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INN takes a look at projections for the cannabis industry in Australia and what they may mean for investors.
Australia's medical cannabis market is young, but with new products set to come online, a growing push towards recreational marijuana legalization and increased clinical research, Australia could offer a unique marijuana investment opportunity.
Investors are eagerly awaiting the potential growth projected for the Australian cannabis space, as the into its own version of Cannabis 2.0 with companies poised to begin generating meaningful revenue.
Here we take a look at projections for the cannabis industry in Australia and what they may mean for investors. Read on to see what you need to know as an investor looking at stocks down under.
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Medical cannabis was legalized in Australia in 2016 when the Narcotic Drugs Act was amended, allowing cannabis to be grown for medical and scientific purposes.
Since then, Australia's medicinal marijuana industry has been hit by the slump currently dragging down marijuana markets across the world.
In a note to investors sent out in November, Canaccord Genuity Australian equity analysts Cameron Bell and Matthijs Smith said the Australian marijuana market currently offers “smoke without fire."
The duo added that Canaccord's Australian Cannabis Index dropped about 40 percent over four months.
The Australian marijuana market has also had to contend with a drastic shift in international investment. In October, some Canadian firms adjusted their global expansion plans in Australia due to the conditions seen in the cannabis industry.
AusCann Group Holdings (ASX:AC8) is now left without the support of Canopy Growth (NYSE:CGC,TSX:WEED) after the Canadian producer announced the sale of its 13.2 percent interest AusCann, raking in C$6.3 million.
Althea Group Holdings (ASX:AGH) also faced a loss after it was found that Aphria (NYSE:APHA,TSX:APHA) was looking to sell 37 million shares of its minority stake in Althea, according to a report from Australian Financial Review, after originally investing C$2.5 million in the Melbourne cannabis firm in 2018.
Despite the struggles of the stock market, the local industry has picked up thanks to the rush of new medicinal marijuana products becoming available to consumers.
According to Australian marijuana research firm FreshLeaf Analytics, during Q3 of 2019, 76 new products were introduced in the market, up from 54 in Q1.
The uptick has been represented in the patient count, as well.
“Although we note the early stage of the sector in Australia and the associated volatility of a nascent industry, over the same period patient numbers domestically have continued to soar," Bell and Smith wrote in their note.
In October, the Therapeutics Goods Association (TGA), the country's regulator of medical cannabis, handed out 3,594 approvals for unapproved medicinal cannabis under SAS Category B (SAS-B).
The pair from Canaccord said this represents a 23 percent increase over patient approvals in September and that 92 percent of the over 20,000 SAS-B approvals have taken place within the last 12 months.
The pair is also projecting that Australia is now on track to have over 25,000 approvals by the end of the year, while FreshLeaf expects between 30,000 to 50,000 patients will receive an approval in 2020.
At the local level, Bell and Smith said the rise in patient approvals could be attributed to legislation put in place in New South Wales that loosened the requirements for prescribing medical marijuana. Now, unless the patient is under 16 years old or has a history of drug abuse, medical practitioners in New South Wales can prescribe cannabis medicines without having to refer to a specialist.
There's also been a decrease in pricing pressure for medical cannabis patients throughout the country. FreshLeaf reported spending from medical cannabis patients was down to AU$395, from AU$415.
Investing in cannabis stocks on the ASX: Projected growth for ASX stocks
There has been a recent increased movement to legalize the drug for recreational use thanks in large part to its legalization in the Australian Capital Territory (ACT), back in September, the first region in the country to do so. There has been movement to legalize the drug for recreational use thanks to the Australian Capital Territory (ACT) became legalization action back in September; it was the first region in the country to do so. The new law is set to go into effect in 2020 and allows individuals over 18 to possess up to 50 grams of dried flower and cultivate two cannabis plants in their home, with a maximum of four plants per residence.
Export markets have also continued to open up, according to Bell and Smith, since the shipment of the drug out of the country was legalized in 2018. The country has expressed its desire to become one of the largest international cannabis suppliers.
On a local radio station, Australian Health Minister Greg Hunt said, “We'd like to be potentially the world's number one supplier."
A 2018 report from Prohibition Partners has forecasted that medical cannabis in Australia could be worth US$2.13 billion by 2028, while recreational cannabis could rake in US$5.53 billion in the same span of time.
In the report, Peter Comerford, CEO of Australia health care product wholesaler Anspec, said the country is in a solid position to “capitalise on whichever aspects of this new industry that it chooses."
Investing in cannabis stocks on the ASX: Investing in ASX cannabis stocks
Here is a closer look at the top four stocks on the Australian cannabis index from Canaccord.
Clinical stage CBD company Botanix Pharmaceuticals (ASX:BDA) works on using cannabidiol (CBD) in its treatment of skin conditions including acne, psoriasis, dermatitis and rosacea.
In fact, the company is preparing the first human trials of a proprietary drug system that delivers synthetic CBD-based medicines to the skin.
Botanix also recently got together with pharmaceutical-grade CBD provider Purisys in a supply agreement that covers Botanix's needs for synthetic CBD as it continues its clinical trials.
There's also EcoFibre (ASX:EOF), which boasts a market capitalisation of AU$1 billion. EcoFibre focuses largely on the hemp business, with a wide range of operations that cover everything from pharmaceutical hemp extracts and hemp textiles to hemp food products, including hemp flour and hemp protein powder.
Cann Group (ASX:CAN) was the first Australian company to receive a licence and permit from the government to cultivate medical cannabis in Australia.
With the new production operations, Cann Group estimates it could bring in US$220 million to AU$280 million in dried cannabis sales.
Cann Group will get access to both domestic and international markets after the company announced a five-year offtake agreement with Aurora Cannabis (NYSE:ACB,TSX:ACB) earlier this year. As part of the agreement, Aurora will receive dried cannabis, resin and medical marijuana products from Cann Group.
For its fiscal 2019 year, revenue for Cann Group was at AU$2.3 million, while other income totalled AU$1.9 million.
Though AusCann is no longer attached to Canopy Growth, the firm has already begun to establish itself in the cannabis market in Australia.
In its annual report for its fiscal 2019 year, AusCann reported it generated AU$1.5 million in total revenue, up significantly from the AU$288,878 it generated in 2018. The company also ended the 2019 fiscal year with AU$35.3 million in cash and AU$42.9 million in total assets.
Investing in cannabis stocks on the ASX: Investor takeaway
Though the medical cannabis industry is still in its early stages, increased patient numbers and a push to recreational marijuana use could open the market to novel investment opportunities.
The growing cannabis export space in the country could also further the growth of Australia's place in the global marijuana markets.
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Securities Disclosure: I, Danielle Edwards, hold no direct investment interest in any company mentioned in this article.