Investing in Synthetic Marijuana

Synthetic cannabis producer Zynerba Pharmaceuticals (NASDAQ: ZYNE) topped expectations for Q1, but its $4.3 million loss was too much to keep investors happy. The stock fell more than 8% on Thursday morning, adding more frustration for investors who bought the stock around $16 when it debuted last August.

As you can see from the chart above, the only time ZYNE has bounced back since last summer was in March of this year, after GW Pharmaceuticals soared more than 100% when the company announced successful phase III trials.

Because Zynerba somewhat operates in the same world as GW Pharma, the stock got a nice lift on the back of that announcement. But it wasn’t sustainable. And today, the stock trades for less than $7.

Buyer Beware

When Zynerba first went public, investors were all kinds of giddy about legal cannabis stocks. And they still are. The only problem is that more than 90% of them are garbage.

I’m not saying Zynerba is in that “garbage” category. It’s still too early to tell. However, if you want to make money in the legal cannabis game, you must know going in that it’s a virtual minefield of disappointments. And I suspect Zynerba could be one of them.

You see, Zynerba isn’t actually a medical marijuana company. It’s not developing cannabis-based therapies. It’s developing synthetic versions of CBD and THC.

Now, here’s the thing…

One of the biggest arguments for legalization is that cannabis could potentially help a lot of very sick people. We’ve already seen evidence of this with epileptic children, vets with PTSD, and professional athletes who use cannabis to relieve chronic pain.

Folks who use medical marijuana do so because they don’t want to go down the road of conventional pharmaceuticals. When grown properly, cannabis is a natural alternative to things like oxycodone and Xanax. And that’s what consumers are looking for.

What Zynerba is doing is really providing a “conventional” therapy, as it’s trying to chemically manufacture the good stuff in cannabis instead of just using the cannabis plant.

The argument is that such a thing is easier than extracting oils and then purifying them. But is it?

I’m not a doctor, pharmacist, or scientist, but it doesn’t seem like folks are having a hard time extracting and purifying oils right now. Let’s face it, we’re not talking about launching a space shuttle, here.

Embracing Legalization

I suspect some investors got into Zynerba because they like the idea of cannabis-based therapies but are worried about investing in something that’s still federally illegal. And that’s too bad, because those who think cannabis won’t soon be legalized on the federal level are going to miss out on a lot of great opportunities.

Now, I’ve heard stories about synthetic cannabis treatments before, and the results have been dismal. Perhaps Zynerba’s product will be better, but I’m not sure it even matters.

By the time Zynerba can get its product to market, medical marijuana will probably be legal in nearly every state in the nation.

Now, management argues that the problem with oils compared to their product is that it’s hard to get consistent dosages with cannabis. And this is true. But rest assured, dear reader; this won’t always be the case. There’s a lot of fascinating research being done right now that’s looking to solve that problem. And I suspect that problem will be solved by the time Zynerba gets FDA approval, which, if all goes well, would happen in 2019.

Understand, I don’t have any ill will towards Zynerba. But I just don’t believe that there’s going to be much of a market for synthetic cannabis in the near future. And therefore, despite the fact that it’s trading at record lows, I don’t think it’s worth a second look if you’re long on legal cannabis.

For a quick trade, there might be something there. But for now, I’ll stick with the real legal cannabis stocks that are actively making me money. Here are the five I’m bullish on this year:

• Canopy Growth Corporation (TSX-V: CGC)
• OrganiGram (TSX-V: OGI)
• Mettrum Health (TSX-V: MT)
• Aphria (TSX-V: APH)
• THC Biomed (CSE: THC)

And there are plenty more to come.

To a new way of life and a new generation of wealth…

Jeff Siegel