Second Set of Eyes: Canabo Medical (CMM.V) getting ahead of Big Data in Big Dope

­Strange Situations in An Evolving Healthcare Environment

For all of the cultural support that Canada has for adult cannabis use, and all of the mileage that federal politicians have squeezed out of that support, cannabis legalization in Canada for recreation use is still a ways off.

The task force report published in December reads like a never ending list of problems. Examination of problems is a good and necessary first step, but we’ve yet to see anything that looks like a roll-out plan. For now, as we wait for full recreational use to get the go-ahead, Canadian adults have to settle for the right to use marijuana as medicine, and that condition has created a unique industry landscape.

The original Marijuana for Medical Purposes Regulations set out a series of fairly expensive licensing conditions that acted as barriers to entry and fostered the growth and success of large commercial farms. The ACMPR that replaced it allowed for the home growth of cannabis, but Health Canada is still picky about who they give commercial licenses to.

There are 38 licenses in all of Canada, producing and processing marijuana for wholesale to the medical dispensaries that continue to pop up like mushrooms. The dispensaries then sell to an estimated 37,000 patients (so far) who may or may not need it to help with whatever condition they told the doctor they had to gain the right to buy it.

In the 6 years or so that Canadians have been able to use commercial pot to treat real and imagined conditions without having to worry about having their door being booted in by the RCMP, patients and doctors have begun to learn a great deal about using cannabis-based treatments. Marijuana is a diverse plant, and a diverse medicine. There are many strains that yield different products when grown different ways, and those plants are being processed into various different kinds of derivatives. It treats different ailments through different processes and behaves differently depending on means of administration, patient archetype and dosage. The industry is experiencing a rapid explosion of pent-up innovation, and it is all at risk of ending up in a big tangled, useless mess if nobody gets to overlaying it with some kind of process.

Someone is on that case.

Evidence-Based Medicine and Business: A Regular Sid and Nancy

I’m not sure when the scientific method became the accepted process for developing new drugs and treatments in medicine but I’m glad it did. Otherwise, I may have died of a nasty infection while some shaman sacrificed a live rooster and danced the hell out of a custom Macarena designed to expel the evil spirits from my body.

Modern healthcare regulation mandates that science be used to demonstrate both the safety and effectiveness of drugs and treatments before they’re sold to the public. This is good and necessary. Companies protect the drugs that they invent with patents, giving them an exclusive right to the drug’s sale when it goes to market. Owning a patent on an approved and widely prescribed drug or treatment makes the cost of development and approval worthwhile.

Naturally, this situation tends to tilt the playing field in the direction of businesses large enough to be able to afford the randomized trials and paperwork mountain necessary for drug approval. There’s no way to get a patent for plants that have been around and used effectively as medicine for centuries, so nobody bothers to finance randomized trials and approval processes for garlic or kraton or echinacea. Health Canada and the FDA are sticklers about things being sold as medicine having to be proven to work before authorizing their sale, and that’s why the same people who are always forwarding emails about chemtrails sometimes put a link in your Facebook comments to a questionable news article giving the hard sell on a natural miracle cure being suppressed by the Globalists at the FDA! (Only $29.95, if you want to buy it as a <wink> dietary supplement.)

The Future

Gene modification tech and gene patenting laws have made it possible for companies to create patented strains of marijuana for specific purposes (at least in theory), and if one of them is ever shown to be more effective than its peers, it may become popular. But achieving such a thing isn’t an easy undertaking. It takes research, and research takes data.

Data has always been valuable, but the era of cheap, fast processors and broadband showed us just how valuable it is, and it became a commodity. It’s almost staggering to think of how quickly “Big Data” has become a leader in our economy and such an integral part of our economic infrastructure.

The healthcare subset of Big Data is so important that it’s hard to find out too much about the business side of it. Companies who aggregate and index patient data, then sell it as a subscription or perform their own analysis and sell those insights tend to be the tightly held properties of either private equity firms or big health companies.

Healthcare giant Kaiser Permanente used their unique access to one of the world’s largest patient networks to grow their own data company called Archimedes. They sold it to private equity firm Symphony Technology Group in 2014 for an undisclosed amount [link]. One could imagine it producing significant revenue at great margin, because that’s usually what PE firms are after.

Healthcore, another analytics company in the health space, operates various kinds of research-for-hire services for clients that they’ve been able to perfect through the extended collection and manipulation of health data, and managed to get paid doing it. They were sold to Wellpoint in 2003, which has since been acquired by healthcare giant Anthem (NYSE:ANTM). Medecision, in the same space, didn’t get too far before they were bought by HCSC.

Well-run health data companies with significant assets are valuable to health care conglomerates. Those companies use data and analysis to get places, and they may prefer to be in control of that information than to buy it from a firm who may just as easily sell it to a competitor. Data sets and the insights they enable are potentially key pieces of the AI boom occurring at the forefront of Big Data. It’s likely that they’re being sold to IBM and Oracle as development aids, and may one day be made even more valuable by the product of that AI.

Canabo’s Part In the Big Data Opportunity

Canabo Medical (CMM.V) appears to be betting that the noisy and messy landscape of Canadian Medical Cannabis could benefit from the neat sorting that might be achieved by the principals that drive the data business.

The company has a series of 10 clinics in Canada (at the time of writing), and four more soon to open. These clinics are dedicated to patients who prefer to treat the afflictions that trouble them with medical marijuana, and have doctors who don’t feel comfortable prescribing it, but will refer them to a doctor who will.

By building the patient/doctor relationships around the treatment of their condition instead of the administration of marijuana, they’re putting themselves in a position to fine-tune treatment and get it right. The company has been set up to use each doctor’s visit to feed an ever-growing set of patient data, that then becomes a company asset. The company also says it conducts “education programs” that show the wider medical community how to correctly and effectively use and prescribe cannabis based medicines, with that education being tweaked as it goes based on data coming back from the patients under treatment.

Brass Tacks and The Upshot

A well-managed medical cannabis user data set, provided it’s large enough and accurate enough, and the insights gained from its analysis, could represent enormous value to any number of cannabis growers, medical establishments, patient service networks, or even Big Data companies. Large Canadian commercial grower Aphria certainly saw value in it, as they did an $8.4M bought deal financing with Canabo in December that made them a 16% shareholder at a 60% premium to market. That kind of a deal could be a prelude for a bigger stake, or a means of securing access to the data going forward, but both options are big nods to the potential of the business plan.

Canabo’s investor literature has the company offering access to its databases on a subscription basis. They also mention evaluation consulting to insurance companies and large employers, a potential bonanza as companies struggle with how to deal with employees taking medicine that could get them high, but there’s nothing in there about research or analysis services of the kind one might expect from the bigger health data companies that are being bought up by private equity. The MD&A pulls out $729,000 worth of research revenue in FY 2016, so the deck may just have missed it.

Well-developed sales networks are integral backbones of the traditional pharmaceutical business. Should Canabo or one of its subscribers use the data set to to inform the successful development of a proprietary cannabis strain or extract, it will need to be sold. If the Canabo “education program” is able to reach critical mass, it could be a proto-sales-network that moves the notional product to market ahead of its peers.

The board is full of doctors, but none of them are data scientists. They are physicians and some appear to have accomplished research backgrounds. CEO John Phillpott is listed as the former CEO of a physician recruitment firm, which seems like a good choice for a company that has to staff a network of 14+ clinics.

Data companies are hard to value at the best of times, and this one is only 4 months old so it’s, frankly, impossible. Their $30M market cap seems fair enough. The young company is already booking revenue from their patient consultation and corporate consultation services, and project that revenue to increase, but those markets are almost as new as the company itself so we don’t really have anything to value them against.

The real value here is in the potential to develop data assets. In theory, those assets should grow at the same rate as patient throughput. Once the base is built, the company has the potential to either develop a revenue-generating subscription service, produce value-added data products, or perform custom research for corporate clients. All of that presupposes that Canabo develops useful data sets but, if they do, there are bound to be applications for them that nobody has even dreamed up yet.

Proper medicine is conducted through testing, and gathering organized, accurate sets of information is the first step. By helping manage their patients’ conditions, Canabo may be putting themselves in a position to become the first entity in possession of those sets. If they do it well, and secure a growing patient base, they may be able to make that information a valuable renewable resource.

— Braden Maccke

FULL DISCLOSURE: I don’t own any Canabo at deadline, though the company is an Equity.Guru marketing client.


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1 Comment

  1. CMM seems very legit and I’ve heard only good things (know people who use their clinics and speak highly of them) but why is APH selling some of their shares at a 50% loss when they only recently invested? Puzzling…

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