Amazon May Sell Marijuana Sooner Than Expected
John Mackey, CEO of Amazon subsidiary Whole Foods, sees the organic grocer pushing into cannabis sooner rather than later.
The marijuana industry is evolving at a rapid pace. Back in 1995, a mere 25% of all respondents in Gallup’s annual survey were in favor of legalizing marijuana, and not a single U.S. state or country around the world had given the green light to cannabis.
Today, two-thirds of all respondents in Gallup’s annual survey now favor the legalization of pot in the U.S., with 33 U.S. states having legalized the drug for medical purposes, and 10 allowing adult consumption. There are also two countries (Canada and Uruguay) worldwide to OK recreational weed, with more than two dozen medically legal countries.
As the industry evolves, so must the companies that operate within it and around it.
Image source: Getty Images.
Traditional and nontraditional cannabis players are evolving with the cannabis industry
For instance, dried cannabis flower has often been viewed as the most popular product of the cannabis revolution. But it’s also been the easiest to oversupply and commoditize – at least in the states of Colorado, Washington, and Oregon, which were among the first in the U.S. to give the OK to adult-use consumption. As a result, growers in both the U.S. and Canada have shifted their production lines to include higher-margin pot alternatives (where legal). These include cannabis oils, vape products, cannabis-infused beverages, concentrates, sublingual sprays, and even edibles.
Vertically integrated dispensary operators in the U.S. have also had to get creative given the slow and arduous process of obtaining cultivation and processing licenses, as well as sales permits. Rather than waiting for their applications to be reviewed and potentially losing market share, vertically integrated dispensaries have been busy acquiring peers that have already gone through the process of obtaining licenses to save time.
Even nontraditional companies are adapting. DSW (NYSE:DBI) , the designer shoe retailer, announced in January that it would be carrying nearly 55,000 units of cannabidiol (CBD) topicals from Green Growth Brands (OTC:GGBXF) in 96 of its U.S.-based stores. CBD is the nonpsychoactive cannabinoid best known for its perceived medical benefits. DSW decided to push into CBD-rich topical creams, muscle balms, and body lotions after 74% of Green Growth Brands’ Seventh Sense line of products sold in 10 of its DSW test stores over a 10-week period. As noted, since these are high-margin alternative products, DSW can reap substantial rewards while taking up minimal floor space, while Green Growth Brands gets increased exposure at a point when market share is still very fluid.
A Whole Foods Market in Plymouth Meeting, Pennsylvania. Image source: Whole Foods Market, a subsidiary of Amazon.
Amazon could be a “prime” marijuana player
Another company that’s not currently a direct, or even ancillary, player in the marijuana industry, but could soon find itself with a prime role (pun intended) is Amazon.com (NASDAQ:AMZN) . More specifically, Amazon’s wholly owned subsidiary, Whole Foods Market, could carry marijuana products sooner than later.
Last Thursday, Feb. 28, Whole Foods co-founder and CEO John Mackey was hosted by the Texas Tribune for a conversation that would hit on a number of topics. One topic, which wasn’t mentioned by the audience but was brought up by Mackey, was marijuana. When asked if Whole Foods would one day carry “alternative proteins,” such as insects, Mackey took the opportunity to suggest that it was possible — just as possible as Whole Foods one day soon carrying cannabis.
Said Mackey, courtesy of The Boston Globe, “If cannabis is ever passed in Texas, chances are good that grocery stores will be selling that too. You just never what happens over time with markets. They change and evolve.”
Check out the latest earnings call transcript for Amazon.
According to Marijuana Moment, Mackey has long been a supporter of the marijuana legalization movement. Back in 2013, Mackey voiced support for legalization in an interview with Mother Jones.
Aside from simply aligning with Mackey’s political views, carrying marijuana in Whole Foods stores would make a lot of sense. Whole Foods traditionally targets a more affluent clientele that’s less resistant to economic hiccups that occur from time to time. Carrying high-quality cannabis and niche alternative products, which speaks to Whole Foods’ emphasis on organic and natural products, would simply be an extension of what it already does.
For Amazon, it would be yet another step to keeping consumers within its retail sphere. Buying Whole Foods was, at first, a bit of a head-scratcher for Wall Street and investors. However, nearly two years after the purchase was announced, the logistics are making sense. Whole Foods gives Amazon access to more than 400 distribution nodes throughout the country and, more importantly, provides another means of keeping consumers in their universe, much in the way grocers build gas stations or content providers bundle television, internet, and phone packages.
Image source: Amazon.
Amazon would have plenty of hurdles to overcome before becoming a true cannabis kingpin
But even with John Mackey supportive of Whole Foods carrying marijuana products in the future, and the CEO of cannabis delivery company Eaze, Jim Patterson, predicting Amazon would enter the cannabis space eventually, there are a lot of hurdles that the king of e-commerce would have to overcome.
The first issue, in case you’ve forgotten, is that marijuana is a Schedule I drug at the federal level, which means it’s entirely illegal, prone to abuse, and not recognized as having any benefits. Although the federal government has been willing to take a hands-off approach to state-level legalizations, it has put its foot down in the idea of interstate transport of the drug. This would create somewhat of a logistical nightmare for Amazon, even with its expansive network of distribution centers.
Secondly, but building on the previous point, traditional logistics companies don’t want anything to do with transporting federally illicit substances. Even with Amazon taking on logistic giants like UPS and FedEx, getting the product from its online website, or even from farm-to-store shelf, could prove challenging in some states.
And third, there’s the big problem of convenience. The allure of Amazon’s e-commerce platform is that you can manage your shopping needs from the comfort of your couch or bed. While online cannabis delivery networks do exist in the U.S., there’s the uncertainty associated with ensuring that the product stays out of the hands of minors.
Make no mistake about it, having the king of retail enter the marijuana space would make a lot of sense, whether it’s through its brick-and-mortar Whole Foods stores or via its e-commerce platform. But the logistics of making this move aren’t as cut-and-dried as you might think. It would almost certainly take a federal legalization of cannabis, or at least sweeping reforms of CBD at the federal level, to fully get cannabis products in its physical and online stores.
John Mackey, CEO of Amazon subsidiary Whole Foods, sees the organic grocer pushing into cannabis sooner rather than later.
The Amazon of Cannabis
[Todd Harrison is the CIO and co-founder of CB1 Capitaland a columnist for Investopedia. The views expressed herein are those of the author and do not necessarily reflect the views of Investopedia.]
In recent weeks, Tilray Inc. (TLRY) became the first Canadian licensed produced to list on the NASDAQ, while Constellation Brands (STZ) invested an additional $5 billion-dollars in Canopy Growth Corporation (CGC) to develop cannabis-infused beverages. What both companies have in common is that inherent in their respective share prices, investors are getting the upside call option of their biotech research & development.
While history paints a picture of Reefer Madness, cannabis and hemp have emerged as the base-line ingredients in a wide array of end-products and use cases that include building materials, plastic composites, cosmetics & vanity, pet supplements, clothing, food, and yes, medicine. While each of these verticals have investment merits, it is the wellness arena that excites us most.
Why? Because the medical community informs the stock market much of it hasn’t studied the science behind the endocannabinoid system. Most doctors remain unaware the cannabinoids found in cannabis are identical in action to the endocannabinoids our bodies produce to regulate neurotransmissions. By using our endocannabinoid system (ECS) as a retrograde pathway, we are able to target a multitude of pernicious conditions and disease.
Most of the world is just beginning to understand the therapeutic benefits of cannabis but two players on the global stage figured it out long ago. Israel has studied the science for 50 years, thanks to groundbreaking work of Dr. Raphael Mechoulam, but there are only a handful of publicly traded early-stage biotech companies with which to express an investment view. And there’s the UK-based GW Pharmaceuticals (GWPH).
The GWPH Advantage
In the 1990s, the U.S. and U.K. governments commissioned separate but similar studies to help determine whether cannabis had the potential for medical efficacy, and both found there to be encouraging evidence. The U.S. ignored those findings and continued its failed War on Drugs, while the U.K. government laid the groundwork for GW Pharmaceuticals, which was founded in 1998.
Over the last twenty years, GW has conducted groundbreaking clinical research and importantly, they’ve filed numerous patents in both the U.S. and U.K. They’ve studied CBD, THC, and a wide range of novel cannabinoid molecules in several distinct therapeutic areas, including epilepsy, autism, cancer and schizophrenia. In short, they’ve got a massive first-mover advantage in a space that most people still don’t realize is a space.
Of course, there is much to learn once the Federal decriminalization of cannabis arrives, paving the way for research, banking and institutional investment in US-based operators, along with what I presume will be a fair amount of M&A. There are two pathways on that front: legislatively, through efforts such as the STATES ACT; and with the demonstration of medical efficacy, which compels the DEA to reschedule within 90 days.
GW’s first drug, Epidiolex ™ for the treatment of childhood onset epilepsy disorders, received FDA approval in June but the collective body language suggests that only CBD will be rescheduled, leaving cannabis as Schedule I. This is due to perceived fear of THC, the cannabinoid that is responsible for the euphoria often associated with cannabis, and widely considered the black sheep of the cannabinoid family. We believe that perception is misplaced and GW has two opportunities to establish that.
Sativex®, a THC-based oromucosal spray for the treatment of MS spasticity, has already received regulatory approval in numerous countries outside the U.S., and we expect an NDA to be filed shortly. Further along the clinical pathway, and the story to which nobody seems to be paying attention to, is glioblastoma, or brain cancer, which we believe will serve as the foundation of GW’s oncology platform and demonstrate once-and-for-all the efficacious agility of cannabinoid wellness.
In February of 2017, GW announced positive phase two primary endpoints for their GBM trial, which used a 1:1 CBD:THC ratio, but they couldn’t release secondary endpoints (overall survival) because “too many people were still surviving.” CEO Justin Gover said at the time that more information would likely be available in “the coming weeks to months.”
Fast-forward to August 2018, a full seventeen months later, and we’re still waiting for those secondary endpoints. The only data we received, a few weeks ago, was that the median survival rate was 662 days compared to 369 days on placebo, and that the company received an Orphan Drug Designation from both the FDA and EMA. For those paying attention, the company is quietly positioning for this new reality.
Last May, the company hired Dr. Volker Knappertz as their Chief Medical Officer. Dr. Volker received his clinical scientist training and M.D. as well as a doctorate degree in research on glioblastoma from the University at Cologne in Germany. We found this to be an interesting nuance given the street-wide perception that GW is only an epilepsy platform.
It’s not uncommon for a biotech company to have a promising pipeline; it is uncommon, however, for analysts to assign no value to it. Only eight Wall Street analysts cover the stock and for the most part, all of them base the entirety of their price targets on the blockbuster potential for Epidiolex ™. We don’t think they understand the story, just as most people don’t understand cannabis; and therein lies the opportunity.
The chasm between perception and reality is where profits are found, and most of the world still views ‘pot’ as a gateway drug. By the time clinical validation arrives, and other people understand that cannabis is more impact investing than vice-fund fringe, GW Pharmaceuticals, more than any other stock in the cannabis universe, is poised to benefit the most.
(Disclosure: At the time of writing this article, CB1 Capital Management has a position in GW Pharmaceuticals, Tilray and Canopy Growth Corporation)
As interest in marijuana companies goes up, one stock is poised to separate from the rest