to acquire best-in-class companies who are poised to benefit from the FDA’s approval of cannabis-based medicine, we think GB Sciences stands out as very attractive potential target.

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