Cannabis stocks guide: Here’s everything you need to know
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Marijuana is the hottest herb on the planet right now, but while investing in medical cannabis stocks could make you a fortune, it could also risk the house.
After a flurry of activity on the ASX in 2017 as the sector kicked off following legalisation the year before, medical cannabis in Australia began re-emerging towards the end of 2018 from news-hibernation.
Growth strategies began kicking in and companies finally started making revenue. Licences were obtained from the Office of Drug Control (ODC), companies rejigged their business models to better exploit a rapidly growing global sector, and some plans just completely fell over.
In this guide, Stockhead explains the factors that have been driving ASX cannabis stocks, and what will spur demand — and stock prices — into the future.
There are 18 pot stocks on the ASX that are neck-deep in the cannabis business; for another 20, cannabis makes up a part of the business.
In the wake of the 2019 calendar year, one might be forgiven for thinking that’s a pretty good question.
Pot stocks globally fell into a relatively brutal bear market, as the excitement around new product lines and regulatory pathways turned into the sobering reality that actual earnings weren’t matching those bullish forecasts.
Aside from a couple of outliers, a scoreboard check in mid-December showed the ASX-listed cannabis companies tracked by Stockhead had posted an average 12-month decline of more than 20 per cent.
The local market followed its more developed counterparts — Canada and the US — lower, as over-excitement in those two markets saw valuations peak in March before a sharp selloff resulted in sector-based declines of around 50 per cent.
The US makes up 90 per cent of the global legal marijuana stock trade, even though it’s still federally illegal there (at least seven ASX cannabis stocks are looking to exploit this market).
The Farm Bill, passed in December 2018, legalised hemp-derived cannabidiol (CBD) in the US.
The other major global market, Canada, has a unique regulatory backdrop in that recreational cannabis use was legalised in October 2018.
Analyst estimates earlier in 2019 suggested that annual recreational sales could be around 585,000kg. But the main story of the year north of the US border was that legalisation has so far failed to provide a framework for cannabis sales to take off.
But while investors have hit the brakes on pot stocks, the future potential size of the market can’t be denied. Forecasts put the value of the industry anywhere between New Frontier Data’s $US25 billion estimate to Grand View Research’s monumental $US146 billion.
In July 2019, Stockhead spoke with Michael Curtis — Toronto-based managing director of cannabis company Embark Inc — who said the pullback in the sector was representative of its natural maturation from “Cannabis 1.0 to Cannabis 2.0”.
“I describe Cannabis 1.0 as the cannabis dream; that’s where you had the visionaries involved and a key part of the value proposition was removing the stigma associated with marijuana products,” Curtis said.
“Industry 2.0 is where people that’ve run very large businesses enter the industry, with a focus on financial metrics and profits.”
He said the next step is for more regulatory advancements — “once the US goes fully legal at the federal level, there’s a long list of other countries that will fall into line” — and the entrance of bigger players once the business metrics are more stable.
Until then though, the volatility historically associated with the sector could continue as new companies compete for market share in a global two-speed regulatory environment.
In Australia, New Frontier Data suggests the total current cannabis market, legal and illegal, is worth between $4.6 billion and $6.3 billion, with an estimated 2 million users who consume about 391,903kg of cannabis a year.
Australia imported 145kg of medical cannabis oil from Canada in 2017, making it the second-largest importer of cannabis products from Canada, although the country plans to be a net exporter of goods.
Currently the sector is split between those like AusCann (ASX:AC8), which believes Australia’s future lies specifically in tapping the country’s existing talents as a drug developer.
And others, like Cann Group (ASX:CAN), THC Global (ASX:THC) or Althea (ASX:AGH) which believe they can corner all parts of the market and succeed as vertically integrated grower-manufacturer-distributors, in the face of cheaper products and greater market power from other countries.
Understanding the types of cannabis stocks out there can help you make a clear distinction when looking to invest.
Marijuana, the colloquial name for the cannabis variety that’ll get you high, has been used for millennia as both a medicine and a recreational drug.
There are two main cannabis species: cannabis sativa and cannabis indica. Both produce delta-9 tetrahydrocannabinol (THC) — the part that gets you stoned — and cannabidiol (CBD) along with about 600 other known compounds.
Hemp is a variety of cannabis sativa grown specially for its fibre. It contains low levels of THC and slightly higher levels of CBD.
The other key compound to know about in cannabis are terpenes.
Terpenes are fragrant oils found in plants that carry flavour and aroma. They carry the pungent odour of cannabis and offer some medicinal properties — but they don’t contain THC or CBD.
About 200 terpenes have been identified which give cannabis its distinct aromas.
Together, cannabinoids and terpenes produce a range of effects known as the “entourage effect” or the type of the feelings the drug or treatment gives. They do this by tapping into the body’s own endocannabinoid system and different cannabinoids and terpenes will influence whether it makes you sleepy, hungry, creative, or acts as a pain reductor.
But as countries have begun to legalise medical use, and, in the case of Uruguay, Canada and South Africa, fully legalise recreational use, bans on cannabis have begun to fall.
Sixty-seven countries have legalised or decriminalised cannabis use in some form or just don’t care enough to enforce laws, and of those, 35 have fully legalised medical and/or recreational use.
Australia pulled the trigger in 2016, with medical legalisation coming into effect on October 30 of that year.
It led to a rash of new, cannabis-focused companies listing, or backdoor listing, onto the ASX in 2017, and a variety of others changing their business operations to incorporate facets of the new industry.
Australia’s first pot stock was MMJ Phytotech (ASX:MMJ), which has since morphed into a cannabis investor named MMJ. Its investments include a $2.65m interest in Canadian production and investment company Embark Inc.
The biggest IPO was Cann Group, which followed that with a mammoth $60m capital raising in November 2017. Strongly supported by institutions, it was the first indication of professional money in Australia becoming interested in cannabis.
The interest from Australian institutional investors is now so high, North American companies are raising money here in order to list in Canada.
While 2018 was a very quiet year for cannabis listings — only Elixinol Global (ASX:EXL) and Althea (ASX:AGH) joined the ASX that year — 2019 is shaping up to be slightly more healthy, with Ecofibre listing in March and Emerald Clinics and CannVaLate promising IPOs later in the year.
Efforts to legalise recreational cannabis in Australia have started, with the Greens and Liberal Democrats for it, citing a Parliamentary Budget Office estimate that it could yield almost $2 billion for the economy annually. Labor and the Liberal-National Coalition are very much against it.
Experts agree that Australia is probably five years away from recreational legalisation.
The World Health Organisation recommended the UN reschedule all parts of the plant so it is no longer categorised alongside cocaine and heroin, but the Commission on Narcotic Drugs has delayed a number of the decisions they will be taking on the cannabis submissions until after the March meeting.
Licences and permits are needed to grow, manufacture and research cannabis in Australia.
The federal government’s Office of Drug Control (ODC) has issued an ever-increasing number of licences that allow companies to grow cannabis for commercial purposes, grow cannabis for research, and manufacture cannabis-based products.
In October 2018 the ODC gained Cabinet-level approval to hire more staff after being swamped by licence applications: they expected 18 a year but at one point were trying to wade through about 190. It takes between 18 months and two years to go from application made to permitted site.
Scroll down to find out which ASX cannabis companies have licences.
The government will not reveal which companies hold the one-year licences — or even which States they are based in. We only know about listed licence holders because of ASX disclosure requirements.
We also know the number of companies actually growing cannabis locally is small: only Cann Group, THC Global, unlisted companies Little Green Pharma in West Australia and MediFarm have permits to grow.
That’s because federal (and state) licences are only the first step. Growers also need a permit which involves a facility inspection and specifies things like which strains a licence holder can grow and the number and weight of its plants.
The ODC website lists 19 authorised suppliers of medical cannabis, which include Bod Australia (ASX:BDA), Cann Group, and Medlab Clinical (ASX:MDC). The list does not include CannPal (ASX:CP1) or Althea which also have the appropriate import licences.
Creso Pharma (ASX:CPH), MGC Pharma (ASX:MXC) and Cann Global (ASX:CGB) all piggyback off other companies’ import and supply licences.
The Therapeutic Goods Administration (TGA) controls who can use medical cannabis in Australia, under two ‘special access schemes’ (SAS): SAS B is for unapproved products and SAS A is for people in palliative care.
As there are only two registered cannabis medicines in the world, Epidiolex for epilepsy and the nose spray Sativex, both owned by UK company GW Pharma, the TGA has also allowed the import of unregistered products that can be used in for medical purposes — that is, products that haven’t been tested in clinical trials.
The end of February 2019 the TGA had approved 4200 SAS B applications.
However, this is not the total number of people in Australia approved to use medical cannabis.
Applications are per product so if one person is using multiple products, they have to apply separately for each; some people are approved, but are turned off at the final hurdle by the high price of medical cannabis products, which can range from $300 for a month’s supply of cannabis oil to $1200 for a 10ml vial of Sativex.
While Australian authorities say there is no predetermined list of conditions that cannabis can be prescribed for, guidance documents by the TGA endorse chemotherapy-induced nausea and vomiting, epilepsy, multiple sclerosis, chronic non-cancer pain and palliative care.
Patient access is looking to be big business for ASX marijuana stocks.
Althea is currently the only listed company to operate in patient access.
MMJ has an investment in Sydney-based Cannabis Access Clinics, while Medlab Clinical (ASX:MDB) and Cann Group own Medicinal Cannabis Medicines Portal and CannaTrac has the CannaHealth portal. Emerald has opened its Sydney and Perth clinics, and is now looking at Melbourne.
The difficulty is, however, that while “everybody knows” cannabis causes drowsiness or increases appetite, there are vanishingly few completed clinical trials that can back that information up and give doctors a basis on which to prescribe.
Currently in Australia five companies are taking treatments through clinical trials or have imminent plans to do so.
Clinical trials are generally divided into three phases. Phase 1 focuses on safety, Phase 2 tests for effectiveness and Phase 3 examines whether the new drug is an improvement on existing treatment. Sometimes trials are further divided into parts A and B, where a B stage is generally more rigorous.
Stockhead monitors 28 small caps that have all or part of their operations in cannabis or, increasingly, hemp.
Three companies, Atlas Pearls (ASX:ATP) and Blackmores (ASX:BKL) were on the list but Stockhead has confirmed they no longer have current cannabis operations.
Thirteen companies are neck deep in cannabis. These can be split broadly into six categories.
Biotechs: These are companies that are focused on creating drugs and taking them through clinical trials, a risky business with a 9.6 per cent success rate.
MGC Pharma has approval to trial CogniCann on dementia patients to treat anxiety and it’s now approved to trial an Alzheimer’s drug. The company has also begun importing its epilepsy medication, much to the relief of Australian sufferers.
Another is Creso Pharma (ASX:CPH) although they also fit into the lifestyle category, thanks to their animal health products and grower category via their Canadian subsidiary, which received a growing licence in 2019.
Botanix Pharmaceuticals (ASX:BOT) is testing a treatment for severe acne and dermatitis, Zelda (ASX:ZLD) is famously trialing a drug to cure insomnia and may have found a cancer treatment, and Auscann wants to trial its capsules next year but hasn’t said for which indication yet.
Patient access: Althea is currently the only listed patient access play on the ASX.
While they have plans to get into growing their own pot, Althea’s main play is importing product made by its 25 per cent shareholder, Canadian giant Aphria, and selling them in Australia.
Growers: Cann Group is the dominant grower in Australia right now. It has a base in Victoria, with two current facilities and is building a third at Melbourne airport, designed by a subsidiary of its major shareholder Aurora Cannabis.
THC Global is the other main listed grower, although they are yet to secure a permit to grow.
Hemp: Elixinol is a major US hemp grower and one of the biggest hemp companies in the world. It makes the majority of its income from hemp-derived CBD oils and foods, although it is seeking to expand in Australian into medical cannabis.
Queensland Bauxite is also heavy in local hemp.
Investor: MMJ switched from being a lifestyle-cum-medical cannabis company to a pure-play investor, after a series of deals didn’t pan out.
Lifestyle: The last group are those with fingers in a range of pies.
An example is Esense-Lab (ASX:ESE) which makes synthetic cannabis terpenes (it doesn’t extract them directly from the plant).
MGC Pharma and Creso Pharma currently also fit into this bracket.
Australian cannabis stocks underwent a lull in 2018 as plans changed and companies geared up to exploit the changing global opportunities.
The medical cannabis and hemp markets grew off a very low base and by the end of the year, began to show signs of commercial viability.
In 2019, the ASX’s marijuana stocks are expecting patient numbers to grow, more locally produced medical cannabis raw material and products to start hitting the market, and generally more pot stocks hitting the market.