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CBD IS THE PLACE TO BE: A PRIMER
There may be no industries that are as dynamic or offer as much upside potential as the CBD industry. As has been widely publicized, the Brightfield Group projects the hemp-derived CBD market will reach $22 billion by 2024. The question is: What makes the CBD industry so special? Many of you are familiar with the basics but given that we tend to forget about the drivers, the characteristics, and the opportunities, we have provided this primer.
Cannabis plants contain unique compounds known as cannabinoids (CBDs)---these plants have nearly 100 active varieties of cannabinoids, including THC, which is the psychoactive chemical associated with “getting high”. Unlike marijuana, which contains meaningful amounts of THC, hemp may only contain a trace amount of THC (0.3% of chemical), which a critical differentiator (more on that below.)
Interestingly, both marijuana and hemp contain a cannabinoid known as Cannabidiol, CBD, which makes up 40% of the plant’s extract. As confirmed by major organizations such as the NIH and WHO, CBDs have demonstrated to be useful to treat major diseases and serious conditions while simultaneously been found to be safe for use by consumers.
In early November 2017, the World Health Organization’s Expert Committee on Drug Dependence issued the following statement in its report:
“CBD has been demonstrated as an effective treatment of epilepsy in several clinical trials, with one pure CBD product (Epidiolex®) that is FDA approved. There is also evidence that CBD may be a useful treatment for a number of other medical conditions…The range of conditions for which CBD has been assessed is diverse, consistent with its neuroprotective, antiepileptic, hypoxia-ischemia, anxiolytic, antipsychotic, analgesic, anti-inflammatory, anti-asthmatic, and antitumor properties.” http://www.who.int/medicines/access/controlled-substances/5.2_CBD.pdf (updated)
The National Institutes of Health (NIH) is a huge supporter of CBD research, with 281 projects funded to the tune of $111M in 2015 alone, and a new one slated to begin the funding phase at year-end 2017. Against this backdrop, the proliferation of CBD-based products has ballooned of late and huge growth is expected in the coming years. The Brightfield Group, in a report issued in late 2018 projected that Hemp-based CBD products will reach $22 billion in 2022. Obviously, the recent legalization of hemp farming in the 2018 Farm Act just signed into law by President Trump has shined a light on the industry and provided it with a major boost.
Since CBDs are far more abundant in hemp products than marijuana-derived CBDs, hemp-derived CBD is the preferred source for CBDs.
Certain cannabinoids are produced in the body and we all have 2 cannabinoid receptors: CB1 and CB2. CB1 receptors in the bran deal with emotions, mood, movement, and other functions while CB2, which is common in the immune systems can affect pain and inflammation. In many research studies, CBDs stimulates the body to use these cannabinoids.
As we have been able to ascertain first-hand via our CBD User Survey (whose final results will be released in early October), CBD-infused products including beverages, oils, edibles, topical solutions, etc. are consumed to treat anxiety, pain, inflammation, and has even demonstrated neuroprotective properties.
Hemp-Derived CBDs: The Lay of the Land
To be certain, hemp-derived and hemp-infused consumer products currently represent a market in the hundreds of millions annually that will enjoy outsized growth. However, given the potent effects of CBDs, we believe that the CBD-dominant segment will outshine the traditional hemp consumer products arena.
By the Numbers: (courtesy of Hemp Business Journal, Brightfield Group, GSCR)
THE PURATION SENSATION
Today, Pura’s EVERx is the leading CBD-infused sports nutrition beverage with over $1 million in sales in 2018 and over $1 million in sales in the first six months of 2019 and targeting $4 million in sales by 2019 year end. PURA recently entered into a select number of partnerships with third party producers of beer, coffee and tea with the intention of producing CBD versions of all three. As a result of the survey results, which indicated consumers’ primary interest in consuming CBD was for the treatment of anxiety and that the preferred beverage for consuming infused CBD was tea, PURA has decided to lead with its new beverage announced yesterday, TranquiliTeaCBD. A CBD extract has already been developed and flavor profiles are also developed. A logo and label are in the works and expected to be complete within the next thirty days. TranquiliTeaCBD is on track to be available for sale to consumers by year end.
With the introduction of the new beverages, and tea, in particular, we believe that the additional offerings will drive sales not just in the U.S. but in new markets in Europe as well.
NEW OPPORTUNITIES, INDUSTRY TRENDS
Most CBD analysts, companies, and investors are focused on the North American markets, and to some degree, Europe---and rightly so. However, a burgeoning untapped opportunity exists in the Caribbean region where only 3 markets have approved CBDs for legal use. Most investors relate the Caribbean with “fun in the sun”, the ubiquitous use of marijuana in Jamaica and naturally have assumed that this characteristic is prevalent throughout the region. Nothing could be further from the truth. Still, a number of the remaining two dozen markets are openly discussing legalization. For example, the Prime Minister of Trinidad, one of the largest and most prosperous markets in the region, has voiced his expectation that Trinidad will soon legalize CBD and cannabis for the first time, creating an untapped, near-shore market opportunity. Excluding Jamaica, the total underlying market in this area is well over 30 million in population---and that does not include the millions of Americans traveling there each year that would be potential consumers as well!
While we do not know if PURA leadership is considering this potential market opportunity, given its forward-looking management, it is possible that they could be one of the forerunners in this region, which would likely have little competition.
Kentucky Senator Mitch McConnell, a chief proponent of hemp legalization and utilization, last week put the pressure on the FDA to expedite the path for lawful marketing of hemp-derived CBD products. McConnell's plan is to insert language into a congressional spending report that is asking the FDA to “issue a policy of enforcement discretion with regard to certain products containing CBD” within 120 days. This move would help companies, stakeholders, investors, and consumers clarify rules, which could prompt banks to take the next step in servicing CBD companies and broaden the reach and sales of CBD products in mainstream, leading bricks and mortar companies as well. With clear standards come greater business flow and industry growth.
While our survey will provide more comprehensive information, what is clear is that CBD-infused beverages is one of the fastest-growing segments of CBD sales and tea is becoming one of the most popular---and all of these themes dovetail with PURA’s mission and approach. Pending announced government standards will serve to boost the companies and their underlying stocks and, in our view, fix the one issue not discussed in this space: price. As sales grow for leading companies, prices will decline, or at least normalize, which will foster the type of direction the industry desires. Plus, it will prompt big retailers to join multi-national food and beverage companies in driving industry growth.
With new products and new markets, PURA is primed to be a sales leader and product innovator in this segment. At present, we preliminarily forecast a doubling of sales to $8M in 2020. Given the type of industry-leading operating margins in the space that we expect will continues, our new, higher price target of $0.35 assumes a Price/EBITDA multiple of 30x. Thus, We reiterate our Speculative Buy rating.
RECENT TRADING HISTORY FOR PURATION, INC.
Senior Analyst: Robert Goldman
Rob Goldman founded Goldman Small Cap Research in 2009 and has over 25 years of investment and company research experience as a senior research analyst and as a portfolio and mutual fund manager. During his tenure as a sell side analyst, Rob was a senior member of Piper Jaffray's Technology and Communications teams. Prior to joining Piper, Rob led Josephthal & Co.'s Washington-based Emerging Growth Research Group. In addition to his sell-side experience Rob served as Chief Investment Officer of a boutique investment management firm and Blue and White Investment Management, where he managed Small Cap Growth portfolios and The Blue and White Fund.
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