Remember the great cannabis gold rush? Thought not. A while ago I hosted a great little event at PR agency Maitland on the business behind Cannabis. There was lots of enthusiasm and a bunch of really great business ideas, mostly if I am honest focused on the ‘artisan’ end of the spectrum. Most people who turned up were expecting something a bit more ‘solid’ i.e a bit more public markets focused stuff. They weren’t too fussy, just a few listed businesses that had public markets credibility about them.  Once that had happened, then we all could all collectively imagine the UK taking baby steps along the trail already blazed first by the Canadians and then the yanks.

Well, a few years later, deadening silence. I haven’t heard a squeak out of any big (or small) bank about a cannabis listing of any sort. Some of us even got terribly excited about the re-emergence of SPACS as a vehicle. More deadly silence.

I have to step back from this and make a few admissions. First off, like many good liberals I tend to think that decriminalising cannabis is probably a good idea but given that the only party that supported said policy, the Liberal Democrats, made almost no noise about it at the last general election, I get the suspicion that we decriminalisers are a voice in the wilderness. Given Sir Keir conservative stance on social policy I also see next to no chance of Labour embracing the policy and as for the Conservatives, well I sense that a few around the cabinet table probably privately believe in it but there’s a snowball in hells chance of anyone doing anything about it.

The next admission is that I can’t say I blame the politicians for being disinterested in cannabis.  My sense is that a broader debate about how we are losing the war on drugs might get some mileage – and dear reader we are most assuredly losing that war – but cannabis just doesn’t move the dial. And that’s because in truth, decriminalisation or legalisation doesn’t actually pass the first test of public policy in the modern age, which is “does it solve a major problem that causes MPs post bag to fill up?”.

No, it doesn’t. Cannabis is an irritant. It still clogs up the court system with pointless penalties and the police would love rid of it. Some putative hemp farmers would like a level playing field in a space we once dominated as a nation (hemp growing in Hampshire anyone). And I suppose there’s some tax revenues that could be squeezed out of it but it runs the risk of the health lobby shouting about the impact of cannabis on mental health.

So, until there is a big problem that needs solving, my suspicion is that the debate will go nowhere except perhaps for some small changes at the medicinal level. And even at the medicinal level there’s a problem. The medical establishment isn’t terrifically keen on exploring the impact of cannabis on pain alleviation for instance and absent those really important  big multiple trials, I’m not sure we’ll see much progress.

By contrast I would keep a beady eye on the coming age of the psychedelics. I have prattled on about this before but there’s a solid body of evidence emerging that entheogenic (naturally occurring in plants) and synthetic (derived in a laboratory) drugs based around some familiar student favourites have very real impacts on what is one of the biggest health challenges of the modern age – the “ mental health crisis”, whatever that might be. As we medicalise every worry, hint of anxiety, and worry we are creating a huge pent up demand for new treatments for mental illness.  As anyone who’s read the primers on this space – I thoroughly recommend Michael Pollans wonderful How to change your mind – medics have been looking at this space for decades. They stopped in the 60s for some very obvious reasons but in recent years serious research has restarted at serious places such as Imperial and John Hopkins Centre for Psychedelic and Consciousness Research. I have an inkling we are at a fascinating turning point and the next step could be that public markets start to take notice.

Riwa Harfoush, an adviser to alternative assets specialist Ocean Wall this week put out a note to clients which I think is worth a mention. Harfoush picked up on Compass Pathways, a UK biotech engaged in Phase IIb clinical trials to show efficacy of their patented synthetic psilocybin (the naturally occurring psychedelic chemical found in magic mushrooms) regarding treatment-resistant depression.

According to Harfoush “Compass is the first pure play psychedelics company to go public on a major American exchange. On the first day of trading the share price jumped 71% from an open of $17 to a close of $29 and the company raised $127 million in an effort to bring their drug to market. Compass’s 34 million outstanding shares are valued at almost $1 billion. Though Compass has yet to achieve FDA approval (some anticipate a 2-3 year timeline), the landscape is evolving rapidly with several federal, state and local initiatives seeking to reclassify psychedelics. In the US, this creates the potential for state-sanctioned but federally illegal initiatives to treat patients. Compass shows strong initial performance and is certainly not alone amongst a growing number of biotech companies exploring psychedelic therapeutics, as well as technology companies responding to unmet needs across the treatment arc. “

My sense is that there is a decent chance that Compass could turn into a poster child for the psychedelic revival and that could in turn turbo charge (both ways) the share price of this young company. One to watch.

Returning to cannabis, my caution and scepticism doesn’t apply to the US, where I think that cannabis is going mainstream big time. Plenty of state governments have discovered that dope is a great way of making money for cash strapped treasuries. We’ve also got some big brands jumping into action and there’s a real sense that cannabis is turning into the next big consumer space. It’s also the case that there’s many listed cannabis firms, and more than a few of them can boast advancing bottom lines (yes, real, growing profits) plus decent valuations for their share price. Crucially there’s a greater sense of momentum at the political level, although the Trump administration is very much not a fan of legalisation. That said the Feds haven’t come down aggressively on the cannabis sector, perhaps because it creates jobs and profits. By contrast most Democrats are four square behind greater liberalisation and so we could view a possible Biden presidency as a positive for cannabis stocks.

A recent monthly note from the excellent cannabis team at Canaccord Genuity certainly think so. Their most recent report – A deep dive into the potential impacts of the US 2020 election on cannabis– suggest positive political momentum for the sector.

“ The Biden-Sanders Task Force could mitigate federal risk” according to the Canaccord’s analyst Matt Bottomley. “Back in July, Joe Biden and Senator Bernie Sanders released Unity Task Force Recommendations that although do not explicitly recommend legalized adult-use cannabis, still call for 1) federally legal medical cannabis; 2) a de-scheduling of cannabis from its current Schedule 1 classification; and, 3) supporting states’ rights in their ability to govern the implementation of adult-use programs while prohibiting the Justice Department from pursuing prosecutions against state-compliant operators. Since then, we have seen a significant increase in trading volumes and institutional attention being paid to the US cannabis sector ahead of the election.

Change in Senate composition could expedite pro-cannabis legislation. Arguably, just as important to continued cannabis reform as who occupies the White House is which party controls the Senate. With a Democratic-controlled House of Representatives that has been making significant strides in drafting new cannabis-related bills, the Senate has been the major roadblock to virtually all of these initiatives. With twice as many Republican seats up for re-election this November, we believe a shift to a Democratic-controlled Senate could be a significant catalyst for pro-cannabis legislation on the whole, including the SAFE Banking Act, the STATES Act and the MORE Act…..”

Crucially that momentum is against the backdrop of “strong fundamental financial performance so far in 2020 by many of the leading US public company cannabis operators, we have seen our Canaccord Genuity US Cannabis Index (CGUSCI), already up +35% YTD, significantly outperform its Canadian counterpart.”  At the stock specific level, the Canaccord report points to Curaleaf,  Harvest Health,  Thumb Industries and Columbia Care all of which provide the most robust exposure to these three markets, which combined already have ~58 retail locations up and running in these states.