5 ‘pot’ stocks that show the grass could be greener on the other side!

Financial journalist and commentator on 3AW and Sky Business
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One of the more intriguing mini-sectors to have emerged in recent years is the medicinal cannabis sector – more than 20 ASX-listed companies are involved in the use of marijuana for medical purposes.

Getting your head around this is a simple matter of chemistry. Cannabis, the plant, has two main species: cannabis sativa and cannabis indica. Both produce delta-9-tetrahydrocannabinol (THC) — the bit that gets you stoned — and cannabidiol (CBD), along with about 600 other known compounds.

The other useful ingredient in cannabis is terpenes, which are fragrant oils. They give cannabis its distinctive pungent aroma and also offer some medicinal properties, but they don’t contain THC or CBD. About 200 terpenes have been identified.

The medicinal properties of cannabis have been known for centuries, and used by a wide range of cultures, including ancient Egypt, Greece, India and China. More recently that knowledge went underground somewhat, on the back of the stereotype of cannabis as an illicit drug, but cannabis has been rehabilitated as a therapeutic candidate.

The simple reason for this is cannabis shows huge promise in treating a range of diseases and conditions, ranging from seizures, inflammation and anxiety to treating chronic pain, nausea, insomnia, and depression.

In this regard, the medicinal cannabis stocks simply want to be treated as normal biotech companies trying to bring potentially helpful compounds to the market, or as healthcare, “wellness” or “nutraceutical” companies (nutraceutical products are food products that can also have physiological benefit or have some positive or preventative effect against disease) with products that fall short of being actual therapeutics.

In Australia, medicinal cannabis is a prescription-only medicine that can be prescribed by any Australian registered medical doctor. It can be used for any condition lasting longer than three months that hasn’t responded to conventional treatments, and where there is evidence to support its use.

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. Currently, the TGA has approved only one cannabis therapy (Sativex) for multiple sclerosis spasticity, but the TGA does allow the import of unregistered products that can be used for medical purposes. That is, products that haven’t been tested in clinical trials. Access to these is offered through one of the Special Access Schemes or through a network of authorised prescribers.

Currently, medicinal cannabis has been approved for use in Australia for conditions including:

  • Different types of pain (e.g. chronic pain, cancer pain and neuropathic pain)
  • Neurological conditions (e.g. epilepsy, dementia, multiple sclerosis and autism)
  • Psychological conditions (e.g. anxiety and depression)
  • Palliative and chemotherapy-associated symptoms

The great majority of medicinal cannabis currently used in Australia is imported, but a group of Australian companies has big plans to change this – plus to get into export markets, which some are already doing.

In the domestic market, the medicinal cannabis companies rely on prescriptions. Latest TGA figures show that more than 38,600 medical cannabis prescriptions have been approved through the Special Access Schemes. Demand for medicinal cannabis prescriptions hit 3,378 in April, which is more than triple the total in April last year. Australia is now the fourth largest medicinal cannabis market in the world behind the US, Canada and Germany.

Earlier this month, it was announced that Australia’s biggest medicinal cannabis extraction and manufacturing plant, a $50 million project in Melbourne’s south-east, will be built by Canadian medicinal cannabis business, The Valens Company, with an Australian medicinal cannabis distributor, Cannvalate, managing the project. Cannvalate – which reportedly plans a stock exchange listing – has signed a five-year distribution agreement with Valens.

Medicinal cannabis is an interesting space, as the therapeutic properties of the plant, and their applicability in disease treatment and management, become better understood. Profitability is in short supply, so it is difficult to point to any companies as recommended investments, but there’s no doubt that some are doing work that warrants a bit of research to identify whether their speculative potential matches your risk parameters.

Here are five of the most interesting candidates:

1. Zelira Therapeutics (ZLD, 5.6 cents)
Market capitalisation: $54 million
FY19 revenue: nil
Net profit: –$3.6 million
Three-year return: –10.8% a year

Zelira has one foot on the conventional pharmaceutical side and one foot on the over-the-counter healthcare market. In the former, its patented medicinal cannabis formulation, ZLT-101, is coming off a successful clinical trial against chronic insomnia, which means Zelira is poised to launch the world’s first clinically validated medicinal marijuana formulation for insomnia into global markets in 2020. To put this in context, at present there are only two registered cannabis medicines in the world, Epidiolex for epilepsy and the nose spray Sativex, for multiple sclerosis spasticity, both owned by UK company GW Pharma.

The company is also conducting a Phase 1 clinical trial in patients experiencing long-term chronic pain. Cannabinoid-based medication can potentially provide an alternative treatment to opioids for chronic pain, but the epidemic of opioid addiction has clinicians looking for a non-drug treatment. Zelira also has a clinical trial programs focused on insomnia and autism.

Zelira also has a pre-clinical research program examining the effect of cannabinoids in breast, brain and pancreatic cancer; as well as research examining the potential for cannabinoids to treat diabetes-associated cognitive decline.

Zelira has also launched a pharmaceutical-grade medicinal cannabis product called HOPE, which was developed to specifically address patient symptoms associated with Autism Spectrum Disorder. It was launched in the US in May 2019 and is also being sold in Germany and the UK; it will be launched in Australia and Asia-Pacific later this year. The company’s other proprietary product, CAN-001, is being developed for the treatment of chemotherapy-induced nausea and vomiting (CINV), which occurs in approximately 80% of the new 23.6 million cases of cancer annually worldwide. From its platform Zelira also plans to introduce products in age-related disorders, oral healthcare and dermatology.

Zelira has only just started earning revenue; but against that, it will shortly be one of the few companies in the world with an actual cannabis medicine, that has passed clinical trials, launched into global markets for a major unmet need.

2. THC Global Group (THC, 38 cents)
Market capitalisation: $56 million
FY19 revenue: $3.5 million
Net profit: –$8 million
Three-year return: 11.4% a year

THC Global has a farm-to-pharma production process involving controlled greenhouse cultivation of cannabis in Queensland and New South Wales and medicines manufacturing at the company’s facility at Southport on the Gold Coast, which is fully licensed by the Therapeutic Goods Administration (TGA) as meeting Good Manufacturing Practice (GMP) standards, which enables future export of these products as GMP medicines. The Southport facility is one of the largest pharmaceutical GMP cannabis manufacturing facilities in the world.

A GMP Licence is a mandatory requirement for the commercial manufacture of medicinal cannabis in Australia and is mutually recognised for supply of pharmaceutical goods in 29 countries across Europe, Asia and Canada.

The company’s brand Canndeo features full-spectrum CBD (cannabidiol) medicines that are available for prescription to Australian patients under Australia’s existing Special Access Schemes. THC also owns a clinic network, Tetra Health, which works with referring and prescribing physicians to offer patients access to this new range of medicine. The Tetra network has more than 600 referring physicians, 30 prescribing physicians and dispensing pharmacies. Another arm to the business is Crystal Mountain, a fast-growing hydroponics equipment and supplies wholesaler and retailer serving the rapidly growing cannabis industry in North America and Europe.

This month, THC Global Group successfully completed a placement raising $6.6 million, with the shares offered to institutional and sophisticated investors at 30 cents a share. The company said it received “significant demand from new institutional investors with positive long-term views on THC Global Group.”

3. Cann Group (CAN, 94 cents)
Market capitalisation: $134 million
FY19 revenue: $2.3 million
Net profit: –$11 million
Three-year return: 21.8% a year

Cannabis developer Cann Group works with Melbourne-based pharmaceutical manufacturing company IDT Australia (IDT), to take material from Cann’s Australian-based cultivation operations and make cannabis-formulated oil and dried flower products to markets in the United Kingdom and European Union. The company recently signed two supply agreements, the first with UK-based Astral Health for the supply of oils and a balanced formulation: Astral is a subsidiary of Europe’s LYPHE Group, which specialises in medicinal cannabis solutions across distribution channels including clinics, online pharmacies and healthcare practitioner training.

The second deal is a three-year agreement with Germany’s ‘iuvo Therapeutics GmbH’ for the supply of medicinal cannabis oils and dried flower material for sale within Germany and other European countries.

Cann Group is building a $130 million manufacturing plant in Mildura, Victoria, but amid oversupply and Covid-19 concerns, the company has scaled-back the original plan for a 70,000 kilograms-a-year capacity. It will now commission the plant on a 12,500 kilogram-a-year basis, by the end of 2020 (in Stage 1A) and add a further 12,500 kilograms-a-year (to complete stage one) “as demand growth is confirmed.” Cann says it expects this Stage 1A capacity to generate “near-term profitability and positive cash flows.”

The company needs export markets to fuel growth because under current Australian laws it cannot manufacture products speculatively and must show an end market for their use. Outside Europe, Cann is eyeing a major potential export market in South America.

4. Little Green Pharma (LGP, 38 cents)
Market capitalisation: $54 million

Listed in February 2020, Little Green Pharma was the first company in Australia to produce locally grown, medical-grade cannabis products. It manufactured its first medical-grade cannabis products in August 2018. The company is a vertically integrated producer of medicinal cannabis, controlling the entire process – the cultivation, production, and manufacturing. Little Green Pharma has an indoor cultivation facility in Western Australia and an exclusive partnership with a GMP-licensed pharmaceutical manufacturer to produce its own-branded range of medicinal cannabis products. In April, LGP sent the first-ever shipment of Australian exported medicinal cannabis oil, to UK customer Astral Health.

LGP also has its own branded range of oil-based products, LGP Classic, comprising of four different ratios of CBD and THC. These products are administered orally.

In May, LGP was granted a manufacturing permit from the federal Office of Drug Control (ODC), which allows the company to perform extraction at its own processing facility at its WA site. The $10 million raised in LGP’s IPO will fund this facility and the company is currently waiting for its expanded ODC cultivation and production permit for its expanded growing facility, which will produce enough material for 110,000 bottles a year (compared with 15,000 at present).

LGP is generating good revenue. In the six months to 31 December 2019, LGP recorded revenue of $716,000, up 188 per cent on the 12 months to 30 June 2019. The March quarterly statement – the first financial result since listing – showed receipts of $630,000 and operating cash outflows of $2.23 million. The number of patients treated with LGP’s therapies grew by 54% during the quarter, to 3,175.

5. Althea Group Holdings (AGH, 35.5 cents)
Market capitalisation: $83 million
FY19 revenue: $702,000
Net profit: –$8.7 million
Three-year return: n/a

Althea Group also has a medicinal cannabis cultivation, manufacturing and export licence. It is building a cannabis cultivation and production facility at Skye in Victoria, where its target is to produce about 3 tonnes of high-grade dried cannabis flower a year. Althea’s Canadian subsidiary, Peak Processing Solutions, also has an extraction and manufacturing facility, from which it plans to supply the Canadian market with cannabis-infused food, beverages, nutraceuticals, and cosmetics. Althea also has a UK doctor network for medicinal cannabis distribution.

Althea recently announced a three-year supply agreement with Nimbus Health GmbH, a pharmaceutical wholesaler with a 25% cannabis market share in Germany. Nimbus will sell and distribute Althea’s full suite of products in Germany under the Althea name. Althea will receive 50% of the net sale profits. In Germany, 120,000 patients have been prescribed medicinal cannabis, with this number expected to grow to 1 million by 2024.

In Australia, Althea finished the March quarter with 5,803 patients (increasing from less than 500 in a year) and 509 healthcare professionals prescribing its products. This led to record revenue for the quarter, of $606,351.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

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