2 Brand-Name Pot Stocks That Will Lose Money in 2020

Sean Williams, The Motley Fool - finance.yahoo.com Posted 5 years ago
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Investors would struggle to find an industry that's growing at a faster and more consistent pace than the legal marijuana industry. According to an annual report from Arcview Market Research and BDS Analytics, global cannabis sales are set to rise from less than $10 billion in 2017 to an estimated $31.3 billion by 2022. This estimate includes an expected surge in sales of 38% in 2019.

With Canada having legalized recreational marijuana, 33 U.S. states giving the green light to adult-use weed in some capacity, and more than 40 countries now on board with legalized cannabis to some degree, Wall Street and investors envision a pretty clear path to substantive profits for most pot stocks. But, truth be told, not all marijuana stocks will be rolling in the green anytime soon.

According to Wall Street's consensus estimates for fiscal 2020 (not all pot stocks operate on a normal calendar year from January through December), a few marijuana stocks, such as MedMen Enterprises, Cronos Group, and Emerald Health Therapeutics, are only expected to be profitable in 2020 by the slimmest of margins. But two even more prominent marijuana stocks are forecast to lose big, once again.

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Canopy Growth

The largest marijuana stock in the world by market cap, Canopy Growth (NYSE: CGC), has a lot working in its favor. The company's 5.6 million square feet devoted to cultivation space (more than 4.3 million square feet of which is already licensed by Health Canada) should assure peak annual output of more than 500,000 kilograms a year, making the company easily a top-tier producer. This output has been particularly important in helping Canopy Growth secure 70,000 kilos in annual supply deals with Canadian provinces.

Canopy Growth also secured a major investment from Constellation Brands (NYSE: STZ) in November. Constellation, which is the company behind the Corona and Modelo beer brands, invested $190 million into Canopy in October 2017, purchased close to $150 million of Canopy's convertible debt offering in June 2018, and then acquired a $4 billion equity stake that closed this past November. Constellation Brands now has a 37% stake in Canopy Growth, with Canopy gaining a time-tested partner and some much needed cash to execute its long-term business strategy. It would not be surprising to see the two work on a nonalcoholic cannabis-infused beverage line, either.

But despite all of this, and the fact that Wall Street is calling for $832 million Canadian in revenue in fiscal 2020, the Street is projecting a consensus loss of CA$0.24 per share next year.

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How on Earth can a company with back-to-back years of 216% and 238% respective sales growth lose money? The simple answer is that Canopy Growth is still busy laying the foundation for its international push, is making acquisitions, and is spending aggressively on marketing and branding its products in order to stand out in a very crowded field. While it's possible that International Financial Reporting Standards accounting could make Canopy's income statement a little less frightening from the perspective of its headline numbers, this is a company that'll still be losing a lot of money on an operating basis possibly into 2021.

There's also the potential for future writedowns given how much goodwill Canopy Growth is now lugging around on its balance sheet following the purchases of Mettrum Health, ebbu, and Hiku Brands, to name a few. In just the past nine months (i.e., since Canopy's previous fiscal year ended) through Dec. 31, 2018, goodwill has grown from CA$314.9 million to CA$1.82 billion. With pot stocks hell-bent on growth by acquisition, future writedowns with this much goodwill are a very real possibility.

GW Pharmaceuticals

Cannabinoid-based drugmaker GW Pharmaceuticals (NASDAQ: GWPH) is also expected to generate some very sizable per-share losses in 2020. According to Wall Street, the company is forecast to lose in excess of $3 per share next year, despite sales growth from $15.9 million in 2018 to more than $415 million in 2020.

On the bright side, GW Pharmaceuticals did create its very own marijuana milestone when the U.S. Food and Drug Administration (FDA) approved the very first cannabis-derived drug on June 25. Epidiolex, which is targeted at two rare forms of childhood-onset epilepsy, easily met its primary endpoint in multiple late-stage trials and reduced seizure frequency from baseline relative to a placebo. Following a unanimous vote from the FDA's panel in recommendation of approving the drug, the FDA formally did just that in June. Having launched Epidiolex in early November, GW Pharmaceuticals is ready to reap the rewards of its first drug making it to U.S. pharmacy shelves.

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There are, of course, multiple concerns with GW's lead drug, its launch, and its remaining product portfolio. For instance, competition looks to be on the immediate horizon. Zogenix (NASDAQ: ZGNX) has an experimental drug known as fintepla that dazzled in late-stage studies in Dravet syndrome, an indication that has only one approved medication at the moment – Epidiolex. Even though Zogenix and GW Pharmaceuticals have never gone head-to-head in Dravet syndrome with their lead drugs, there could certainly be some physician, patient, or insurer bias based on the clinical data, with fintepla producing seizure frequency reductions of more than 50%, and Epidiolex regularly falling in the 30% to 40% reduction range. Long story short, Zogenix's lead drug could launch by later this year (assuming FDA approval), which could really eat into Epidiolex's sales runway.

Epidiolex also comes with a monstrous price tag of $32,500 for a full year of treatment. Management suggests that this cost is on par with existing pathways to treat its two indications, but it could nevertheless be a tough sell at this price.

GW Pharmaceuticals is also running additional studies to expand Epidiolex's label to include tuberous sclerosis complex and Rett syndrome, as well as examining new cannabinoid compounds for autism spectrum disorders, glioblastoma, and schizophrenia, to name a few indications. Running clinical trials costs a lot of money; and since GW Pharmaceuticals is still burning through a lot of cash, it'll potentially turn to the secondary market to raise capital. All told, this looks to be a stock and situation to avoid. 

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.