There are so many companies entering the cannabis market - some private, some public - that by now you would think that we would have a clear idea of what works and what doesn't, and be able to emulate other company's success by borrowing their play book.
The good news is, this is absolutely true: There are several companies that have reached levels of success that it is inspiring to take a closer look at what they have done to see if there are lessons to be learned.
The bad news is, two of the most successful companies have wildly different pathways to success.
In this article we examine GW Pharmaceuticals (Ticker: GWPH) and Kush Bottles (Ticker: KSHB), and look into what made them successful. One took the conservative road to riches, the other is very speculative.
An article in the Wall Street Journal told the news: GW Pharmaceuticals was up on the news that it had successfully treated a form of epilepsy using its cannabis-based drug. The London-based company said its marijuana-derived drug for children with severe epilepsy significantly cut the number of seizures they suffered during a Phase III trial, possibly paving the way for the first U.S. approval of a drug of its kind.
Shares in the company more than doubled in trading Monday, rising 140% to close at 519 pence ($7.46) in London. The drug, called Epidiolex, reduced the frequency of seizures by 39% in children with a severe form of epilepsy known as Dravet syndrome, compared with a 13% reduction in a control group, over a treatment period of 14 weeks.
GWPharma said it planned to use the data to file for approval of the drug with the U.S. Food and Drug Administration, which has already granted the drug certain priority designations to accelerate its approval. The active ingredient in Epidiolex is a substance known as cannabidiol, which GW Pharma derives frommarijuana plants grown at a government-sanctioned farm in an undisclosed location in the south of England. If approved, it would be the first cannabidiol-containing medicine to receive the green light from the FDA. The regulator has previously approved two drugs containing tetrahydrocannabinol, or THC, another marijuana derivative.
This news caused the stock to rise, but investors should note that the company is bleeding red ink - with an operating loss of over $86 million for the period ending Sept 30, 2015. This is more than double the operating loss of $31 million recorded on Sept 30, 2014.
Moreover, this company is highly speculative. It depends on its cannabis-based drugs passing clinical trials and gaining FDA approval. With cannabis still scheduled a Class I Narcotic in the United States, gaining widespread acceptance seems to be years off at best, and a fairy-tale at worst.
Additionally, there are several class action lawsuits pending against the company, with attorneys trolling the Internet looking for unhappy investors.
The complaint alleges that throughout the Class Period, defendants made false and/or misleading statements and/or failed to disclose that: (i) the Company lacked effective internal financial controls; (ii) the Company lacked effective controls over completeness and valuation of clinical trial accruals; and (iii) as a result of the foregoing, Defendants’ statements about GW Pharmaceuticals’ business, operations, and prospects were false and misleading and/or lacked a reasonable basis.
In its 2015 Annual Report, GW Pharmaceuticals disclosed the discovery of a material weakness in its internal control over financial reporting for the year ended September 30, 2015. The Company noted that “management does not have sufficiently precise controls to evaluate the completeness and accuracy of the calculation of clinical trial accruals due to the incorrect allocation of expenditure to clinical studies.” On this news, GW Pharmaceuticals stock fell $3.55, or nearly 6%, to close at $56.31 per share on January 11, 2016.
Still, the company makes news and attracts investors. It is widely seen as one of the most successful companies in the cannabis industry.
As recently profiled on TheStreet.com, Kush Bottles has been growing steadily by providing the very unglamorous but very necessary packaging that is required by each state with a medical or recreational marijuana program.
The company doesn’t touch any cannabis or cannabis-based products, so it doesn’t run the risk of Federal shutdown as do other companies that are involved with growing or processing the actual plant.
The company has earned a reputation in the business-to-business side of the cannabis industry as a premier provider of the plastic containers, child-resistant bags, labels, tamper-evident seals, and other items that are necessary to sell any type of marijuana product.
Contrary to GW Pharmaceuticals, Kush Bottles is profitable. Company revenues more than doubled year end 2015 over 2014, and revenues in the first quarter of 2016 were up 177% over the same period one-year prior. Cash flow is positive, and all signs point to continued growth.
Kush Bottles is no newcomer. The company has already sold over 100 million units and continues to earn recurring revenues from its growing list of customers. The company is creating new packaging materials and recently announced that it was the first company in the nation with a certified child-resistant packaging solution for e-cigarettes.
The Gold Rush Comparison
To compare the two companies to the Gold Rush, GW Pharmaceuticals is digging mines: It is capital intensive, takes a long time to achieve a return on investment, and after digging and digging - you might come up empty handed.
Kush Bottles is in the pick and shovel business. They are providing the tools that other companies must have to operate. And as Mark Twain said, “When there’s a Gold Rush, it’s a good time be in the pick and shovel business.”
Still, we love both companies. We applaud GW Pharmaceuticals for their long-term view on the industry. The company may not be profitable for years (if ever).
And Kush Bottles just keeps plugging away – with impressive triple digit growth, real profits, and plans for continued growth.
Two companies, two distinct pathways to success.