Small Caps | Jan 31 2024
This story features CANN GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: CAN
Republished to correct ECS Botanics Holdings has facilities in Northern Victoria (no longer in Tasmania).
Some cannabis gems are sprouting in the ASX weed patch, but they are hard to find in the haze of hype.
By Tim Boreham, Editor, The New Criterion
What ASX sector has enjoyed a 20,000% surge in demand over the past five years but now languishes in penny-dreadful territory?
We’re not talking about lithium, buy-now-pay-later operators or some of the more hopeful exponents of artificial intelligence. We’re referring to the medicinal cannabis sector, which continues to show that extraordinary demand does not equate to prosperity for all.
Locally, Therapeutic Goods Administration data show that since mid 2016 close to 950,000 patients have been treated under its authorised prescriber scheme, by which suitably qualified GPs can provide scrips for unapproved products.
Except for two approved cannabis based drugs for epilepsy and multiple sclerosis, that’s all of them. According to the Office of Drug Control, Australia produced 24,900 kilograms of marijuana in 2022, up from 16,700kg in 2021 and with a ‘street value’ of $244m.
But for most of the ASX pot plays, the ‘grow it and they will come’ approach isn’t working.
A key problem is that the material is easily grown and obtained – or so we’re told – and highly commoditised. The supply and demand dynamics are blurred by recreational usage, which is legal in Canada, many parts of the US and Europe.
Here, it’s legal to possess a small stash for personal use – but only in the ACT. The aptly-named Greens are pushing for nationwide legalisation of rec usage and may well have their way if their crucial cross-bench votes are ever required to pass other laws.
In the meantime, the (understandably) tight regulations increase growing costs and the price of prescriptions, tempting many users to access the illicit market.
The funk emanating from the sector is such that most of the original crops of cannabis stocks have lost -90% or more of their value. Examples are the putative growers Cann Group ((CAN)), the suspended Auscann Group Holdings ((AC8)) and the trailblazing MMJ, now focused on the recreational Canadian cannabis market via its minority-owned Harvest One.
Sadly, the companies pursuing the alternative cosmeceutical or ‘wellness’ routes have not fared too well, either. The promising BOD Australia last November called in the administrators, despite having “evidence based” products on market.
Some companies have renounced the weed, so to speak. Having dabbled in cannabis treatments for ailments including acne, Botanix Pharmaceuticals ((BOT)) is now focussed on a non-cannabinoid treatment for excessive sweating.
Others have turned their gaze to the next big thing of psychedelic medication, including Incannex Healthcare.
So who are the promising players in a paddock full of weeds – literally and metaphorically?
Formerly Cronos Australia, Vitura Health ((VIT)) doesn’t grow a single plant itself and has focused on being an intermediary between prescribers, patients and product suppliers.
Vitura’s core Canview platform links more than 1000 authorised cannabis prescribers (mainly GPs), 4100-plus dispensing pharmacies and 8000 regular patients. The platform sources around 280 products from 39 local and Canadian suppliers.
Vitura also owns telehealth provider Cannabis Doctors Australia – a business supplemented by the $25m purchase of the non-cannabis focused Doctors on Demand.
Being profitable, Vitura is a sector unicorn: a net surplus of $13.8m in calendar 2023, up 129%, on revenue of $117.3m (up 75%). The company even distributed a fully franked dividend of one cent per share and – no – we’re not on something!
Valued at $250m, Vitura shares have lost half their value over the last 12 months, with a board spat clouding the picture.
Once the most successful ASX pot stick, Elixinol Wellness ((EXL)), previously Elixinol Global) had a decent hemp business in the US before regulatory road humps put paid to that.
Four years ago Elixinol commanded a peak valuation of more than $500m; today the company is worth less than $10m. It still sells branded nutraceutical and skincare lines, here and in the US
Althea Group ((AGH)) has adopted a dual strategy of developing and distributing medicinal cannabis. In October last year Irish regulators granted reimbursement to its THC-infused treatment for chemotherapy-induced nausea. The recreational cannabis is dealt with by its Canadian subsidiary Peak Processing Solutions.
Althea’s September quarterly report shows the $4.6m from the ‘rec’ side almost eclipsed the $4.9m from the medical side. Althea recorded its first quarter of net cash inflows of $35,000, partly the result of cost cutting effort that saw the CEO and the CFO accept a -10% pay cut.
ECS Botanics Holdings ((ECS)) in January reported record revenue of $7.3m for the December quarter, 58% higher than a year previously. The company also reported positive operating cash flow of $321,000.
ECS grows the stuff at its facilities in northern Victoria, with the outdoor cultivation areas expanded by 60% to meet demand from its white-label customers, including New Zealand’s Nubu and Germany’s Sante.
In October the company signed a $24m offtake agreement with Medicann Health, which took effect from last month.
Little Green Pharma ((LGP)) supplies the European market from its acquired facility in Denmark, which is yet to receive the ‘by appointment to H.R.H.’ seal from Queen Mary. We’re sure management isn’t holding its breath.
LGP also services the local market – its biggest revenue source – from a facility in WA.
LGP reported revenue of $12.8m in the second half (to September 30 2023), with adjusted underlying earnings of $700,000 compared with a -$5.9m loss previously. The reported loss declined to -$2.2m from -$7.8m previously.
Despite the traction, LGP shares have lost about -70% of their value since listing in February 2020 and the market values the company at a mere $40m.
In essence, the local cannabis sector remains in an early growth stage characterised by frequent mis-steps. While the ASX pot stock performance has made investors feel a bit dopey, it would be remiss to overlook a sector that is now trading at bargain-basement levels.
This column does not constitute financial product advice. You should consider obtaining independent financial advice before making any financial decisions.
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