And You Thought Money Doesn't Grow On Trees

A Sensational Cannabis Story

John Collett of the Sydney Morning Herald published an article a few days ago entitled, "After the highs, pot stocks come back down to earth," wherein he went on to explain how the Aussie cannabis share market has tanked as the "initial euphoria surrounding medical cannabis gives way to disappointment."

The premise for his statement is that Auscann, once the darling of the ASX-listed pot stocks, which traded as high as $1.50 around June 2018, is now trading at $0.40 – a fall of more than 75 per cent.

 

John, as a fellow journalist, we respect your right to an opinion. However, on this one, we're calling BS.

 

The problem we have with this article is two-fold. A usual, when it comes to cannabis, the major news outlets look for sensationalism in order to sell. If it's not a story about a granny that had to be taken to hospital after accidentally eating some cake with cannabis in it, then it's a story of how the pot stock market is "disappointing" because a named share has tanked.

The second is just that.

How can one possibly use Auscann as the barometer for ASX cannabis stocks? Why, because it was one of the first to list on the ASX? Because Canopy Growth (the world's largest cannabis company) is a cornerstone investor? All of these are true, yet still, to use this as the litmus test for how cannabis stocks are performing for investors is simply ludicrous. Sorry John, but it is.

 

Auscann (down 45%)

Auscann listed on the ASX in early February 2017, at a time when there were only a handful of pot companies, and their aim was simple. They were going to Farm to Pharma! They would grow cannabis, produce their own medicinal cannabis and have an R&D division (as they had the license) on the side. Vertically integrated model – we got it.

Key to their status at the time was the fact that their cornerstone investor was none other than Canadian Licensed Producer powerhouse, Canopy Growth. Then, in January 2018, Australia allowed its cannabis companies to export their products, opening up a far, far greater total addressable market than Australia itself, and the company really took off.

 

 

Then came the change in direction. We're going to be Pharma to Pharma – no more growing. We are going to manufacture hard-shell capsules for the treatment of chronic pain. It's a very big market and one that is front of mind in every country in the world, as Oxycontin and Co. continue to ravish human life.

Elaine Derby leaves in December – given the new pharmaceutical direction is not really her core competency – and eventually, they find Ido Kanyan of Teva Pharmaceuticals (biggest pharmaceutical player in Israel) to lead the team. We like that move.

However, now that they don't grow anymore, they'll need to get their supply from somewhere. Their cohort on the ASX, The Cann Group, was supposed to supply them, but they had their own "issues" surrounding their cultivation facility.

They also have a JV in Chile – DayaCann – that was supposed to negate the supply issue, until the Chilean Government thought it best that no Licensed Cultivators (of which DayaCann is the only one) should be allowed to export. And although just recently they finalised a shipment of oils from MediPharms Labs, the damage had already been done.

A combination of a pivot, some bad luck, and a host of insiders cashing in on what was a crazily overvalued company, have contributed to an incessant price drop since April 2018.

But that's just one stock, and there are a couple of others that have performed quite differently. In fact, these stocks have been on fire since the turn fo the year. And at The Green Fund, we've mentioned them many times.

 

Ecofibre (up over 100 per cent)

Brisbane based Ecofibre is a hemp-centric business comprised of three different business units (very similar to Elixinol). Ananda Health – provides high-quality hemp derived nutraceutical products to the US market. Ananda Food – provides 100% Australian grown hemp food to the Australian market.

And Hemp Black, which is essentially a high-tech fibre textile with broad application. The fibre's anti-microbial properties limit the spread of germs, and so it can be used in 3D printing, in hospitals or even for office furniture. This business is expected to be a major future earnings driver with its innovative hemp-based products in textiles that Ecofibre is developing in partnership with Thomas Jefferson University in Philadelphia.

Ecofibre's Chairman is rich-lister Barry Lambert, best known for building Count Financial, which he sold in 2011 to Commonwealth Bank for $373 million. The company's CEO is Eric Wang, who was the former CEO of Perpetual, and it also looks pretty good on paper that Lambert holds a 24 per cent stake in the group, while Wang controls 18 per cent.

Ecofibre officially commenced trading on the ASX on the 29 March 2019. It opened at $1 per share and quickly rocketed from there. Their March 2019 delivered unaudited consolidated revenue of $10.1m, with guidance that there will be a small profit for FY19 with revenue set to increase more than 5.5x FY18.

 

Botanix Pharma (up over 150 per cent)

Botanix Pharma is an Australian medical dermatology company engaged in the development of cannabinoid-based products for the treatment of a range of skin conditions and are working to get the first cannabinoid products approved by the FDA.  If successful, they could dominate a multi-billion dollar dermatology market which has seen few new products approved in the last 20 years.

The first two products off the rank target the treatment of Acne (BTX1503) and Atopic Dermatitis (BTX1204). Both drugs are currently in Phase II trials, with outcomes due in late 2019. As it stands right now, there are no cannabis-based products approved for these markets and no-one else is studying the impact of CBD-based products on these conditions.

They have recently released positive endpoints for the Phase 1b study with their BTX1308 drug for Psoriasis. With it, came the first ever biopsy results showing the exact impact the anti-inflammatory properties of CBD are having on skin diseases, and with it, the validation of almost zero side effects. Acne treatment with no side effects, burning skin, or depression – are we done here?

 

Althea (up over 250 per cent)

The Althea Group's (ASX: AGH) mission is to corner the market on the importation, cultivation, and supply of medical cannabis for patients Australia-wide.

The Melbourne-based company has a three-stage business strategy focused on sales driven growth, scalable domestic production, and early revenue generation. It also intends to pursue strategic partnerships with companies such as the Canadian low-cost medical cannabis producer Aphria, which owns a 25 per cent stake in Althea.

Since Althea was founded in 2017 it has already managed to get five branded medicinal products on the market, register over 1,000 patients, and service its first patient in the UK, where they recently placed a flag in the ground. Real revenue, real patient growth, real global focus. And executing flawlessly as far as we can tell.

 

Ecofibre Althea Auscann Botanix Pharma Cannabis Stocks
Source: Yahoo Finance

The Bottom Line

The Australian cannabis industry is still in its infancy, no one is denying that, but the fact remains that it is a fast-growing one. There is not one Data Research company on the planet right now, that would point to a stagnating cannabis industry. Far from it. In fact, most analysts are expecting 25 per cent compounded annual growth for the next 10 years!

For ASX companies that have taken the time to develop a sound business plan, have shown exception execution, and have the management knowhow to take advantage of this global green rush, then the future is very, very bright. As can be seen in the comparison above, Auscann's miserable performance (in black) over the past 6 months has been spectacularly overshadowed by the performances of its above-mentioned peers.

One simply cannot look to one stock to define a market, and then drive sensationalism from it. We do not believe in that, but if we considered a hypothetical "if you can't beat them join them" scenario, then we'd focus the attention of our article on Althea, and just how fast the Australia market is growing and how investors have banked gains north of 250 per cent in only six months. And every sensational article needs a good title.

We've given you ours.

Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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