Cannabis Cavalcade

Cannabis is a busy, messy plant with lots of fiber in addition to its chemical constituents.  The typical cannabis plant produces between 8 to 100 cannabinoids and about 300 non-cannabinoid chemicals.  Among the primary cannabinoids are tetrahydrocannabinol (THC)  -  the one that delivers the infamous ‘high’ associated with ‘smoking weed’ -  and cannabidiol (CBD).  Both have been found to have therapeutic effects, leading to approvals of cannabis for medical purposes in thirty-one of the United States, Guam, Puerto Rico and District of Columbia.  Another fifteen states have laws on the books that allow use of cannabis with high cannabinoid content with low psychoactive effect, i.e. high CBD and low THC content.  

While there is little uniformity among the states in regulating production or distribution of cannabis, at the federal level the prohibition is clear and uniform across all states and territories.  The U.S. Federal Government has just NEVER accepted any medical use of cannabis.  At least that is what is stipulated by the prevailing Controlled Substances Act of 1970.

In what seems typical of the anti-establishment character of cannabis users, in June 2018 the U.S. Federal Drug Administration (FDA) approved a cannabis-based compound called Epidiolex for treatment of epileptic seizures.  Yet, the developer, GW Pharmaceuticals Plc. (GWPH:  Nasdaq), was made to wait for the U.S. Drug Enforcement Administration (DEA) to complete a review before taking Epidiolex to market.  Cannabis is classified as a ‘schedule 1’ controlled substance, the highest level possible in the DEA’s hierarchy of restricted drugs.  Schedule 1 is for compounds with no medical use and a high potential for abuse.    

This week in what may be a seminal moment in the history of cannabis policy in the United States, the DEA has classified Epidiolex as a schedule 5 controlled substance.  The fifth rung on the DEA ladder is reserved for compounds with a proven medical use and low potential for abuse.  It is the formulation of Epidiolex that made the difference.  Epidiolex contains CBD and THC and so has all the therapeutic value of cannabinoids without the euphoria effect.  It has been deemed safe even for children as young as two years of age.

GW Pharmaceuticals management has wasted no time in pledging to put Epidiolex on the market by mid November 2018.  It is no surprise they are anxious to begin shipments.  The market for epilepsy seizure treatments is consider very large and growing, as is illustrated through an estimated $3.4 billion revenue opportunity by 2029 reported from Bank of America Merrill Lynch.  Even adjusted for various risk factors the BofA analyst suggests a market value of $1.5 billion.   

Shareholders and traders responded with enthusiasm to the DEA action vis-a-vis Epidiolex, trading GWPH higher and boosting the share prices of other cannabis-based drug developers.  Top in that group is Zogenix, Inc. (ZGNX:  Nasdaq), which also has a candidate called ZX008 aimed at pediatric epilepsy.  Zogenix has completed at least two Phase 3 studies and expects to complete a third in late 2019, to prove efficacy in various epilepsy conditions. 

These trailblazing biotech companies, GW Pharma and Zogenix, have paved the way for developers of cannabinoid-based compounds targeting other diseases and conditions.  PreveCeutical Medical (PRVCF:  OTC, PREV:  CN) in the coverage group of Crystal Equity Research is working with the University of Queensland (UoQ) on a therapy for anxiety disorder based on CBD.  The compound will be delivered using a proprietary nose-to-brain drug delivery solution that the UoQ calls the SolGel system.

PreveCeutical is focusing its initial research in Australia where a number of states and territories have moved to legalize medicinal cannabis.  In Queensland, where the company’s research and development partner is located, cannabis is legal by prescription from specialists for patients suffering from a range of diseases, including multiple sclerosis, cancer, HIV/AIDS and others.  Each state appears to have a different approach to medicinal cannabis.  Nonetheless, researchers across Australia are moving ahead with cannabis-related projects.  Over 100 different clinical trials involving cannabinoids are registered with the Australian New Zealand Clinical Trials Registry. 

PreveCeutical and its partner at UofQ  has successfully begun a library of chemically ‘fingerprinted’ cannabinoid extracts based on medical cannabis samples received earlier this year at the University research facilities.  Each unique extract will be formulated and loaded into the Sol-Gel nose-to-brain drug delivery system to develop a range of cannabinoid-based therapies that will address various anxiety disorders.  The Sol-Gel system has already been proven capable with a steroid compound, giving the team a good foundation of knowledge to incorporate the cannabinoid-based formulation into a gel that is delivered to the nasal mucosa with a spray device.  PreveCeutical’s lead scientist is targeting early 2020 to enter clinical trials in Australia.

The company’s target anxiety disorder market is exceptional in size.  Anxiety disorder is an umbrella group of mental illnesses that prevent normal life routines.  This includes a variety of panic disorders, phobias, social fears and general anxiety.   Large population-based surveys have found that at least one-third of the population is affected by an anxiety disorder during their lifetime.  Grand View Research estimates the global market for anxiety disorder and depression treatment will be valued at $18 billion by 2025.

Big, wide market opportunity may not be enough to get full valuation in the public equity markets.  PreveCeutical valuation and stock performance bear little resemblance to GW Pharma or Zogenix that are competing for a comparatively smaller pie.  A lesser known company and certainly less fortified with capital, PreveCeutical has much to prove to investors.  Nonetheless, PreveCeutical appears to be in the right place at the right time to join the cannabis cavalcade.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  PreveCeutical Medical (PRVCF, PREV) is the subject of research published by Crystal Equity Research in the Focus Report series for issuer-sponsored research coverage.