ASX cannabis stocks have gotten a boost from the rising tide of regulation in recent months.

But in a December interview with Stockhead, cannabis investor Mark Bernberg said the onus is still on ASX cannabis stocks to prove out viable business models.

So what comes next? We caught up this week with three cannabis companies to get the view on regulation from the company side.

For all three, their path to a viable business model is based on clinical backing for cannabis products.

It’s a pathway more commonly associated with biotech stocks, and requires the same investment philosophy; patience with the possibility of a big payoff.

We contrasted the CBD biotech model with more traditional cannabis cultivation companies, featuring comments from listed players Medlab (ASX:MDC) and Incannex Healthcare (ASX:IHX) as well as private company Entoura.


For starters, a quick summary of recent events:

    1. Australia’s health regulator (the TGA) will downgrade cannabidiol (CBD) to a Schedule 3 (S-3) drug, opening the door to over-the-counter pharmacy sales (not just prescription).
    2. The TGA is also taking submissions on whether to enforce Good Manufacturing Practice (GMP) standards on all cannabis products imported to Australia.
    3. US Democrats have indicated a willingness to push for the federal decriminalisation of cannabis when Joe Biden assumes office.

Points 1 and 3 in particular acted as a catalyst for some broad-based share price gains in the ASX cannabis space.

And the companies we spoke to provided some interesting context about how they will play out on the ground.

For example, Entoura general manager Clare Barker said the TGA’s S-3 ruling is more likely to be a 2022 story, not 2021.

“It’s a step in the right direction, but it will still be a significant process to register the products before they get to the pharmacy shelf,” she said.

To get S-3 approval, cannabis companies will first have to apply to the Australian Register of Therapeutic Goods.

“The standard length of time for an S3 application is 330 days. So technically you’d be looking at November this year at the earliest, unless someone got an expedited application.”

Medlab CEO Sean Hall also shared some interesting context on the optimism surrounding US legislative changes, where “the devil is in the detail”.

President-elect Biden is in favour of decriminalising marijuana possession. But he’s so far stopped short of full legalisation, applying that directive instead to medicinal cannabis products.

And “cannabis use for medical treatment is the sole jurisdiction of (US health regulator) the FDA”, Hall says. And the same goes for Australia, Europe and elsewhere.

“If you’re developing medicinal cannabis products, it’s now solely at the discretion of your federal health agency,” Hall said.

“They don’t allow that kind of narrative, unless they’ve approved it. And if you want approval, you need to do the homework and put together a drug application.”

Pot stocks or biotechs?

In Hall’s view, a divergence has emerged in terms of how investors should assess cannabis companies.

“The way I look at cannabis is you have pot stocks, which are traditionally cultivation plays. But there’s a difference between a pot stock and a biotech.”

Canada was the “poster child” for how pro-cannabis regulations can open up markets, but the problem was it ultimately turned into a “race to the bottom”, Hall said.

Instead, all three companies we spoke to are working towards products that have clinical backing with the resultant point of differentiation — patent approvals and market protection.

Product development

Listed player Incannex Healthcare has four clinical trials underway for four different medicinal cannabis products, including treatments for sleep apnoea and traumatic brain injury.

Like Medlab, the company is focused on the US market. And speaking with Stockhead, chief medical officer Dr Sud Agarwal laid out a framework of “common traits” for how IHL pursues clinical results.

Like any biopharma development, it’s a multi-year process requiring an up-front investment and if everything lines up, it leads to “very substantial returns”.

In that context, the clinical areas IHL is focused on all have “common traits”

“One is that it’s solving a major unmet need. It also has to have an addressable market of more than $1bn, with export access to the seven major global pharma markets,” Agarwal said.

“Then there needs to be anecdotal evidence in medical literature that people are already using cannabis to treat those areas. And lastly, each one must be susceptible to an FDA accelerated pathway for registration (under 2.5 years).”

Agarwal attributed the some recent momentum in IHL shares to some positive pre-clinical data the company released into the end of last year.

It’s now recruiting patients for a Phase 2b trial to assess the safety and efficacy of its IHL-42X sleep apnoea treatment.

Medlab announced this week that it’s been granted an Investigational New Drug (IND) status by the FDA for its lead drug candidate NanaBis, a CBD/THC formulation used in the treatment of cancer pain.

The IND will allow the company to commence “critical” Phase 3 trials, which is currently the only CBD pharmaceutical carrying out Phase 3 trials approved by US regulators.

For Entoura’s Barker, she’s awaiting data from the company’s first randomised control trial last year (due in February) for its THC/CBD insomnia treatment.

“It was a 30-patient trial — not large numbers but we want to understand the safety profile of the product,” she said.

“What we also get out of that is an understanding of dosing levels; at what dose rate patients get a change in the quality of their sleep.”

When it comes to clinical research “the hard part about cannabis is it’s not conforming to traditional pharma model,” Barker said.

“It’s a combination of phase 1, 2 and 3 in some areas because the safety really has been established in a generic sense.”

“So in terms of what you need to be successful in this space, I firmly believe it’s a ‘patients first’ approach.

“The company has to be focused not on making money but on meeting the right patient needs, because then you’ll make the right decision and the strategy will follow.”