The biotech sector may be one of the biggest beneficiaries of the legal cannabis movement.
In previous articles, we have been quite vocal about our bullish stance on the cannabis biotech sector. In the current US markets, we believe the greatest opportunity lies in biotech and the pharmaceutical production of cannabinoid and cannabis related drug treatments. And recent political shifts may have just created a perfect storm for cannabis biotech investors. Right now could be your greatest opportunity to consider adding cannabis biotech to your portfolio. And we aren’t the only ones who think so.
Todd Hagopian, manager of a biotech fund at Marketocracy, believes the biotech sector will benefit most from a Donald Trump Presidency. Todd is one of the most successful biotech investors in the market today. His returns have averaged 26.03% since starting his fund in 2011, which compares nicely to the S&P 500’s 11.58% return over the same period. Over the last five and three year periods, Todd Hagopian did better than the top U.S. Equity fund managers.
But why are we so bullish on cannabis biotech?
For over a year, analysts have been anticipating and factoring in a Hillary Clinton victory that sent the ishares NASDAQ Biotechnology ETF (IBB) plummeting 23% from 9/21/15 through Election Day this November. Why? Clinton was very vocal about her desire to slash what she believed to be excessive profits in the biotech industry. This would force drug companies to lower prices that would tighten margins and decrease net profit. If Clinton won the election, there were concerns that she would flip the Senate and/or House of Representatives to Democratic control. This would have allowed her to take action on the pricing practices of the biotech sector.
But with the White House and Congress now in Republican control, the biotech sector is set up for an extraordinary comeback. In fact, it has already begun. The IBB is up about 10% since Election Day. With Trump taking the White House, biotech investors could be in for one heck of a ride as this could be just the beginning of a move that could see the biotech sector double.
In an interview with Ken Kam of Forbes, Todd Hagopian said, “After underperforming the S&P 500 by over 30% in the past 14 months, there is plenty of room for this sector to run. In fact, the S&P 500 Biotechs are trading at a Forward P/E of just 22.4% vs. Consumer Staples who are trading at a Forward P/E of 17.2%. This is pretty remarkable, considering that the same group of Biotech companies have a short term earnings growth rate of 17.3%, versus the Consumer Staple companies who are projected to grow at just 8.0%. Basically, this data would seem to suggest that either there is a huge bubble in Consumer Staples stocks, or the Biotechnology market is about to double.”
This is the perfect storm for cannabis biotech investors. Not only is the overall biotech industry expected to experience a massive bull run, but cannabis legalization is quickly spreading across the US. The November Election Day was an enormous victory for the cannabis industry. There are now 8 states that allow the recreational use of marijuana and another 21 that allow its medical use. We could be looking at a golden opportunity for cannabis biotech investors.
In his interview with Forbes, Hagopian went on to name a few other catalysts that biotech investors seem to have in their favor:
- The Obamacare fight needs to stay away from pricing. The odds of a Republican House and Senate trying to pass a law regulating drug prices, and have it signed by a Republican President seems slim to none.
- The Supreme Court needs to stay conservative. Donald Trump has already promised to nominate conservative judges to the court. The Supreme Court will likely stay 5-4, or even 6-3, in favor of conservative views.
- M&A activity needs to restart. The low valuations seen in the biotech sector after the Clinton selloff mentioned earlier in this article has sparked a ton of M&A rumors in the biotech sector. The Clinton biotech scare not only provided great opportunity for individual investors but also for large biotech titans to swallow up smaller companies with promising intellectual property and clinical data from early drug trials. We have already seen recent M&A activity in the cannabis sector with Canopy Growth Corp., Canada’s largest marijuana company, agreeing to buy competitor Mettrum Health Corp. for $8.42 a share.
The current environments of the overall biotech sector and marijuana industry have created an exciting time for cannabis biotech investors. Several catalysts are aligning for what could be a booming 2017 for the entire space. In addition, many companies are expected to announce FDA clinical and pre-clinical trial data soon. Favorable results will be a catalyst to send individual stocks and the overall cannabis biotech sector considerably higher.