April 30, 2025
Commentary
April saw continued volatile equity markets as investors grappled with the impact of rising tariffs on consumer behavior, slowing growth and the potential for weaker earnings across many industries. This tariff uncertainty has spread across all sectors, as global supply chains strive to adapt to new trade policies. During the Q1 earnings season, key challenges for healthcare and consumer health companies have included the origin of active pharmaceutical ingredients (APIs), medical device parts, personal protective equipment (PPE) such as gloves, masks, and gowns, as well as labor costs involved in producing alternative supplies in various regions. Consequently, many companies have chosen to withhold forward guidance. However, it is worth closely examining those companies that can navigate these challenges and continue to provide guidance despite the headwinds.
Summary
In this month’s commentary, we review Q1 earnings from the first week of May, with top U.S. cannabis holdings GTII and TRUL releasing financial results that we summarize below. We also discuss recent regulatory updates in the U.S. cannabis space as April provided bipartisan bills from the House of Representatives to once again address federal cannabis laws, banking and the potential for interstate commerce.
We also review Q1 results from medical device and pharmaceutical names such as (DGX) Quest Diagnostics, Johnson & Johnson (JNJ). In addition, we analyze the recent short selling of HCA Healthcare (HCA), and the factors we believe in to keep us watching for continued entry points.
Monthly Update
Greenthumb Industries (GTII), operating 104 retail stores in 14 U.S. markets, released Q1 results that illustrated the difficult environment in which to operate, combined with a resilient financial structure and strong balance sheet that differentiates GTII from the rest of the operators in the cannabis industry. Revenues in Q1 were $280 million shy of street expectations of $284 million, a QoQ decline of ~5.0%. The company had strong CPG (wholesale) growth of 12.3%, which offset retail sales declines. The environment for all retail operators is challenging, and the cannabis industry is no different. GTII same store sales (SSS) growth was down ~5% YoY, with management disclosing that stores in Illinois, Pennsylvania, New Jersey, and Connecticut were experiencing significant retail pricing pressure. Gross margin was 51.2%, or $143 million down ~250bp QoQ due to retail pricing pressures, but still considered at the high end of the industry range, TRUL being the industry leader with a gross margin of 62%. The EBITDA margin was $72 million or 25.7% vs 35% in Q1-24. Management guided for Q2 sales to be flat with EBITDA margins continuing to be below 30% over the following quarters due to continued price compression, which may weigh on the stock price. However, what investors should focus on is the free cash flow (FCF) of ~$44mm in Q1, after the company pays 280E taxes, and the anticipated adult use transition in markets where GTII has exposure, Virginia, Minnesota and potentially Pennsylvania. We note that GTII stands out due to its very strong balance sheet. The company finished the quarter with $211 million USD of cash on hand and debt of ~US$252 million, resulting in net debt of ~$ US41 M, an enviable position in an industry that is composed of many weaker, highly levered players.
Trulieve Cannabis Corp (TRUL) released Q1-25 results illustrating that the company is executing well despite macro issues facing consumers across North America. First quarter revenue reached $298 million, with 95% of revenues from retail sales, beating consensus revenues of $294 million. Sales in dollar terms remained relatively flat YoY while TRUL expanded its retail footprint by 17%, reflecting increased competition while also showing the agility of TRUL management to retain customer traffic and build loyalty. Retail traffic in Q1 was up 7% YoY while TRUL continues to produce efficiently, achieving a gross margin of 62% or $183 million versus $174 million or 58% vs Q1-24.
An area that has yielded strong results for the company is its rewards program, where membership is over 625,000 as at March 31, 2025. Crucial to the success of any loyalty rewards program is generating higher sales per customer and TRUL states that its members accounted for 68% of transactions during the first quarter, a group that, on average,e spends 2.3 times more per month than regular customers. It is important to note that investors have doubted TRUL ability to sustain leadership in FL, something TRUL continues to disprove. The company maintains a competitive advantage with scale, efficiency and a distribution network that continues to produce industry leading margins. TRUL also recently announced its entry into the hemp derived THC beverage market with a promotional campaign beginning this summer, featuring Onward, its CBD/THC drinks and upward infused with caffeine. We believe the innovation and branded product mix distinguish TRUL as one of the leaders in the industry.
Adj EBITDA was 37% in Q1 or $109 million vs 36% in Q1-24 or $106 million, with cash flow from operations of $51 million and free cash flow of $34 million. The Company reiterated guidance for 2025, ending the year with free cash flow of over $200 million. Free cash flow is an important differentiator in the cannabis industry, as many companies have significant debt maturities. TRUL management stated on the call that their goal is to repay a portion and refinance their maturing debt of $326 million (maturity 10/26) during this calendar year. Cash on the Balance Sheet at quarter end was $329 million. As of quarter end, the company operates at 229 retail locations, 162 in FL, with 4 million Sq ft of production across five states FL, AZ, GA, MD, PA, OH, WV.
US Cannabis Update
While many investors have moved to the sidelines, we continue to see catalysts on the horizon for the cannabis industry. Multi-state operators (MSOs) moved sharply higher during the latter part of April as the Trump Administration suggested it could be in support of Congress passing legislation regarding cannabis banking. There has been no official confirmation from the White House, however the President campaigned stating that he was in favour of the Florida recreational cannabis ballot initiative, and he was quoted saying that he would “work with Congress to pass common sense laws, including safe banking for state authorized companies, and supporting states rights to pass marijuana laws”.
On April 17th, two bipartisan cannabis reform bills were tabled that focus on different aspects of cannabis legislation at the federal level. The first uses the acronym, the PREPARE Act, which stands for Preparing Regulators Effectively for a Post-prohibition Adult-use Regulated Environment. The Bill was tabled by Republican Congressman Dave Joyce of Ohio and co-sponsored by Democrat and House Minority Leader, Hakeem Jefferies. “Currently, nearly all 50 states have legalized or enacted cannabis to some degree, bringing us closer to the inevitable end to federal cannabis prohibition. Recognizing this reality, the PREPARE Act delivers a bipartisan plan,” Joyce said in a press release. The PREPARE Act seeks to establish a ‘Commission on the Federal Regulation of Cannabis,’ which would be tasked with constructing proposals for a ‘fair, honest, and transparent process for the federal government to establish effective regulations'.
That same day, Representative Joyce also introduced the STATES 2.0 Act, standing for Strengthening the Tenth Amendment Through Entrusting States. This bill proposes significant regulatory changes for cannabis at the federal level. STATES 2.0 would provide full autonomy to each state to regulate cannabis without federal interference. Rather than simply re-schedule cannabis to a lower rating on the Controlled Substances Act (CSA), STATES 2.0 calls for cannabis to be entirely removed from the CSA. Under the bill, states would be allowed to legalize, regulate, or prohibit to suit each state’s population base. The bill would allow states to establish laws to regulate and distribute cannabis in addition to allowing for interstate trade of cannabis if both origin and destination states permit it. These are early days in this discussion in a Republican led Congress, however what is noteworthy is that the GOP could steal the issue that is widely popular with the electorate and achieve a federal excise tax rate that could generate hundreds of millions of dollars in tax revenue for the federal government.
State Level Cannabis Regulatory & Market Update
Pennsylvania is an important market for many US cannabis companies and several fund holdings. GTII, TRUL, TSND, CL and VRNO have all established cultivation and medical distribution, both wholesale relationships as well as retail dispensary locations. With a population of over 13 million people, PA is an important state that represents future growth based on the potential of adult-use sales. Once again, legislators in PA are taking steps towards cannabis legalization with the introduction of House Bill 1200, sponsored by Rep. Rick Krajewski (D-Philadelphia). This bill aims to legalize recreational cannabis for adults 21 and older, primarily through publicly owned stores overseen by the Pennsylvania Liquor Control Board. The bill also includes provisions for clearing criminal records related to cannabis offences and reinvesting tax revenue into communities disproportionately affected by the War on Drugs. While this bill has strong Democratic support, the lack of bipartisan support suggests it will have a difficult time getting through PA’s Republican controlled Senate. However, in addition to this legislation, another bill, this one with bipartisan sponsors, is expected to be filed shortly. With strong public support and the state surrounded by adult-use jurisdictions, it is only a matter of time until PA passes adult-use legislation.
(DGX) Quest Diagnostics stands out for its resilience in the current uncertain equity market environment. DGX is a global leader in diagnostics, laboratory testing, genetic and molecular diagnostics, and health data analytics to healthcare providers and patients as well as insurers, operating an international network of labs and patient care facilities in the U.S., Canada, Brazil, Mexico, and India. The New Jersey-based lab-testing company beat street Q1-25 estimates with earnings of $2.21 per share, rising 8.3%, beating expectations of $2.15/share. Revenues in the quarter were up 12.1% with strong growth for blood test volumes YoY to $2.65 billion in sales, up 12.1%, also beating analyst expectations of $2.63 billion. The cost of services during the reported quarter was $1.79 billion, up 12.2% year over year, while gross profit at $863 million was up 11.9% YoY. The gross margin in Q1 was 32.5%.
Supporting further growth in the stock, the company reaffirmed guidance for $9.55 to $9.80 earnings per share and $10.7 billion to $10.85 billion in revenues for 2025. There are several growth drivers for DGX. The aging population and the prevalence of chronic diseases lead to demand for diagnostic tests. There have also been breakthroughs in diagnostics, which have helped in early detection in the areas of oncology and autoimmune disorders, leading to greater scope of tests that are available. Finally, with more awareness, some consumers are proactive in measuring health and fitness, further driving demand for DGX services. We also believe that the adoption of AI and automation enhances testing accuracy while enhancing. cost-efficiency.
Recent acquisitions include the acquisition of LifeLabs in Canada for $1.0 billion USD in Aug 2024. In Feb 2025, DGX acquired certain assets of Spectra Laboratories, the renal-specific laboratory testing division of Fresenius Medical Care, as well as Allina Health, a regional clinic business in Minnesota and Wisconsin. The recent transactions add significant revenue, especially LifeLabs, which will contribute $700 million in revenues on an annual basis to DGX.
Top ten holding Johnson & Johnson (JNJ) released Q1-25 financial results during the month that beat analyst estimates on both top-line revenues and earnings per share. Q1 revenues reached $21.9 billion, a 2.4% increase in first-quarter sales. In Q1, JNJ’s pharmaceutical business posted a 2.3% gain, boosted by higher sales of its cancer drug Darzalex and depression treatment Spravato. The medical-device division saw sales rise 2.5%, attributed to higher sales related to its subsidiary that manufactures cardiovascular medical implant devices.
The company posted profits of $11 billion, or $4.54/sh, in the first quarter compared with a profit of $3.26 billion, or $1.34/sh in Q1-24. Resilience was shown in the results at a time when many larger public companies are revising guidance down or removing forecasts. JNJ raised guidance projecting sales of up to $91.8 billion in 2025, compared with a prior view of up to $90 billion. CFO Joseph Wolk told investors and analysts on the earnings call that the outlook reflects J&J's completed acquisition of mental-illness drug developer Intra-Cellular Therapies, which the company valued at $15 billion, and added Caplyta, a pill that treats bipolar depression and schizophrenia, to JNJ's vast pharma portfolio. J&J has upped its 2025 sales forecast by $700 million, thanks to the addition of Caplyta to its lineup. Mr Wolk suggested JNJ is well-positioned given that healthcare has proven to be more recession-proof than other industries however, it is not immune to potential tariff costs. The company outlined that new tariffs, primarily on medical technology products, are projected to add $400 million in costs this year.
HCA Short Strategy
With a macro view of healthcare data over the last year illustrating a slowing trend in hospital patient days while labour costs are still rising, we have been selective in our positioning in the space. We have seen rising labour costs in healthcare and hospitals specifically, which seem to be persistent through Q1-25. In addition, we see headwinds emanating from the White House and Health Secretary Kennedy that are also creating headwinds on the pharma side. As a result, we have been analyzing opportunities where we can implement strategic short positions to take advantage of the current environment. Shorting companies or ETFs is complex and executed on as a trade. We stay nimble and typically short-term.
One company we have transacted on the short side is HCA Healthcare (HCA). HCA is the largest private healthcare provider in the world. It operates over 190 hospitals and approximately 2,500 ambulatory care sites, surgery centers, urgent care centers and physician clinics in 20 states. HCA also operates and the United Kingdom. The company also has facilities in the UK where it operates six private hospitals in London that provide a range of outpatient and diagnostic facilities.
For the past several years, partly due to increased healthcare coverage provided under emergency pandemic resource funding, revenues grew and were able to more than offset increased costs of care. What we have seen more recently is that increased operating expenses for labor, supplies and infrastructure have outpaced increases in reimbursement rates.
Just before the release of its Q1-25 financial results, there was strong price action on HCA. We viewed this as an opportunity to implement our strategy as we see headwinds building for HCA and had a view that Q1 results would signal the beginning of a weakening trend. Revenues rose 5.7% YoY for Q1 to $18.32 billion, showing that the company is taking advantage of growing demand, yet under the surface there were certain segments of the business that could mean downside in months and quarters to come. Same facility ER visits rose 4%, yet inpatient surgeries rose just 0.2% while outpatient surgeries dropped 2.1%. On the earnings call Q&A, investors sought clarity on surgical volume declines.
The miss in outpatient surgeries could be a bigger issue that is just coming to the surface.
Over the last two years HCA spent considerable resources building up its outpatient offering to meet growing demand. Outpatient surgeries are a growth driver for US hospitals due to its increased efficiency in the use of fixed assets, along with lower costs and patient preference for convenience. HCA has been strategically investing in outpatient facilities and procedures to capitalize on this trend, leading to a growing share of revenue from outpatient services.
Outpatient revenues account for 37% of overall revenues however if growth stalls or declines, that can be a major impediment to revenues and profitability going forward.
Adjusted EBITDA grew to $3.73 billion, a 6.6% increase from $3.35 billion in Q1 2024, reflecting margin expansion. However, cash flow from operations dropped to $1.65 billion, a 33% drop from $2.47 billion a year earlier.
Options Strategy
Since the inception of the option writing program in September 2018, the Fund has generated significant income from options premium of approximately CAD$5.25 million. We will continue to utilize our options program to look for attractive opportunities given the volatility in the sector and to assist in rebalancing the portfolio in favor of names we prefer, as we strongly believe that option writing can continue to add incremental value going forward.
Ninepoint Cannabis & Alternative Health Fund - Compounded Returns* as of April 30, 2025 (Series F NPP5421) | Inception Date - August 4, 2017
1M |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
Inception |
|
|---|---|---|---|---|---|---|---|---|
Fund |
1.88% |
-9.48% |
-7.51% |
-24.84% |
-40.90% |
-16.53% |
-8.09% |
-0.05% |
*All returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at April 30, 2025.
Statistical Analysis
Fund |
|
|---|---|
Cumulative Returns |
-0.41% |
Standard Deviation |
27.2% |
Sharpe Ratio |
0.06 |
The Ninepoint Cannabis & Alternative Health Fund, launched in March of 2017 is Canada’s first actively managed mutual fund with a focus on the cannabis sector and remains open to new investors, available for purchase daily.
Charles Taerk & Douglas Waterson
The Portfolio Team
Faircourt Asset Management
Sub-Advisor to the Ninepoint Cannabis & Alternative Health Fund