What’s The Deal With Pot Stocks?

By Tim Boreham | More Articles by Tim Boreham

With the ASX-listed cannabis sector in a sharp retreat since late March, some investors are wondering whether they’re seeing the bourse’s equivalent of Fidget Spinners – those finger-held gadgets infiltrating playgrounds in the same way as marbles and Yo-Yos all those years ago.

The new six months or so will determine whether the extraordinary interest in pot stocks turns out to be just another craze, or something of more substance (so to speak).

Paradoxically, the sell-off has come as the pot companies position themselves with almost daily announcements about regulatory approvals, clinical programs or new tie-ups with offshore partners.

Claims about being ‘sector first’ – whether in growing or importing the stuff or developing specialist applications – abound.

Frankly, it’s hard to see through the fug of claims and counter-claims but some strategy trends are emerging, such as an intriguing ‘mission creep’ from the medical to recreational markets.

When Phytotech (now MMJ Phytotech, ASX code MMJ) blazed the path as the first listed pot stock in early 2015, management stressed its focus on serious medical cannabis applications.

Now, MMJ Phytotech is proudly targeting the Canadian medical and recreational markets, which is expected to have a combined value of $8-9bn by 2024.

A new entrant, the The Hydroponics Company (ASX code: THC) is equally agnostic.

While THC aims to produce high-quality pharma grade products, its core (and profitable) activity is supplying the hydroponic and other equipment (including nutrients) to cultivate the coveted herb.

This activity does not discriminate between medical and recreational crops.

THC’s Canndeo arm is also developing “high quality’ pharma products.

Canndeo chief Andrew Beehag says Donald Trump’s surprise presidential win overshadowed a concurrent vote in seven states (including California) to legalise adult recreational use.

From July next year, recreational use will also be allowed in Canada, also a leader in medical cannabis.

“We are not just looking at the Australian medicinal market,’’ Dr Beehag says. “There is a large market for recreational cannabis.”

Unusually for the sector, THC’s equipment side means the company has been operating profitably for five years, with expected current year earnings of $1m rising to $3m next year.

Another feature of our pot pourri of pot plays is that while the early emphasis was on the legal local medical sector, they now stress their international activities and partnerships.

Recent federal and state reforms means medical cannabis is decriminalised in most geographies. But supply will be tightly controlled through authorised GPs and specialist who appreciate the myriad therapeutics effects of the weed.

Of all the cannabis stocks, Cann Group (CAN) arguably is the most locally focused. Having only listed last month, Cann became the first pot stock to secure a commercial growing permit from the Office of Drug Control (seven have been issued to date).

Under a two-staged process, Cann first grew low THC industrial hemp to show the regulators the company could handle the growing process. “The difference is we put our licence application in on the basis of proven capability,’’ says CEO Peter Crock.

Crock previously worked at Nufarm, while Cann director and backer Doug Rathbone ran the crop protection giant. That said, Cann should have a head start in keeping the weeds from the “weed” at its southern Melbourne facility.

Auscann (AC8) recently was granted a licence from the Office of Drug control to grow a stash of medical cannabis in WA. Auscann is also highly credentialed, in that founder and chairman Mal Washer was health minister in the Howard government era. His daughter, Elaine Darby, is CEO.

Meanwhile our dope pioneer MMJ recently imported its first medical cannabis shipment into the country, via local distribution partner HL Pharma.

MMJ’s Swiss subsidiary Satipharm makes the pills, which treat a variety of conditions. And speaking of the hilly landlocked nation, Creso Pharma (CPH) has signed a letter of intent with Swiss firm Cannapharm to supply medical cannabis to seven Asian Pacific and Latin American countries (this stock is covered by Independent Investment Research)

Despite the local deregulation, the industry is much more developed elsewhere. While the potential size of the local medical market is guesstimated at $100-400m, the US market for legal recreational and medical cannabis is forecast to be worth $US20bn ($26bn) by 2021.

The medical stuff is already legal in 29 US states (and for that matter, 16 other countries including India, Israel and the Netherlands).

Auscann also has ties with Canada’s Canopy Growth (the biggest producer of medical cannabis in North America) and Chilean grower Daya Cann.

Zelda Therapeutics (ZLD), is tied up with the Chilean not for profit advocacy group Fundacion Daya, in view of a clinical program tackling autism, insomnia and eczema.

Zelda promises that successful results will “provide a clear pathway to potential revenue generation from Chile and other South American markets as early as 2018.”

When sizing up the pot plays, the other things to watch is an emerging dichotomy between those simply growing and supplying the stuff and those pursuing specific medical indications.

For instance the commercialisation plans of the Europe-based MGC Pharma (MXC) revolve around Dermaplus, a range of skincare products with clinical rather than beauty applications.

MGC recently reported positive clinical results (conducted in Slovenia) in relation to treating redness, flaky and oily skins and “seborrhoea and psoriasis like conditions.”

Locally, MGC has unveiled a collaboration with RMIT University “on a full suite of medicinal cannabis research initiatives.”

One aim is to build an international cannabis library, outlining the genetic makeup of the CBD strains (of which there are hundreds).

MGC says the research will be done at a secure facility; a message that we suspect is pitched more at students than investors.

Zelda chief Stewart Washer (Mal Washer’s son) says there’s plenty of room for legitimate clinical-oriented providers in the local market, where there are 1.8m neuropathic pain patients in Australia.

If a decent chunk of those opt for cannabis at $5-15 per day, it quickly adds up to a billion dollar market.

Five years after medical dope was legalised in Canada, 130,000 patients have been treated. “Here, we are finally getting doctors interested in being authorised practices. The nice thing is we can ride on the coattails of the Canadians.”

On the recreational side, Washer cautions medical cannabis plays to just say no: “If you are a medical company you are a medical company. You don’t play the middle ground.”

Just as the graphite and lithium booms attracted a strong of hangers-on, the dope sector has also won its fair share of opportunists.

Cannabis-infused honey, anyone?

Casualties will emerge. But at least the pullback from such heady valuations shows investors are taking a more clear-headed approach. That means only the stocks with a cogent story likely to be rewarded.

Having said that, investors who bought into a round of secondary capital raisings at inflated prices may be feeling just a bit dopey.

About Tim Boreham

Tim Boreham edits The New Criterion. Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades' experience of business reporting across three major publications.

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