The effect of legalizing marijuana internationally will not lead to an explosion in consumption, according to an industry report prepared by GT Research, the US-based biotechnology analytics arm of the GTV Capital hedge fund. The analysis is most striking given the source, as GTV is specifically targeted at the biopharmaceutical sector, with a particular focus on the budding cannabis industry.
Last month, Health Minister Rajitha Senaratne reiterated plans for the establishment of a 100-acre cannabis farm, expected to produce over 25 tons of the controlled substance per annum, in a bid to meet demands for Ayurvedic preparations.
When the plans were first announced last year, Minister Senaratne highlighted the plight of Ayurvedic doctors who currently depend on cannabis stocks from confiscated narcotic stockpiles to prepare their medicines.
“By the time our native doctors get this cannabis, it is about four to five years old and it has lost its effectiveness,” the minister said.
The Health Ministry plan, slated to be brought before Cabinet shortly, envisions farmers cultivating the crop under the supervision of the military. After meeting local needs for ayurvedic medicinal preparations, the government hopes to export surplus from the farm to jurisdictions where the herb has been legalized for widespread use, such as parts of the United States, and Canada.
Canada’s impending full-legalization of marijuana was discussed in-depth in the GT Research study, titled “Right-Sizing the Canadian Recreational Cannabis Market”, which is available to industry insiders on the firm’s website. According to the study cited in Forbes, most Canadian consumers would rather continue to purchase cannabis on the black market, rather than pay a premium for legitimate supplies. “A whopping 37% of heavy consumers wouldn’t participate in the [recreational cannabis market] at a $1 legal premium,” Forbes quotes the report as stating.
While the GT report expresses skepticism of sky high market expectations following legalization in Canada and elsewhere, the firm remains bullish on the budding cannabis industry as a whole, according to Damitha Pathmalal, Portfolio Manager at GTV Capital and Director of Research at GT’s analytics arm.
“You can be informed, do your due diligence and be strategically optimistic about where the cannabis market is going, or you can fall for the dotcom era style hype and the inevitable pump-and-dump type schemes that are almost certain to infect this sector in the years to come,” cautioned Pathmalal. “Our fiduciary duty to our investors is to deploy capital to the wheat and steer clear of the chaff.
Such an endeavour would be easier said than done, according to Gitendra E. Chitty, Director of the Strategic Advisory Practice at KPMG Sri Lanka.
“During the dotcom bubble of the early 2000s, a lot of otherwise very savvy investors and fund managers were taken up by the hype of the tech boom, and threw due diligence to the wind,” Chitty, who at the time oversaw an internal software platform at the headquarters of General Electric, recalled.
“While some institutional investors have learned these lessons the hard way, the scandal at Theranos has reminded us all of the need for fund managers to thoroughly vet biotech investments, cut through the hype and ask tough questions of their portfolio companies,” he warned. Chitty was referring to the recent $500,000 fraud settlement between the United States Securities and Exchange Commission (SEC) and biotechnology darling Theranos, which, founded in 2003, was once valued at over 9 billion dollars. In a nutshell, the company was accused of “raising more than $700 million from investors through an elaborate, years-long fraud in which they exaggerated or made false statements about the company’s technology, business and financial performance.”
Despite the imminent likelihood of a local export market for cannabis in Sri Lanka, GTV is not exploring local investment opportunities, according to Pathmalal. “While our mandate does not restrict us to a specific region, we need to look at the bigger picture of any local market in considering any international investment,” Pathmalal said.
“I feel sad to say this as a Sri Lankan, but the structural issues in the local market make us wary to engage here without relying on political patronage. Ours is a Special Situations fund and not a Special Relationships one. For example, the ongoing controversy around insider trading in Central Bank Bonds—which are the most sacrosanct investment in any economy—was a giant red flag to us.”
Pathmalal is no stranger to workings of the Sri Lankan capital markets. Before moving to the United States for his MBA degree from Duke University, Pathmalal lived and grew up in Sri Lanka from his childhood, having attended the Asian International School and Colombo International School, before earning his undergraduate degree and later working for Moody’s Analytics and Dialog Axiata in Colombo in the areas of research, strategy, and corporate development.
“As long as the government remains in the business of picking winners and losers, the engine of creative destruction that is necessary for true innovation in this or any other sector is unlikely to take root in Sri Lanka,” Pathmalal cautioned. “History doesn’t repeat itself but it rhymes. The local economic policy-making bodies bear a striking resemblance to Venice’s Great Council, which was comprised of the business leaders of the time and informed government policy. It ostensibly fostered economic growth but by its design was a protectionist old boys club. In 1330 Venice was the size of Paris and three times larger London. It is now a city that is literally under water and a museum for tourists.”
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