Those aiming to capitalize on cannabis have learned that looking abroad can be a lucrative alternative to investing in companies focused on the United States, where cannabis remains federally illegal. The best example, of course, is Canada, which has seen incredible gains in the stocks of its licensed medical marijuana producers over the past 2 ½ years, as the country has moved towards full adult-use legalization.
With its market dynamics similar to where Canada was just a few years ago, Australia is emerging as another top choice among speculative investors.
Medical on the Rise
Australia, which has a population of about 24 million, does not yet have a robust medical program. In early 2016, its legislature passed the Narcotic Drugs Amendment Act, which allowed for the creation of a licensing and permit scheme allowing both regulated cultivation of cannabis plants and the production of cannabis and cannabis resin for medicinal purposes or research. The Office of Drug Control, which oversees the industry, and has issued three types of licenses: cultivation or production of medical cannabis, research, and manufacturing of a drug or product. As of mid-April, it had granted 16 medical cannabis cultivation licenses, 10 research licenses, and 9 manufacturing licenses since the process began in February 2017. While it doesn’t publish a list of license holders, it does make available a list of manufacturers and suppliers.
There may be potential for global powerhouses to emerge from Australia, catering to the Asia-Pacific region and beyond.
Australia is doing a good job of getting a regulated industry started, but it struggles with low patient counts because no qualifying conditions have been established yet. The Therapeutic Goods Administration (TGA), the country’s equivalent of the US Food and Drug Administration, is looking into cannabis to treat epilepsy, MS, chemotherapy side effects, and pain, and for use in palliative care. For now, patients can access medical cannabis as an unapproved drug through authorized prescribers, special access, and clinical trials, but very few patients are actually receiving medical cannabis thus far. As of November, the government put the total number of patients at 300.
One recent change by the Australian government was to open the door to exports, a move announced in early January that’s expected to expand opportunities for licensed companies and minimize the risk of catering exclusively to a domestic market that might be slow to evolve. In response, several companies already have announced plans to build larger facilities.
In addition to being smaller than Canada by about 30%, Australia is far behind it in terms of the size and development of its medical cannabis program. So at this point, it doesn’t seem that Canada should feel threatened for its spot as the global cannabis leader. After all, several Canadian licensed producers own substantial stakes in Australian companies and/or are exporting products into the country. Still, there may be potential for global powerhouses to emerge from Australia, catering to the Asia-Pacific region and beyond.
Five Companies to Watch
For those looking to potentially invest, I track over a dozen Australian companies that are trading publicly on the Australian Stock Exchange (ASX), though in my view, only five are worth exploring at this time, including AusCann Group Holdings, Cann Group, Elixinol Global, MGC Pharm,a and Zelda Therapeutics. AusCann, MGC Pharma, and Zelda Therapeutics are members of the Global Cannabis Stock Index. Please keep in mind that inclusion here is not a recommendation of purchase.
AusCann Group Holdings (ASX: AC8) (OTC: ACNNF) began trading in February 2017. The company’s ASX page is here, and it recently provided an update on its operations. Canopy Growth (a client of mine at New Cannabis Ventures) is a strategic partner that owns approximately 11% of the shares.
The company is licensed for cultivation, manufacturing, and research, but it currently has no sales. It is pursuing operations in Chile through a joint venture as well as in Australia. The company reported cash of A$12 million as of Dec 31. AusCann has approximately 273 million shares outstanding, giving it a market cap of approximately A$456 million at the recent closing price of A$1.67. The stock has increased 109% in 2018.
Cann Group (ASX: CAN) (OTC: CNGGF) began trading publicly in May 2017. The company’s ASX page is here, and you can access its most recent investor presentation. Aurora Cannabis (a client of mine at New Cannabis Ventures) is a strategic partner that owns approximately 23% of the shares and is reported to be considering an acquisition of the company.
The company is licensed for cultivation and research but isn’t yet generating revenue. It has a cash balance of A$85 million that it is deploying into facility construction. With 139.5 million shares outstanding, Cann Group has a market cap of approximately A$417 million at the recent closing price of A$2.99. The stock, which went public at A$0.30, has gained 9% in 2018.
Elixinol Global (ASX: EXL) (OTC: ELLXF) began trading earlier this year. The company’s ASX page is here, and it published an IPO prospectus in November. The company also shared a presentation in February.
Elixinol’s largest business is its US hemp-based CBD company. It also operates Hemp Foods Australia and a newly formed medical cannabis company focused on Australia. In 2017, it generated sales of A$16.5 million, up 62% over 2016, primarily from its US nutraceuticals business. The company reported year-end cash of A$18.8 million. With 103 million shares outstanding and a recent closing price of A$1.72, Elixinol has a market cap of approximately A$177 million. The stock has increased 72% since the IPO in January.
MGC Pharmaceuticals (ASX: MXC) (OTC: MGCLF) began trading in early 2016 after conducting a reverse merger. The company’s ASX page is here. It provided an operational and strategy update in early March.
The company reported sales of just A$127,377 in the quarter ending Dec. 31. The company has historically focused on dermatological products, having introduced a CBD herbal cream for relief from psoriasis. It is also importing CannEpil, which it will produce in its Slovenian laboratory, to treat epilepsy. The company grows in the Czech Republic and is constructing a production and cultivation facility in Malta. The market capitalization, based on 1.2 billion shares outstanding and a recent closing price of A$0.076, is approximately A$91 million. The stock has declined almost 15% in 2018. It recently raised A$5 million selling shares at A$0.07 in a private placement.
The company, which generated sales in the half-year ending Dec. 31 of A$871,762, is focused on research, including pre-clinical cancer and diabetes research as well as clinical trials for insomnia and autism. With 755 million shares outstanding and a recent closing price of A$0.115, the market cap is approximately A$87 million. The stock has increased 24% in 2018.
While the valuations seem rather high in Australia, the country is in the early stages of its federally legal medical cannabis program—and it’s moving in the right direction. There are several publicly traded companies that also offer the option to buy them with a US trading symbol.
Next up: I discuss mutual funds focused on the cannabis industry.