Legal cannabis is opening up but research is the key to long term earnings.
by Dr Sean Hall
There are some contradictory trends around increasing legalisation of cannabis around the world. Easier access means more potential users, greater revenue expectations and this has sent some listed cannabis stocks soaring.
But few of these stocks actually have earnings, and this is especially true when we look here in Australia.
Cannabis itself is a conflicting term, often used as a generalisation, for example, the cannabis industry. When we talk about the cannabis sector, especially within the investment community, we need to further define “what” in the cannabis sector – agricultural growing, manufacturing, importer/exporter, and/or research and development (R&D). We also need to consider if we are talking about marijuana or hemp.
R&D in this area, whilst predicated on success, offers innovation, uniqueness, patents, and robust medical/scientific offerings that potentiate new approved medicines.
There are many cannabis offerings out there but only a few global entities are currently pursuing the registration pathway.
There are time and cost factors involved in drug registration but regulators (such as the FDA, TGA and EMA) are more collaborative if the cannabis research and development models can help with the treatment of specific patient groups.
History of pharmaceutical development has shown that commercialisation of R&D is the key to long term earnings but let’s see how this is playing out with cannabis.
Investors have backed the cannabis trends and there is some reason for this – the global medical marijuana market is tipped to reach US$55.8 billion by 2025, according to Grand View Research.1
But a recent article in The New York Times described marijuana fervour as being reminiscent of the dotcom boom of the 1990s.2
As an example, it noted the top 12 Canadian marijuana companies are worth US$42 billion with investors snapping up stock and yet for these companies “profits are a dream of the future.”
One Canadian marijuana grower, Canopy Growth was listed on the NYSE in 2018 and since, investors have pushed its market capitalisation to a whopping US$14 billion.
This makes it worth nearly four times the market value of Canadian manufacturer Bombardier, one of the world’s largest makers of planes and trains.
So what’s behind investor thinking?
Guiding trends have been in the U.S., where some states have made it easier for doctors to prescribe certain marijuana drugs and for the public to access some cannabis-based products, and in Canada, where cannabis has been legalised.
While legalisation in the U.S. is progressing, what many do not appreciate is that it is state-based, with complicated surrounding regulation and taxes.
In California for example, while recreational use is allowed, lawful marijuana attracts a 15 percent excise tax and about another 10.5 percent state tax, although marijuana for medicinal use has a lower tax bracket.
Lawful supply has to come from within the state and be bought from city licensed dispensaries which are limited to certain geographical areas, meaning consumers have to drive to a dispensary for a purchase.
Despite the legislation, cannabis is not available at every street corner, it is not available in supermarkets or gas stations, and dispensaries are not usually in suburban areas.
A key feature is that cannabis, whether for recreational or medicinal usage, must come from within the state and cannot be imported across state lines because that would be “trafficking” and so prosecutable by the US Drug Enforcement Agency (DEA).
And these same “trafficking” rules apply to all states.
The Californian economy may be huge – 39 million people over 163,700 square miles – but there are only some 400 licensed dispensaries.
Even the new Canadian legislation heavily restricts advertising and is laden with bureaucratic rules, including licensing and inspection requirements for producers.
So, when enthusiasts extrapolate from the trends and see wider marijuana use, applications in drinks and foods and consequently soaring profits for growers and product developers, but there is still a gap between potential and reality.
On the medical front there was some easing of restrictions last September with the DEA rescheduling “some cannabidiol” medicine “as long as the medications have been approved by the U.S. Food and Drug Administration.3
This has involved moving the medicines from the restricted schedule 1 category to a lesser schedule 5 while noting that a schedule 5 drug is still illegal without a prescription.
The end of 2018 saw the U.S. Farm Bill renewed which includes federal legalisation of hemp at federal level, including the plants used to produce cannabidiol (CBD) oil. It is still unclear how each state will move forward with this new law but effectively, hemp and hemp products are now allowed to be moved across state borders.
While cannabis remains an illegal substance in Australia, state and federal governments have made it easier for doctors to prescribe marijuana where there is a medical need.
For research-based cannabis, the Australian government has established a process for speedier market access.
One Australian life sciences company, Medlab Clinical, has developed two cannabis-based medicines, one current under investigation as an alternative to opioids for pain management.
The most advanced is Nanabis, which is a whole plant 1:1 extract of the two most active cannabis ingredients, CBD and THC (tetrahydrocannabinol).
It is currently being trialed in advanced cancer patients at Sydney’s Royal North Shore Hospital and is administered as a buccal spray using Medlab’s patented NanoCelle delivery platform.
Another company, MGC Pharmaceuticals, is conducting clinical trials into the benefits of its “CogniCann” product that is used to treat dementia and Alzheimer’s patients.
Whilst there are a number of “pot stocks” in Australia, many are choosing not to follow the clinical trial route to support drug registration via the Therapeutic Goods Administration (TGA).
Momentum in Europe
Medical use of cannabis in Europe is also gaining momentum.
Most countries in the European Union allow, or consider allowing, the medical use of cannabis or cannabinoids in some form.4
In November, the U.K. joined other European countries and now allows doctors to write prescriptions for medicines containing cannabis.
As patients push for access to these treatments, pharmaceutical companies and cannabis producers are hoping to claim a piece of the fast-growing market. However, the fragmentation of the European market makes it difficult for patients and doctors, as each country sets its own standards and regulations for cannabis-based products.
Gaining approval from the European Medicines Agency (EMA) can be a lengthy process, with manufacturers having to present evidence of efficacy and safety among other strict conditions. This is not too dissimilar from the TGA or FDA requirements.
While Canada is leading the way in developing the medical cannabis sector, some Asian countries are also part of the trend.
In November 2018, South Korea became the first East Asian country to legalise medical cannabis, amending its Narcotics Control Act, for treatment options for patients with epilepsy and other rare diseases in the country.
While the legislation says access to medical cannabis will be very limited, only allowing hemp-based CBD products, this is a big step for a country that in the past has sentenced people to death for selling cannabis.
Two other countries, Thailand and Malaysia, are now also moving towards legalisation of medical marijuana.
In countries where there is capital punishment for drug trafficking offences, there is a need to differentiate between marijuana for medical and recreational uses. It is critical for governments to have medical proof for cannabis-based treatments.
While global growth of cannabis markets seems assured, it is also clear that medical research is critically linked to its long-term validity and viability.
Research underpins the case for medical use and in separating out active components, like CBD and THC, shows the extent of a variety of applications in the future. Research also underpins consumer safety.
Commercialisation of research is progressing rapidly and is being closely followed by regulators but it also warrants the attention of investors if they are looking for the source of long-term earnings from cannabis.
At the end of the day, potential health claims for a product (cannabis or otherwise) are the sole jurisdiction of the regulators, these same regulatory bodies employ strict methodology for approvals. Approvals are based on strong analytical and clinical data to support the finished product in question.
- Medical marijuana market size to reach USD 55.8 billion by 2025, Grand View Research, January 2017. Available at <https://www.grandviewresearch.com/press-release/global-medical-marijuana-market>
- Marijuana legalization in canada has companies chasing a green rush, Ian Austen, The New York Times, 16 October 2018. Available at <https://www.nytimes.com/2018/10/16/world/canada/cannabis-legalization-industry.shtml?emc=edit_th_181017&nl=todaysheadlines&nlid=740913341017>
- DEA takes some CBD off Schedule 1 – with FDA approval, Hemp Industry Daily, 27 September 2018. Available at < https://hempindustrydaily.com/dea-takes-cbd-off-schedule-1-with-fdas-approval/>
Dr Sean Hall is the CEO and managing director of Medlab Clinical