The 2019 bear market in cannabis stocks has led many investors to reassess their view of what really represents compelling value in the sector.

Since March, cannabis market indexes in Canada and the US have slumped by around 50 per cent. The local market hasn’t fared much better, having slumped by an average of around 20 per cent — a number which would be closer to 40 per cent if not for a handful of successful outliers.

But while that rising tide is no longer carrying all cannabis stocks higher, the nascent state of the industry means broader growth rates around usage and customer numbers are still robust.

To get an update on the sector Stockhead spoke with Rhys Cohen, a principal at medicinal cannabis consulting firm Freshleaf Analytics.

On the home front, Cohen highlighted that the nascent state of the sector meant relative growth rates were likely to remain strong in 2020.

“We estimate there’s about 10,000 active patients in Australia, and it’s growing at around 20 per cent month-on-month,” he said.

“So it’s entirely possible in 12 months time we might have more than 30,000 active users, which is a reasonable assumption to make if the current growth rates hold.”

Cohen also said the number of products in the local market would push towards the 100-mark. And right now most of those are imported from overseas producers, which presents an opportunity for Australian cultivators who can bring products to market at a lower price.

But despite the projections around local growth rates, Cohen said the bigger commercial opportunity was for companies that could execute on a successful export strategy. And that stems in part from the robust regulatory regime the Australian industry operates within.

“I think one thing Australia has done better than Canada and the USA has to do with our regulatory framework at a fundamental level,” Cohen said.

“If you look at how the industry developed in Canada, the mainstream medical community didn’t want a bar of it. So you’ve got this weird situation where someone sees a doctor, the doctor writes a medicinal cannabis recommendation and the patient contacts the drug manufacturer directly.”

“Conversely, if you’re an Australian, your cannabis is obtained the same as any other medicine; it’s prescribed by a doctor and dispensed through a pharmacy, which I think is a better way to do medical cannabis.”

But while low-dose CBD products are already in widespread over-the-counter distribution in markets such as Europe and the US, Cohen said he didn’t expect that framework to be applied in Australia anytime soon.

“I’m not optimistic, and that’s based on conversations I’ve had and observed other people having with the regulators,” he said.

“The decision to allow that kind of pathway will be one that will be made by the Therapeutic Goods Administration (TGA), and I think they’re unlikely to get on board with that — it’ll probably be a bit of a bridge too far at this stage.”

But taking a longer-term view, Cohen said Australia’s robust regulatory framework would create a competitive advantage for successful exporters.

“The interesting thing about Australia is that local cultivators will be competitive internationally,” he said.

“Our medical cannabis regulations are among the most stringent in the world, so by default any company that manages to bring a product to market is already adhering to the highest global standards of quality control.”

While Freshleaf is focused mainly on monitoring trends and regulatory developments in domestic medical cannabis, Cohen also offered his thoughts on this year’s mayhem in the listed space.

“My take is it did become a bubble. The kind of valuations we were seeing were totally unrealistic in connection with the revenues these companies were generating at the time,” he said.

“I think a lot of companies — especially the Canadian ones — were so awash with new funding they had more cash than they knew what to do with. And they were desperate to unload some of that, so it drove investment into big construction projects. But that only makes sense as a commercial strategy if you’ve got somewhere to sell your product.”

“So I think on one side you had companies being pushed by investor sentiment into overcommitting, and on the other hand they were being squeezed because the regulatory landscape wasn’t moving quickly enough to provide sufficient demand for the increased supply capacity.”

Ultimately, the repricing of cannabis stocks in 2019 was representative of the sector’s relative immaturity. And in that sense it was a “painful but necessary correction”.

“We’re now getting to the point where you can’t just put out a press release about a non-binding letter of intent and get a stock bump,” Cohen said.