Is Australia Becoming the Next Big Growth Market for Cannabis?

Compass Cannabis is making a big play for cannabis consumers in Australia, calling it the best international market "outside North America".

Although the Australian cannabis industry has struggled during 2020—as the coronavirus pandemic continues to wreak havoc on the global economy—one cannabis company has identified the land down under as the next big growth market for cannabis.

The forward-thinking Canadian healthcare provider, Compass Cannabis, first made its entry into the Australian market in 2018, before launching two cannabis clinics in NSW last year.

We've really looked hard at different regions, but Australia was the one we really found had the potential. In 2018, when we first arrived, it was very early in the business cycle. Where we see it sitting today, well I suspect cannabis is Australia's fastest growing industry. We don't see that number slowing. It's already exceeding the early Canadian patient figures which were 7,900 after 13 years in 2014. Compass Cannabis President, Dave Martyn

During this time the company also managed to secure a partnership with Medipharm Labs (TSE: LABS) that will see its white label products resold—under the clinical model—in the Australian market, before negotiating a similar deal with Medigrowth in New Zealand.

In fact, the company is so heavily invested in the potential of the Australian market that Compass Cannabis President, Dave Martyn, has already confirmed that he plans to move there.

The company's rapidly expanding patient base has even prompted Compass Cannabis to begin construction on a third clinic, which will be funded via an equity crowdfunding campaign that will be hosted on Birchal during July 2019.

Compass Cannabis has also established a virtual healthcare service that makes use of telemedicine platforms to continue treating patients during the COVID-19 pandemic.

"I believe Australia and New Zealand are the best international markets outside North America in terms of growth. Both have flown under the radar because of COVID-19 and because they're still early stage, but the near-term catalysts are here," Martyn said.

"We have been using telemedicine in both Canada and Australia since the pandemic started, with quickly growing numbers of patients."

"However, the goal is to expand our reach and capabilities as patient demand for these services continues to increase."

The company claims that they decided to pursue their current expansion plan—in lieu of targeting other potential growth markets like the US, UK, and Germany—due to the substantial month-on-month growth displayed by the Australian cannabis industry.

This trend can clearly be seen in the growing number of Australian patient approvals—which continued to increase exponentially throughout 2019—with over 4,000 uses approved in May alone. And this number only gets more impressive when you consider the fact that there were only 250 patient approvals issued during the entirety of 2017.

 Since then this number has skyrocketed, which resulted in more than 15,000 approvals being granted last year, with a further 70,000 to 140,000 expected during 2020, according to competing estimates from the Australian Department of Health and data analytics company FreshLeaf Analytics.

"Australia is a market we have funded out of our own pocket since 2018. We've had some good success — we have a couple of clinics here and patient growth is very strong — and now we better understand the market and where it's going we want to expand," Martyn said.

"We see significant opportunities in advising patients on medical cannabis, and around importing and selling products. We are also looking for funding to expand our telemedicine and virtual health system in Canada and Australia. With COVID-19 keeping everyone at home, it feels like a great time to do this."

Luckily, Compass Cannabis has plenty of cash in the bank to fund its Australian expansion bid, after the company sold off its retail division, Starbuds International, for $14 million in April 2020.

However, the company believes that pursuing a crowdfunding campaign will allow Compass ally itself with retail-level Australian investors, while also further bolstering its war chest for future expansion efforts.

Another factor that drew Compass to Australia was its comparatively business friendly regulatory environment—compared to other jurisdictions—along with the potential introduction of over-the-counter CBD sales in February 2021.

Adding to this is the potential legalization of recreational cannabis in New Zealand—via the upcoming NZ referendum in September—which could open the door to cannabis tourism while also further legitimizing efforts to decriminalize the plant's use in Australia.  

As a result, the company has already begun developing both dried flower and oil products which will specifically target the CBD market in anticipation of its possible legal reclassification early next year.

Signs of Survival

It may seem like a big gamble for Compass Cannabis to go all in on market like Australia, which is still relatively nascent compared to more established regions such as the US and Canada. However, the Australian cannabis industry is already showing signs of revival, despite the ongoing economic downturn.

Earlier this month THC Global (ASX:THC) signed a 12-month supply and production agreement with Cannatrek to develop the company's branded medicinal cannabis products. Under the terms of the agreement, Cannatrek will provide the company with 240 kg of dried cannabis flower per year, which THC Global will then manufacture into medicinal cannabis products.

This is a significant milestone for us and for the Australian medicinal cannabis industry. By utilising our Southport facility to produce high-quality products for the Cannatrek and Canndeo brands, we are increasing the number of locally-made medicines available to patients and supporting the development of the industry as a whole. THC Global CEO, Ken Charteris

Cannatrek will also provide THC Global with an equal quantity of cannabis biomass—bringing the total amount to 480kg—for the production of its Canndeo product range.

Once complete, these products will then be distributed to Tetra Health's clinical network—which was acquired by THC Global in May for $3 million—of more than 600 prescribing doctors.  

News of the agreement caused shares in THC Global to spike by 5.33% before the close of trading, which was followed a week later by an announcement the company had successfully completed a $6.6 million institutional placement.   

"We are pleased with the significant interest we received from institutional, sophisticated, and wholesale investors through this Placement," THC Global Ken Charteris said.  

"We now have a stronger share register with better institutional representation, and a stronger balance sheet to take us forward through this period of scaling up our cannabis pharmaceutical operations."

The placement received significant demand from institutional, sophisticated, and wholesale investors, and was made as part of a move to further align THC Global with other entities and institutions that share its long-term strategic focus on cannabis pharmaceuticals.

Only days later the company also announced that it had signed a binding agreement with Medleaf Therapeutics produce and supply GMP pharmaceutical products for the New Zealand market.

The deal will see an initial order of 2,250 bottles—including full spectrum CBD and balanced THC:CBD medicines—fulfilled by THC Global in the latter half of this year, with distribution expected from October 2020.

"By increasing our production of medicines from our Australian facilities, we're able to improve efficiency and price competitiveness whilst still delivering industry leading quality, which will continue to build as we supply additional customers such as Medleaf, and Australian patients," Charteris said.

"We are very pleased to be working with Medleaf as one of New Zealand's leading cannabis medicine brands, and look forward to working together on providing choice in high quality and affordability of medicinal cannabis to patients in New Zealand."

Pot Stocks Rally

At the same time, a number of other ASX-listed pot stocks have also begun to recover ground lost during the initial days of the coronavirus outbreak, such as Althea Group (ASX:AGH).

In May the company announced a 3-year supply agreement with the German pharmaceutical wholesale juggernaut, Nimbus Health GmbH, which gave Althea a significant share price bump, much to its investor's relief.  

Against all odds the March quarter was a great success for Althea. Revenue certainly exceeded our expectations, whilst strong patient and prescriber growth continued. Gross profit margins have improved due to restructuring of commercial arrangements, with cash collection also now faster. Althea Group CEO, Josh Fegan

Under the agreement, Nimbus will sell and distribute Althea's entire range of branded products in Germany—which is expected to have more than 1 million cannabis patients by 2021—with a 50/50 profit split between the two companies.  

Althea also recently completed work on a new manufacturing and extraction facility for its Canadian subsidiary, Peak Processing Solutions, which is focused on the production of cannabis-infused cosmetics, nutraceuticals, food and beverages.

By the end of its most recent quarter the company also had more than 5,803 patients on the books—despite having less than 500 only roughly one year ago—along with 509 healthcare professionals who are now prescribing Althea products.

As a result, the company's revenue was up almost 40% from December—with March being its best month on record—despite the onset of COVID-19.

Meanwhile, shares in the Cann Group (ASX:CAN) also managed to make a comeback in recent weeks, having managed to claw back almost 50% of its value after the pot stock bottomed out in March.   

This was due in part to the announcement of a new supply agreement with Astral Health—which operates as a subsidiary of the LYPHE Group—for the export of Cann medicinal cannabis to the UK market.

Following this, Cann Group also confirmed that it had locked down a second agreement with the German company, iuvo Therapeutics GmbH, which will see its products distributed into Germany and other European markets.

"These agreements represent important progress as we execute on our strategy to be a producer of choice for both the Australian domestic market and markets elsewhere," Cann Group CEO Peter Crock said.

"We have been able to demonstrate an ability to supply a broad range of products from specific medicinal cannabis cultivars to unique finished product formulations that meet our customers' specific end-market requirements."

"Our manufacturing arrangements with IDT Australia (ASX:IDT) ensure we can meet the high GMP standards that reputable distributers in overseas markets such as the UK and Europe require."

Patient Growth Continues

Another promising sign is the robust ongoing user growth in the Australian cannabis market, which is expected to more than double in 2020.

According to the Principal Consultant for FreshLeaf Analytics, Rhys Cohen, monthly user growth rates in Australia are currently averaging around 8 per cent, which is "a pretty good compound rate as far as patient growth goes".

Any company that's able to run the gauntlet and get a Schedule 3 pharmacist-only product on the shelves in Australia, that product would almost definitely — and automatically — meet food-grade standards in Europe and would easily be able to be sold as a novel food throughout Europe which is something no one has done yet. And these products could also easily be made available in pharmacies throughout North America. So I think the opportunities for non-prescription CBD are much more immediate than prescription medicine right now. FreshLeaf Analytics Principal Consultant, Rhys Cohen

Although, he also stated that the Australian cannabis industry is simultaneously undergoing a period of significant price competition, as a wave of additional products—not to mention new cannabis companies—gradually make their way to market.

The number of medicinal cannabis products available to Australian patients has already increased by 30% since December 2019, while the price of CBD formulations has begun to dip below 10c per milligram for the first time.

"it's been pretty tough competition because the number of active patients hasn't grown as fast as we thought it would — largely because of COVID I think. But it's still been relatively resilient — we're up to 15,000 active patients at the moment, and depending how things go we're hoping for 20-25,000 by the end of this year," Cohen said.

"From September last year to March this year, we saw a 17.5 per cent reduction in prices across all products. And since March, a few new products have come to market which have extended those price wars."

"Recently we noted that a company came out with a new range of [CBD] products that retail for 6c a milligram, so that's quite an extraordinary plummet in pricing."

The upcoming reclassification of CBD as an over-the-counter medicine is also expected to provide a huge boost to the Australian cannabis market, as it will allow domestic producers to quickly build their distribution network, while also providing an avenue to explore further international expansion opportunities.

"it's a bit of a double edged sword — most local companies haven't had the opportunity to incur huge debts in Australia, but that's largely because the ODC (Office Drug Control) have been so slow issuing licenses", Cohen said.

"So, we've avoided a lot of those issues, but it does mean raising money for Aussie companies is tough."

"Unless you've got a compelling business proposition it's going to be a hard slog for those companies."

This pot stock could reach new heights in 2020 due to Coronavirus

The COVID-19 pandemic is showing no signs of slowing down, and as global markets enter meltdown many cannabis companies are feeling the effects of capital crunch.

While the market crash will continue for some time, it represents a golden opportunity for investors who are capable of riding out the volatility until share prices rally.

Luckily, one pot stock has developed antimicrobial drug that can already treat two superbugs while limiting their ability to develop antibiotic resistance.

Investors can also start picking up shares at rock bottom prices, as global investor sentiment continues to dampen thanks to COVID-19.

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Hugo Gray
Hugo Gray

Hugo Gray is a Melbourne-based journalist with a body of work that covers a diverse range of topics, including immigration law, sex technology, and now the rapidly expanding cannabis industry.

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