Expert views on TGA's latest Cannabis ruling

Australia’s listed cannabis space got a jolt last week with the TGA’s preliminary ruling on over-the-counter sales for low-dose CBD products.

And as the dust settles, Stockhead took the opportunity to catch up with industry commentator and cannabis investor Mark Bernberg, to get his thoughts on the road ahead.

Bernberg emphasised the ruling is “extremely positive” for Australia’s cannabis ecosystem. However “I think to look forward one has to look back in some ways, and the best place to look back would be the US market,” he said.

“From 2018 heading into 2019, US stocks like Charlotte’s Web and CV Sciences were market leaders in CBD, and there was a huge amount of hype when it came to new deals and CBD products on shelves.”

“But the problem with it is that when you do open the market up to legal CBD distribution through pharmacies, there’s not a lot of hurdles in terms of getting a product to market.”

“Provided it’s quality CBD, these products don’t require the technical growing capabilities of pharmaceutical cannabis.”

Citing the US example, Bernberg said hype gave way to reality — and the ongoing challenges involved in building out sustainable business models. As a result, a number of early leaders have fallen by the wayside.

So in that context, he argues the reality for investors is that pro-active CBD legislation isn’t necessarily a rising tide that will lift all boats over the medium term.

Broader shift

While it remains to be seen which ASX stocks can capitalise on the tailwinds forming, Bernberg said there’s no doubt the TGA ruling will act as a catalyst to significantly expand the addressable CBD market for common ailments such as pain, anxiety and insomnia.

And that will be important as momentum builds around the number of Australian customers looking to access cannabis products through legal channels.

Industry advisor Adam Blumenthal, from EverBlu Capital, is also optimistic about future growth in the Australian market.

In comments to Stockhead, Blumenthal cited July research from the National Drug Strategy Household Survey, which indicated that around 690,000 Australians had used cannabis for medicinal purposes over the last 12 months.

However, only 3.9 per cent (~27,000) of respondents said they’d accessed cannabis products through legal prescription pathways — a discrepancy which points to broader industry growth in the years ahead.

“The Australian Department of Health estimates that there were 15,666 medical cannabis patients (not including Sativex botanical extracts) accessing via legal means during 2019,” Blumenthal said.

“And by June of this year, Australia was seeing triple digit year-on-year growth in patients accessing medicinal cannabis legally. So these figures point to a large existing base of patients and a rapid migration of these patients from using illegal sources to legal.”

“Some industry sources suggest the long term forecast could eventually see 300,000 to 600,000 patients using medicinal cannabis in Australia,” he said.

Differentiation

Shares in a number of ASX-listed cannabis manufacturers bounced following last week’s news. However, Bernberg said the early opportunities may lie in adjacent sectors such as clinic providers and distribution.

“Am I excited for the cannabis companies themselves? Yes and no. The initial reaction should be great, but then you’ve got the fact that every single cannabis company on the ASX now has the ability to bring out their own CBD,” Bernberg said.

Blumenthal said that to stand out from the pack, companies will need to prove they can bring “differentiated products” to market, that provide “better absorption and bioavailability to target specific patient /consumer populations”.

“For example, that means a specific formulation for geriatric patients who cannot swallow, or rapid release formulation for pain,” he said.

To win the distribution battle, he said companies will need to develop a “portfolio of different products within several regulatory categories — e.g. medical plant cannabis, synthetic medical cannabis, pharmaceutical cannabis and nutraceuticals”, ideally with a “global footprint”.

Getting past the hype

Among the other industry providers that could benefit from broader industry tailwinds, Bernberg cited the example of cannabis access clinics as more people seek information about CBD products.

“If CBD moves to an OTC pharmacy pathway, people will still need to understand it — what they’re taking it for and the possible side effects,” he said.

“So companies such as Emerald Clinics (ASX:EMD) — it could be a great thing for them because it broadens the potential patient base and allows for more revenue and distribution.”

On the production side, Bernberg mentioned Ecofibre (ASX:EOF), which is chaired by rich-lister Barry Lambert, as a possible beneficiary.

“They’ve built a strong product and could benefit — if not on the end-product side then certainly the inputs for their hemp product could be valuable,” he said.

But from an investor perspective, he said it remains to be seen which cannabis stocks can get runs on the board as the broader sector matures.

“Globally, one thing very noticeable right now is there’s a huge shift in the cannabis industry — the cowboys and gold diggers are all going,” Bernberg said.

“So the hype phase is over and investors are looking at it and saying ‘we’re going to treat you like beverage companies now’. In other words, who has the right management, the right cost structures, proof of operating leverage? That’s what you’re seeing now in some of the bigger companies.”

He noted that while the US correction saw many CBD companies get washed out, US stocks such as Green Thumb Industries and Cresco Labs — companies which have taken steps to a establish a viable business — have still outperformed in 2020.

“If you look around, the trash is beginning to fall by the wayside. Investors are taking a more profit-driven decision making process, as opposed to growth,” Bernberg said.

“Most people are coming to realisation you’re not going to have hundreds of companies in the sector, because it’s not big enough.”

“So the leading companies right now are ones that have demonstrated more maturity in terms of their policies, procedures and frameworks.”