The Green Fund's CEO, Mark Bernberg, sat down with Stockhead to discuss his top 3 cannabis biotech plays for 2020.
This story originally appeared on Stockhead
As market watchers would know, cannabis stocks globally have had a wild ride over the last three years. The volatility is a natural by-product of any frontier market – full of stops and starts as companies try to build out their business models amid an uncertain regulatory environment, with no historical playbook to rely on.
To try and make sense of it all, Stockhead recently spoke with Mark Bernberg, the Sydney-based co-founder of the cannabis investment firm The Green Fund.
As an experienced market analyst, Bernberg had a front-row seat to the recent turbulence, from mid-2017 ("a huge bull run – picking winners was like throwing darts at a dartboard") to the 2019 bear market, when the global cannabis index slumped by 65 percent.
It was a period punctuated by periods of overexcitement, two-speed regulatory environments across different jurisdictions and some poor operational execution in the early going. Broadly speaking, Bernberg is optimistic about the year ahead, as Canadian companies focus on the booming market for cannabis edibles and extracts while more US states move towards legalisation.
Back on the home-front, Australia's market ran somewhat adjacent to the thrills and spills in North America.
That was largely due to a stricter regulatory regime, where THC cannabis remains outlawed while CBD products can still only be purchased via prescription. However, the listed cannabis small caps that call the ASX home certainly weren't immune to the global selloff.
A scoreboard check-in mid-December showed the companies tracked by Stockhead had posted an average 12-month decline of more than 20 percent – a result that was partially buffered by a couple of outsized gains.
"The Australian market is an interesting one, because in percentage terms it's the fastest-growing medicinal cannabis market globally. Comparatively, you're talking pretty small numbers but there's still significant growth," Bernberg said.
"I think we'll continue to see that growth as more patients get approvals and more authorised prescribers join the market."
In that environment, Bernberg expects the standards around prescriptions to be broadened to include ailments such as general pain, anxiety, and inflammation. And because of the way Australia's regulatory framework is structured, the local market is also at the forefront when it comes to clinical research in the cannabis space.
When it comes to investment opportunities in ASX-listed cannabis stocks, Bernberg has a clearly established framework with a bias towards biotech plays and away from cultivation.
"If you look at the regulatory infrastructure in Australia, the good thing we have going for us is clinical R&D can be done at the federal level. In the US you actually can't do that," he said.
"Add on the R&D tax rebate where companies can claim more than 40c on the dollar, and Australia becomes one of the most capital-centric R&D opportunities for cannabis companies globally.
"So it creates a breeding ground for cannabis biotechs, and that's where we are putting our attention when it comes to the Australian market."
Within the cannabis biotech space, Bernberg highlighted three stocks with favourable metrics:
Botanix Pharmaceuticals (ASX:BOT)
"BOT shares fell sharply in October from around 25c to 9c, but we firmly believe the business is poised for growth," Bernberg said.
He also pointed to the track record of company president Vince Ippolito, who helped lead the sale of dermatology company Anacor to global pharma giant Pfizer in a $US5.2bn ($7.9bn) deal.
"They're going after the acne dermatitis market, which has had no new drug treatment in 20 years. We think they have a first-mover advantage in terms of CBD-centric treatments."
"There's lots of clinical data which shows CBD treatmens have anti-inflammatory properties, and most dermatological skin conditions are caused by inflammation."
MGC Pharma (ASX:MXC)
"We believe in their strategy. I like the fact they've established operations in Malta and Slovenia, which lay the foundations for exports into Europe," Bernberg said.
"Europe isn't ready for large-scale cultivation, so imports will be a big part of that market. And the fact they're GMP certified, with a production line pumping out 8,000 units an hour bodes well."
Bernberg added that the company's efforts to establish a dual-listing on the London Stock Exchange could also provide a big jolt of momentum.
"I believe the UK market is kind of like Australia in early 2017, where you had all this pent-up demand, he says.
"They've been very slow in terms of their infrastructure and approval process, but the chances are that UK investors are excited by the opportunities.
"We've seen online traffic to The Green Fund increase from the UK every month, and there would be a period of exuberance from that market.
"MGC are going to have to show good execution but if they can do it, I believe it's a company with a strong upside."
Medlab Clinical (ASX:MDC)
"For me, it starts with their CEO, Sean Hall. He's been there and done that — he sold his bioceuticals company to Blackmores," Bernberg says.
"They've gained traction with their nutraceutical range. And if you're cannabis and you can show revenue generation, that will stick in my book.
"Nutraceuticals are a low-margin product. It's not easy but they've done it before and now they're running clinical trials for Nanabis, the cannabinoid anti-cancer drug.
"Phase II trial results are due soon and if they can get a positive endpoint on phase II, I think they'll open themselves up for an international licensing deal."
Looking ahead, Bernberg expects the focus to remain on medicinal cannabis products, with THC legalisation still some years away yet.
He flagged 2025 as a target date and highlighted that one regional development worth watching would be the referendum on cannabis legalisation in New Zealand, scheduled for September 19.
"If it's a vote in favour of legalisation, then I think New Zealand will have a legal framework by 2022. And that could provide a catalyst for Australia, given the potential impact on regional tourism," he said.
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