Merrill Lynch High on Marijuana

Merrill Lynch

In a report leaked to Philly Inquirer columnist Chris Goldstein, Merrill Lynch has reportedly taken a bullish stand on certain segments of the legal marijuana market. But where the report does not focus is almost as telling as where it does. Here are several things every marijuana investor should notice:

This is Merrill Lynch, for pity’s sakes. The report is not publicly available but was distributed to a select group of “wealth management” clients. This is not a wild and crazy crowd. More adventurous investors might take this as an indication that the time to get in on the ground floor has passed.

The report makes no mention of any company that is directly involved in the business of growing, processing or selling marijuana products for medical or personal use under state laws.

Estimates of the size of the existing commercial market vary widely. Giadha Aguirre DeCarcer, Founder and CEO of New Frontier, puts it at $5 billion. Merrill Lynch puts it at $7 billion. Future estimates vary even more. The Merrill Lynch report appears to focus on a very small sector of the industry. It is a cannabis industry analysis without much evidence of a green, growing plan. The narrow focus leaves nagging questions about the real potential of the market.

As reported by Goldstein, one area of focus is GW Pharmaceuticals (NASDAQ: GWPH), whose CBD-based drug, Epidiolex, has shown promise in the treatment of children with severe forms of epilepsy. GW Pharma’s THC-based drug, Sativex, has been approved for use in the treatment of muscle spasms associated with muscular dystrophy in 28 countries and is fast-tracked for approval by the FDA. GW Pharma, with its base of operations in the United Kingdom, has opposed marijuana legalization in the United States.

Another area of particular interest in the report is the cannabis testing market. The recent media focus on contamination, including microbes, heavy metals, pesticides and residual solvents has brought this to the forefront. Even beyond the issue of contamination, medical and recreational users want to know the cannabinoid and terpenoid profile of what they consume.

From an investor’s perspective, the sector includes businesses that test marijuana for potency and quality and the equipment that makes it possible. Among the companies named in the Merrill Lynch report are Agilent Technologies (NYSE: A), a $4 billion company based in California; Waters Corporation (NYSE: WAT), a $2 billion company based in Massachusetts; and Thermo Fisher Scientific (NYSE: TMO), a $17 billion company with offices in Pennsylvania.

A vast array of laboratories and equipment designed specifically to test cannabis have sprung up in recent years, also including the consumer-based MyDx (OTCQB: MYDX), and the recently beleaguered CannLabs (OTCQB: CANL).

The Merrill Lynch report estimates that the market for testing equipment could grow to between $50 million and $100 million by 2020.

Finally, no one supposes that the core business of Bank of America, Merrill Lynch’s parent company, is social justice. But social investing is not a new idea. Even at second hand, the analysis may strike some as tin-eared. People are still in prison for conduct that Merrill Lynch’s “wealth management” clients now eye as plausible.

Cannabusiness is big. Merrill Lynch is not the first to the party. The report does not appear to break new informational ground, but it speaks to a different audience, and that is the news.

Anne Wallace is a New York lawyer who writes extensively on legal and business issues. She also teaches law and business writing at the college and professional level. Anne graduated from Fordham Law School and Wellesley College.

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