An Impressive Backend Play on the $23.4 Billion U.S. Cannabis Market

The list of conditions for which cannabis may prove highly effective at treating now totals 172 – everything from nausea and pain management to anxiety, blindness, epilepsy, and multiple sclerosis.

No other drug can make this claim.

Cannabis is so powerful medically because our bodies are wired to receive it. See, humans have an endocannabinoid system. It reaches into every major section of the body, allowing our cells to communicate with cannabis directly.

While the nation moves toward full legalization, it’s the biotech aspects that are the big driver here. It’s why more than twice as many states have made medical – instead of recreational – marijuana legal.

As savvy tech investors, we’re looking for a broad backend play. We want to avoid the risk inherent in a new drug while capturing the broad upside that medical marijuana holds.

Key Strategic Advantage

That’s what we’re getting with Innovative Industrial Properties Inc. (NYSE: IIPR). This firm sits at the nexus of cannabis and real estate.

It plays a crucial role in an industry lacking access to growth capital. While many cannabis operators acquire their own real estate up front, they have limited options for funding further expansions.

IIPR buys cannabis companies’ land and grow operations and leases the space back to clients on a long-term basis, snapping up the farmland that is best suited for the production of medical-grade, high-end cannabis. Those leases typically extend beyond 15 years, and IIPR builds in yearly rent hikes exceeding 3%.

IIPR’s strategic advantage is a strong balance sheet that helps it strike deals rapidly. That comes in handy at a time when competition in this area remains very limited due to cannabis’ ongoing federal prohibition.

In the states, this is already a major industry – 33 states and the District of Columbia having legalized medical cannabis, with 10 allowing recreational use.

Arcview Market Research says U.S. demand for legal cannabis will grow 20.8% annually to $23.4 billion in 2022. Medical cannabis accounts for around 40% of that market.

Growth and Income

IIPR has been growing its cannabis presence at a rapid clip. When it IPO’ed in December 2016, it had one property under contract to acquire – PharmaCann’s 127,000-square-foot facility in New York.

The firm has since bought another four properties in 2017 and another six in 2018. Through the end of last year, $167 million had been deployed in new deals. In 2019, the firm has spent another $87 million and says there is a brimming pipeline of new properties to acquire.

Real estate investors can typically expect a 5-7% annual cash-flow yield when buying industrial warehouses or other commercial properties.

Yet for IIPR, that figure is a whopping 14.7%, as the firm has very favorable terms in what it pays for land and then what it can secure in leases.

As just one example, IIPR bought a 266,000-square-foot industrial space in Saxton, Pennsylvania, in May for $13 million. The firm quickly lined up a tenant, Green Leaf Medical, for use of half of the space. Once another tenant is in, annual net rent on the property should be around $2 million and will rise from there thanks to rent increases.

IIPR is structured as a real estate investment trust (REIT), which means at least 90% of its earnings must be returned to investors each year in dividends.

And payouts are now rising at a rapid rate. IIPR’s dividend should rise around 75% this year and keep growing at a 30% clip in 2020 and again in 2021.

So this is a great combination of growth and income in a brand-new industry.

A Savvy Management Team

For cannabis investors, the importance of seasoned management can’t be underestimated. Gone are the days of the sector being dominated by artisanal growers and sellers.

These days, the field is attracting serious mainstream investments from sizable backers, like our very own Canopy Growth Corp. (NYSE:CGC) that received a $3.66 billion cash injection from beverage giant Constellation Brands Inc. (NYSE: STZ) last year.

Top-notch management teams are starting to become a key theme for the maturing cannabis industry, and I’m happy to report that IIPR has that in spades.

Chairman Alan Gold, for example, previously served as CEO of the life sciences REIT BioMed Realty, which was acquired by The Blackstone Group LP (NYSE:BX) in January 2016 for $8 billion.

CEO Paul Smithers previously founded Iso Nano International LLC, which designs and builds advanced materials for the aerospace and electronics industries.

And the leadership team has been in place since the firm was founded, a great sign of stability.

Crying All the Way to the Bank

When IIPR went public in 2016, the firm was met with derision from many quarters. One headline from CNN blared that “Marijuana Stock IPO Goes Up in Smoke.” The article noted that shares of the then-new IPO fell 4% on the first day of trading.

I’m glad Innovative Industrial Properties ignored the critics and built a great franchise. It helps explain why the stock has continued to rise despite snarky media attacks.

These days, the firm is focused on building its fast-growing real estate empire. It’s deployed $259 million to acquire 21 properties spanning 1.5 million square feet of grow space.

Thus far in 2019, it brought three new properties in California and two in Pennsylvania into the fold.

PharmaCann stands out as IIPR’s largest investment thus far. The $68.5 million purchase in May 2018 helps IIPR to profit from the strength of this multi-state, vertically built cannabis grower.

As of the end of the first quarter, IIPR had $59.2 million in the bank to snap up more properties. The firm has been able to raise capital on very favorable terms thanks to its remarkable cash-flow profile.

IIPR’s backers are also glad to invest in and lend to the firm because of its track record of snapping up primo real estate assets and leasing them to the most respected medical cannabis growers in the industry.

A Bright Future Ahead

That stellar reputation also helps when it comes to its clients. IIPR has built a great reputation from existing growers for the quality of the greenhouses it’s refurbished or built and for the ease of dealing with the firm to meet various capital needs.

Since IIPR sees such a high volume of appealing properties, it can afford to be selective. And this management team has a proven record of never overpaying for desired properties.

They nitpick every potential deal to ensure it will yield those very impressive cash-flow yields we discussed earlier.

IIPR is off to a terrific start in 2019. First-quarter rental revenue spiked 444% from a year ago, and adjusted earnings grew 275%.

The firm’s dividend is now rising at a very fast pace as a result. IIPR is serving a crucial role in the fast-growing cannabis industry – a proven buy-and-lease real estate strategy that’s a win-win for clients and investors. That makes this REIT a unique foundational play in a new and very lucrative industry.

Action to Take: Buy your first one-half position in Innovative Industrial Properties Inc. (NYSE: IIPR), and place a lowball limit for your next half-tranche at 20% below your entry price.

The Backend Biologics Play

Tearing up a $399.5 Billion Market

When it comes to building wealth, we at Wall Street Watchdogs owe a lot to the 49ers.

No, I’m not referring to what was once my favorite football team.

I’m talking about all those miners who came from around the world back in 1849 to strike it rich in the golden hills of California.

Attracting an estimated 300,000 immigrants, the Gold Rush was the greatest migration at that time in U.S. history. It made San Francisco a boomtown and helped cement the state as a place where fortunes can be made overnight.

Here’s the thing. As a Silicon Valley veteran, I can’t help but think of one of the greatest – and most profitable – gold-rush ironies…

It was the merchants who really made it big – enterprising folks like Levi Strauss of the global jeans brand, John Studebaker (who made a fortune in the auto industry), and banking giant Wells Fargo.

12 Years and $2.5 Billion

Now you know why I’m always on the lookout for pick-and-shovel opportunities, which I often refer to as backend plays.

Just as it was back in the original Gold Rush, the idea is to make money on a broad sector filled with promise without risking too much capital on a single “mine.”

I believe it’s one of the best ways to invest in the many great breakthroughs in biotech today.

Biotech firms are often in a similar situation to the original 49ers. They take on huge risks with no promise they will ever make money.

But you can see what motivates them.

Global drug and biotech sales are worth more than $1.2 trillion a year. In other words, once a drug gets to market, the sales and profits are just off the charts.

And while many new drugs are lifesavers, this is a sector filled with heartache.

Consider that the Biotechnology Innovation Organization (BIO), a trade group, estimates that just 9.6% of drugs that scientists discover ever get approved for sale. The BIO study looked at 7,400 drug programs by 1,103 companies.

The costs and time spent in developing new compounds is even more daunting. A few years ago, the Tufts Center for the Study of Drug Development found that it costs $1 billion to get a new drug to market.

Tufts has since updated that study to reveal that the field is only getting tougher. It now forecasts that on average these days, it takes 12 years to go from discovery to commercial launch.

And the cost is a staggering $2.5 billion. Of course, that takes into account the costs of the many failed drugs as well.

A $400 Billion Market

That’s why I see a chance to score huge gains on a backend biotech supplier. Repligen Corp. (Nasdaq:RGEN) is great play in the fast-moving field of biologics.

Biologic drugs are produced from living organisms or contain components of living organisms. Such products include recombinant proteins, tissues, genes, allergens, cells, blood components, and vaccines.

Grand View Research says the biologics market will hit $399.5 billion by 2025, up from $276.6 billion in 2015.

The Quiet Biologics Leader

Don’t worry if you’ve never heard of Repligen. Most investors haven’t. It just may be the quietest firm in its sector.

But make no mistake: We have a real winner on our hands.

With a market cap of just $3 billion, the company is set to double its earnings per share in less than three years. Sales are also on pace to double by the end of 2021.

Based in the Boston suburb of Waltham, Massachusetts, the company makes and supplies the high-value ingredients other biopharma firms use for their own pharmaceuticals.

Because it’s a supplier rather than a drug maker, Repligen gives us the big upside potential of new drug development. But with this play, we simply don’t have the downside risks and long waiting times posed by the U.S. Food and Drug Administration (FDA) approval process.

Repligen is a major provider of a substance known as Protein A, which is used to produce many leading drugs. For instance, Protein A is used to separate and purify cancer fighters known as “monoclonal antibodies.”

And monoclonals are on the rise. To date, some 85 have hit the market, a roughly 50% increase since 2015. Plus, there are now roughly 400 more in various stages of the clinical pipeline.

The firm also supplies products that help with gene therapy, antibodies and vaccines, as well as the cutting-edge bioprocessing of nanoparticles.

The firm is literally targeting the global supply chain for biologics. Besides the Boston area, Repligen has operating plants in California, Germany, and Sweden.

And it boasts crackerjack leadership. CEO Tony J. Hunt joined in 2014 after the firm he was running got acquired by Thermo Fisher Scientific. He has a master’s in biotechnology as well as an MBA.

Four Pillars of Success

Repligen boils down its wide-ranging list of products and services into four main fields…

Bioprocessing of living cells or molecules, worth $9 billion a year.

Filtration of biomaterials, worth $900 million a year.

Proteins used in biotech products like monoclonal antibodies, worth $475 million.

Chromatography used to process and purify biotech compounds, worth $180 million a year.

No wonder Repligen is bucking the overall stock trends in biotech and Big Pharma today.

Wall Street is concerned that during the run up to the 2020 presidential election, candidates may propose price controls on health care.

And President Trump has said he wants to put the squeeze on drug prices as part of what he sees as a populist mandate.

These two factors explain why bellwether indices for biotech and Big Pharma are getting beaten by the S&P 500, which is up 9.8% so far this year. Biotech stocks are up just shy of 4%, while drug stocks as a group are down 8.4%.

By contrast, RGEN has gained nearly 32%, a little more than triple the S&P’s return this year. But there’s still plenty of upside remaining.

Over the past three years, the firm has grown its earnings by 25% and doubled to 60% in the most recent quarter.

Based on this strong track record, I believe we have a shot at making 75% over the next four years. It’s a conservative forecast.

The numbers show earnings should double in about 32 months. But I cut that back to account for any slowing economic growth over the next couple of years.

Actions to Take: Buy half your intended stake in Repligen Corp. (Nasdaq:RGEN) at market, and then put in a lowball limit order for the second half-stake at 20% below your entry price.