Inside the dilemma facing the medicinal cannabis industry

Despite industry advocates like Olivia Newton-John, not one ASX-listed medicinal cannabis company has produced a full-year profit. But there are still some buying opportunities.

Olivia Newton-John, inside her cannabis greenhouse in the United States, was one of the main advocates for cannabis to be regarded as a medicine.

For every Olivia Newton-John there is a Pete Evans – and this is precisely the problem for the medicinal cannabis industry.

Newton-John, who died this week aged 73, was a key advocate of the alternative therapy, with the cancer research institute that bears her name in Melbourne embarking on national clinical trials – the conventional and legal way to develop new medication.

Evans is also a medicinal cannabis advocate, releasing The Magic Plant documentary. But he has attracted the ire of the Therapeutic Goods Administration, which fined him almost $80,000 last year and ordered him to stop making “various claims” about his therapeutic products.

Across the broader medicinal cannabis industry, a wild west scenario is playing out that has crunched the value of related stocks by as much as 80 per cent, with legitimate players being tarred with the same brush as those bypassing clinical trials and other research.

Not one of Australia’s ASX-listed cannabinoid-focused companies has produced a full-year profit since cannabis cultivation was legalised in 2016, despite talk of multi-billion dollar opportunities to treat conditions from sleep apnoea to inflammatory bowel disease and concussion.

Sud Agarwal – a former chief medical officer of Incannex who now heads his cannabinoid-focused business Cannvalate – said the “reality has begun to set in”.

“The industry went off with a bang in 2016-2017 and there was kind of new industry excitement, and it may have got overheated,” said Dr Agarwal, who remains Incannex’s biggest shareholder.

“By 2019-2020 things got a bit tighter and certainly in 2021 and the latter half of early 2022, there was a real compression of values. That is mainly because a lot of companies haven’t performed in terms of revenues but also people who had previously been investors in cannabis probably just got fatigued.”

Cannvalate CEO, Sud Agarwal, says reality has set in after the medicinal market became overheated. Stuart McEvoy/The Australian.

Hygrovest, a listed investment company focused on cannabinoid stocks wrote in its June portfolio update that “he decline in the value of the listed Canadian cannabis sector during FY22 has been the biggest disappointment” it has faced. Since December, has been forced to expanded its investment mandate to resources, healthcare and the digital economy.

Dr Agarwal said several American companies claiming they had a cure for Covid-19 “didn’t help the cause”. US Neutra Corp – an over-the-counter stock that does not trade on any formal stock exchange – trumpeted in January a Oregon State University study that found cannabidiolic acid and cannabigerolic acid prevented Covid-19 from “penetrating” human cells, despite being yet to complete phase one clinical trials.

“Australians are a bit more cautious about making those claims because the TGA would clamp down on it relatively quickly – like what happened with Peter Evans when he made some claims about his products,” Dr Agarwal said, adding companies that will succeed will venture down the biotech route, creating specialised rather than generic products.

To this end, Incannex – the largest ASX-listed cannabis stock with a market value of more than $400m – has launched a raft of clinical trials and has been liaising with the US Food and Drug Administration closely.

Rory Hunter, a fund manager at SG Hiscock’s Medical Technology Fund, which has invested in a range of cannabis companies, said while there was growing investor impatience and fatigue, there also were also some opportunities.

“A lot of commitments have been made that have not been met, in particular in regard to a lack of cash-generative business models. That has played out in recent months,” Mr Hunter said.

“The fact is not all companies are underperforming. Cronos Australia is one ASX-listed company that has strong financial performance. It’s downstream in the value chain, highly scalable and has a cash generative business model. It’s also the only ASX-listed company in the industry making money right now.”

Cronos – unlike many of its rivals, does not grow or manufacture cannabis, operating as a market place – posted customer cash receipts of $70m for the year to June 30, a 245 per cent increase on the previous year.

Other companies in the sector are making progress. Cannabis grower, Cann Group, has opened its new factory in Mildura, delivering on its strategy to become a large-scale producer. Its share price has surged almost 10 per cent to 30c in the past six months, compared with a 3 per cent slump across the broader share market.

Cann Group chief executive Peter Crock – who worked with Newton-John as president of Medicinal Cannabis Industry Australia – said it had always been a “balancing act bringing light to the subject without being seen as a fringe element”.

“In my view, the institutional interest in medicinal cannabis and investors from definitely post the bubble burst in 2019 is everything‘s been tagged with the same brush,” Mr Crock said.

“Olivia was always really careful not being seen to be commercially driven or doing it for commercial gain. In terms of giving a voice to the role of cannabinoids in wellness she was absolutely a key one to avoid saying this is a ‘cure all type’.”