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Why investors will remain high on pot stocks

Nicki Bourlioufas  |  27 Apr 2017Text size  Decrease  Increase  |  

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The rush of companies raising capital on the ASX to cultivate medicinal cannabis and develop therapeutic drugs is likely to continue, given a high unmet need for effective pain management treatment, according to Morningstar healthcare equity analyst Chris Kallos.


Medicinal cannabis has been found to be effective in treating chronic pain management, epilepsy, and chemotherapy-induced nausea. Nearly one in five Australians are expected to experience chronic pain, and the drug is gaining wide acceptance.

The medicinal cannabis market has prompted several startup companies to list on the ASX to raise capital to take advantage of potential opportunities.

"There is a high unmet need for more effective pain management drugs. There have been serious problems with opioids, such as addiction and other side effects, and the beneficial effects of medicinal cannabis are quite well known. The problem has been government policy," says Morningstar's Chris Kallos.

But that is changing. In March, the federal government granted the first license for an Australian private company, Cannoperations, to grow and harvest medicinal cannabis. While supply from that license is for the Victorian medicinal market, "other licenses for other Australian jurisdictions are expected to be issued shortly," the Minister for Health Greg Hunt says.

In February, the government relaxed restrictions over the controlled importation of cannabis for medicinal purposes. The medication is currently sourced from overseas on a case-by-case basis, but new rules will allow fast-tracked importation.

In October last year, the government legalised the cultivation, production, and manufacturing of medicinal cannabis products in Australia.

And this week in South Australia, medical specialists in the state will be able to prescribe medicinal cannabis to patients for short terms without getting state government approval, which was previously required.

The Australian market for medicinal cannabis is estimated to be worth more than $100 million a year, a white paper by the University of Sydney Business School estimated last year. This has drawn players into the market.

Medical cannabis company AusCann Group (ASX: AC8) re-listed on the stock market in February and raised $5 million to finance their growing plans. The company is part-owned by Canadian giant Canopy Growth Corporation, the world's biggest producer of medicinal cannabis, and it says it wants to take advantage of the huge market for chronic pain drugs.

"The prevalence of chronic pain is projected to increase as Australia's population ages, from around 3.2 million Australians in 2007 to 5.0 million by 2050," AusCann said in its recent prospectus.

The company's shares are up 125 per cent over the year to date.

Other recent pot stock listings include Zelda Therapeutics (ASX: ZLD) (up 240 per cent over the year to date), MMJ Phytotech (ASX: MMJ) (up 180 per cent), and Creso Pharma (ASX: CPH) (up 200 per cent).

Another company, The Hydroponics Company, or "THC," is expected this month to float on the ASX after being oversubscribed.

Last month, Zelda Therapeutics, which listed on the ASX in November 2016, successfully completed a $6-million placement with Australian and Hong Kong institutional investors at a discounted 7 cents. Again, the offer was oversubscribed.

In March, shares in traditional medicine provider Stemcell United (ASX: SCU) soared after the company said it would "pursue opportunities in the medical cannabis sector" and the company appointed "King of Cannabis" expert Nevil Schoenmakers as a strategic advisor.

While there is nothing in the production pipeline yet for Stemcell, Schoenmakers' appointment alone sent the company's shares soaring.

Whether these local listed companies realise their growth potential remains to be seen, but one thing is likely. When the federal government does grant more licenses to local companies to grow and harvest medicinal cannabis, some real money will be made while the therapeutic effects of marijuana are better realised in Australian medical and political circles.

Offshore, the legalisation of medicinal cannabis in the US market has boosted global activity, according to THC. Its prospectus says the use of medicinal cannabis is legal in 28 US states. These numbers are expected to rise towards 40 US states by 2020 as public approval and support increases.

But unlike Australia, many US medicinal marijuana companies are traded through the over-the-counter market, rather than on public exchanges such as in Australia.

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.