As popularly reported, Merrill Lynch, the investment arm of Bank of America, recently leaked an equity report — “Medical cannabis has high POTential: a joint biotech & tools primer” — detailing a bullish outlook on the cannabis industry.
The 45-page report authored by Bank of America Merrill Lynch’s lead “Life Sciences Tools and Diagnostics” analyst, Derik De Bruin, along with several other in-house analysts, offers great news for investors, entrepreneurs and anyone with a financial stake in the legal cannabis industry.
The report is significant, as Merrill Lynch is arguably one of the most important investment firms in the country, and it is believed that this is the first report of its kind coming from a major Wall Street firm. It reveals extensive research and analysis across a diverse cross-section of areas coupled with an optimistic overall outlook of the industry.
On their view of the industry, Merrill Lynch stated:
The cannabis industry is poised for growth if cannabis legalization and use expand. As the cannabis industry expands, we expect to see a corresponding increase in cannabis medical research and the implementation of cannabis testing and labeling regulations, which should drive adoption and growth of life sciences tools within this market in our view.
Seth Yakatan, CEO of Kalytera, a company developing synthetic CBD to treat osteoporosis, Prader-Willi Syndrome and obesity, is enthusiastic Wall Street is taking note of the cannabis industry: “The cannabis industry continues to be looked to as one with enormous potential for growth, and this report’s development is a clear indicator that the trend isn’t going away. I’m very happy to hear that even large firms such as Merrill Lynch are taking notice of the industry in this light, and hope that others follow suit.”
Key findings of the report
Chris Goldstein, of Philly420 and PhillyNORML, was the first to report on the leaked version and offered key highlights of Merrill Lynch’s findings — culled from the reports analysis on three key areas: products, fields, and markets. Moreover, the report provides insights into the current and future legal status of cannabis, as legal issues surrounding cannabis will affect the industry’s bottom line.
More specifically, Merrill Lynch focused on the investment opportunities within “life science tools and diagnostics” — a sector within the industry that deals with lab analyses, testing and quality control.
Merrill is particularly bullish and enthusiastic about the “life science tools and diagnostics” sector, because in every state where cannabis is legal, state governments are becoming increasingly attentive to quality control issues, therefore mandating stricter attention to product consistency, quality and testing.
As the industry grows and matures, the role of these companies will no doubt become more and more important. By and large, before cannabis can be sold on the open market, it must be screened, tested and approved.
Among other issues, a key safety concern is the use of pesticides, which has become a hot button issue. States are crafting stricter regulations around what kinds of pesticides may or may not be used by cultivators. While the report didn’t provide specific details on individual testing labs, Merrill Lynch reported that they are bullish on the sector, which they describe as “highly fragmented and rapidly evolving.”
Matt Karnes, managing partner of GreenWave Advisors — an independent New York City-based advisory and research firm whose research was cited on page 39 of Merrill’s revised report — concurs with the findings of the report: “The [Bank America Merrill Lynch] report underscores GreenWave Advisors thesis on the industry and in particular ‘lab testing’, a subset of the sector that we believe is emerging yet presents some challenges, specifically with respect to the inconsistency of regulatory frameworks, testing and reference standards which vary from state to state.”
Merrill Lynch believes the “life science tools and diagnostics” sector will be one of the most lucrative areas for cannabis investors to put their money. In fact, Merrill Lynch estimates that the market for testing equipment may very well grow to between $50 million and $100 million by 2020.
GreenWave Advisors, on the other hand, estimates the size of the market to reach $850 million by 2020. The reason for Green Wave Advisors higher estimates is that their forecast includes revenues from testing, consulting and other analytic services, while Merrill looks only at the companies who provide the tools and consumables.
Key players in the industry
Merrill Lynch went on to identify who they believe are they key players who manufacture “life science tools” used to perform cannabis lab tests. The companies they identified include:
- Waters Corporation (NYSE: WAT): A $2 billion dollar Massachusetts-based company
- Agilent Technologies (NYSE: A): A $4 billion dollar Silicon Valley company based in Santa Clara, California.
- Thermo Fisher Scientific (NYSE: TMO): An $17 billion industry powerhouse based in Philadelphia
Merrill’s report also covers “pharma” companies developing “canna-pharma” products, including:
- GW Pharma (NASDAQ: GWPH)
- Insys Therapeutics (NASDAQ: INSY)
- Zynerba Pharmaceuticals (NASDAQ: ZYNE)
Unlike GW Pharma’s plant-derived products, both Insys Therapeutics and Zynerba are developing drugs with synthetic cannabinoids.
Silicon Valley + Wall Street = A bright future for legal cannabis
As the industry continues to blossom, more and more wealthy investors are drawn to legal cannabis, including prominent billionaire Silicon Valley investors such as Peter Thiel, Paypal founder and one of Silicon Valley’s most successful venture capitalists, and Mark Zuckerberg’s pal, Sean Parker, who founded Napster and was an early investor and co-founder of Facebook.
Conveniently, Sean Parker is also one of the key proponents and big-money backers behind California’s “adult-use” cannabis legalization efforts. Not only has Sean Parker been putting significant financial and intellectual capital behind advancing California’s legalization efforts, Parker has been trying to consolidate and unify California’s dizzying number of competing ballot initiatives.
Merrill Lynch’s report, and the increasing backing of high-visibility investors such as Parker and Thiel, is good news for the industry. Merrill Lynch is one of Wall Street’s biggest players; Parker and Thiel are two powerful Silicon Valley forces.
A reality check?
While this is great news for the industry, it’s not necessarily time to break open the champagne — or your favorite Kiva edible. The lack of regulatory consistency, unresolved banking issues, the evolving legal landscape and uncertain political climate continue to create barriers to achieve critical mass throughout the mainstream investment community.
GreenWave Advisors’ Matt Karnes is bullish, but cautiously optimistic, “While we believe this is a significant move for a ‘bulge bracket’ firm, one of the largest and most profitable multi-national investment banks in the world, to publish a detailed report on the industry, we do not expect Bank America Merrill Lynch — or any other major firm — to write extensively on the sector in the immediate future.”
Karnes continues, “We also don’t believe coverage of any of the ‘pure play’ cannabis companies will be considered. But rather, research efforts will be focused more on opportunities that are tangential, or ancillary to the industry, companies with the potential for significant market valuations and investor returns.”
