By Gabriel Yi, Managing Director of M3 Investment Group
It’s been a sector that has experienced triple digit rallies in recent months. There have been unprecedented moves in intra day share prices of certain companies like Stemcell United (SCU), which exp loded 3000% in one day. Why?
They announced the appointment of the “King of Cannabis” Nevil Schoenmakers as Strategic Advisor to “pursue opportunities in (the) Medicinal Cannabis sector”. These dramatic price movements on simply the possibility of entering the Cannabis space show signs, on face value, of a bubble about to burst. However, there has certainly been investor interest and media coverage into the space, so it would be appropriate to look past the smoke and hype, and evaluate the investment case for Cannabis stocks.
Medicinal Cannabis is used to treat Chronic Pain, nausea resulting from chemotherapy and painful symptoms caused by conditions such as Multiple Sclerosis (MS) and Epilepsy. The chemicals within Cannabis that provide the most medical benefit include Cannabidiol and Tetrahydrocannabinol.
The US market is widely considered the global leader in the use of medicinal cannabis, with 29 states having legalised the use of marijuana for medical purposes. The value of the global medicinal cannabis industry has been estimated to be as large as US$250 billion in 2016. So it’s clear that the addressable market is substantial and there exists significant growth opportunities for established global players to cultivate, service and/or supply the product. However, the majority of ASX listed stocks in the medicinal cannabis sector are in their infancy stages with only a couple names actually generating any revenue, let alone a profit.
So, what has changed in the Australian medicinal cannabis environment to create such invigorated interest in the space?
The Australian government has recently announced that companies are now able to cultivate, import and sell medicinal cannabis to meet demand. This has lit a rocket under many ASX listed stocks that have any association with medical marijuana. Some of the key stocks to watch in this space include:
1. AusCann Group (ACS)
ACS aims to produce high quality and clinically validated cannabis medicines in Australia for domestic and export markets. Their first harvest in Chile is expected to be completed by April 2017, which is intended to be sold to third parties for various clinical trials. Successful trial results could lead to product registration and commercialisation.
2. Creso Pharma (CPH)
CPH is involved in the development, registration and commercialisation of medicinal cannabis and hemp- based therapeutic grade products and treatments. The company comes fresh off an $8 million placement which it says will enable them to fast-track the commercialisation of its animal and human health nutraceutical products. CPH has also recently announced it had signed a commercial agreement in Brazil for the marketing, sale and distribution of its products in the Latin American country.
3. MMJ Phytotech (MMJ)
MMJ aims to develop and commercialise cannabinoid based therapeutic products to treat a range of clinical symptoms across different international markets. The company runs three subsidiaries with operations across the entire medicinal cannabis value chain. MMJ have recently announced that their Australia n distribution partner, HL Pharma, has received approval for a medicinal cannabis importation license from the Department of Health.
4. MGC Pharmaceuticals (MXC)
MXC is a medicinal cannabis company aiming to establish full vertical integration across the whole medicinal cannabis value The company has a combined Israeli, European and Australian clinical research strategy to take advantage of rapidly changing regulatory environments. MXC aim to develop and supply high quality cannabidiol resin extract for the European cosmetics and medical markets.
It’s clear there is a significant addressable market for medicinal cannabis and if there are further eases in regulation, an investment opportunity may exist. However, the medicinal cannabis stocks which have experienced substantial rallies are all still in their infancy stages, and with this comes high execution risk. Although there is potential for growth in the industry, companies should establish a track history of positive earnings so fundamentals have the opportunity to catch up to the hype.
This content has been prepared without taking into consideration any individual’s particular objectives, financial situation and needs. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.