How high is too high for Australia's Medical Cannabis stocks?

It wasn't a groundbreaking scientific discovery in the field of medicinal marijuana that turned the Singapore-based biotech from a $5 million company to one with a $145 million market capitalisation virtually overnight. Indeed, the company hasn't even entered the field.

The astonishing price run was sparked by the appointment of a new a "strategic adviser" to help the company "assess opportunities" in the sector: Nevil Schoenmakers.

Suddenly everyone wants a slice of an industry that is already worth billions.

The reaction to Shoenmakers' appointment is thanks to the Australian/Dutch dual national's legendary cannabis breeding reputation – fans lauded him as "The King of Cannabis" and the United States try to extradite him from Australia in the early 1990s. Arrested in Perth, he posted bail and then disappeared.

The founder of Australia's first listed medical cannabis company, Ross Smith, is only a few shades less colourful.

He floated Phytotech (now MMJ Phytotech) on the ASX in January 2015 to a roaring response – climbing from 20¢ on issue to 92¢ on their second day – only to resign as executive director two weeks later over a threatening social media rant. Smith said his Facebook account had been hacked.
Investors attracted

But despite these antics the industry has been too attractive to resist for some investors.

AusCann managing director Elaine Darby says there is an incredible amount of hype in the cannabis industry.
AusCann managing director Elaine Darby says there is an incredible amount of hype in the cannabis industry. Photo: supplied
To give a sense of scale consider that medical marijuana sales hit $US4.9 billion ($6.5 billion) in the United States last year and will reach $US7.3 billion in 2020, according to research by marijuana investment group Archview.

The local industry is a fraction of that size but investors have still thrown money at Australian players since the growing of cannabis for medicinal use and research was legalised in February 2016.

America is the Wild, Wild West: there are no standard set of rules that apply.

"We get phone calls all the time from people wanting to invest in the industry," says Merchant Funds managing director Andrew Chapman, whose small-stock fund has about $10 million invested across four local medical cannabis companies.

"The reasons why the shares have done so well over the last six to 12 months is there's a lot of money chasing the theme, but there's just not many homes for the money to go into."

A handful of the Australian companies seeking to cultivate or manufacture medical marijuana in Australia are listed on the ASX, and nearly all have outperformed the wider market by a considerable margin this year.

Shares of three of the largest cannabis pure plays – AusCann, Zelda Therapeutics and MMJ Phytotech – each grew by more than 150 per cent in the past six months. The All Ordinaries Index on the ASX has lifted 12 per cent.

The local industry shouldn't expect runaway sales growth like that seen in the United States, where individual states have legalised use of the drug, says Adam Miller, founder of medical cannabis technology and innovation accelerator BuddingTech.

"America is the Wild, Wild west: there are no standard set of rules that apply," he says.

"They have a significant medical market but none of the products that are being sold there have gone under any clinical trials, there's no standardisation."

Miller says that while it is delivering eye-watering sales figures at the moment, most of the US industry would be shut down overnight if the federal government there put an industry framework in place that abides by the United Nations Single Convention on Narcotic Drugs.

Australia on the other hand has gone by the book, he says, which means the market will grow slower but it will be compatible with a global market should it eventuate.

In California marijuana can be prescribed for a variety of conditions, including headaches or anxiety, and bought in a variety of forms. But Australian doctors can only prescribe the drug in pill or oil form and when there is scientific evidence that a certain product is effective for that condition. It is worth noting also that depending on the use the plants can be bred to virtually remove any intoxicating effects.

State and federal governments and the Therapeutic Goods Administration are still deciding what medical conditions qualify, but medicinal marijuana has been used to treat people who have epilepsy, chronic pain, chemotherapy-induced nausea and HIV/AIDS.

Companies that want to grow, import or manufacture cannabis oils or tablets need to apply for a licence from the Office of Drug Control, which has so far issued four licences for growing, two for research and one for manufacturing.

Market potential

Despite these constraints, Miller says there is a significant market waiting to be tapped. A white paper BuddingTech wrote with the University of Sydney found there would be a patient portfolio of about 30,000 Australians with epilepsy, HIV and multiple sclerosis that would seek to use the drugs. Those alone would be worth $150 million to $200 million a year.

No producer has brought an Australian grown or manufactured cannabis product to the market yet, with a Victorian government trial the only cultivation for medicinal purposes currently under way, according to the Department of Health. Patients are instead taking imported products.

Meanwhile hopeful participants like AusCann, one of the largest cannabis companies on the ASX, are still waiting for their licences to be approved.

"Everyone can see the potential but we still have this uncertainty," says AusCann managing director Elaine Darby.

AusCann has just harvested its first crop from its growing facilities in Chile. The majority will be used in clinical studies which, if successful, will mean AusCann can register those products and sell them there in about 12 months time.

Regulatory hurdles

With the opening up of the local market Darby says the company plans to be growing about two hectares of cannabis in Australia by the middle of next year. It will then need to take its produce to trial to prove it is an effective treatment for specific conditions before doctors can prescribe it.

In the meantime AusCann will start importing produce from Canadian company Canopy Growth, which is the largest manufacturer in North America and also AusCann's largest shareholder, with a 10 per cent stake.

Federal Health Minister Greg Hunt's move to relax importation laws in February sent AusCann stocks up 24 per cent.

While jumping through regulatory hoops is slowing the process, Darby says the biggest challenge facing the industry is convincing doctors to prescribe cannabis medication.

Because medical cannabis is not approved by the Therapeutic Goods Administration, doctors need to become an "authorised prescriber" of cannabis, while also complying with a layer of state-based rules – a process Darby says is onerous.

"The market potential is massive: if you look at chronic pain alone, that's conservatively a $5 billion market sitting there," she says.

"But at the end of the day you need to get the doctors to prescribe. If you look at Canada there were only a handful of doctors prescribing, there's now in excess of 300 prescribing and well in excesss of 100,000 patients and that's all happened in a couple of years. But if you look at their initial growth, it was very slow."

Manufacturing potential

MGC Pharmaceuticals has also been preparing for legalisation in Australia, and has set up trial operations in Slovenia while tapping expertise from Europe and Israel in anticipation of the local market opening up.

APRIL 29 2017

Patrick Hatch