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Investors rush to take advantage of pot stock high

Nicki Bourlioufas  |  10 Jan 2018Text size  Decrease  Increase  |  
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The Federal Government’s decision to allow exports of medicinal cannabis products prompted an early investor rush on ASX-listed Australian medicinal cannabis producers.

Some so-called "pot" stocks saw a short-term jump of more than 50 per cent on speculation the drug will become a mainstream alternative to opioid medications.

The market for medicinal cannabis is potentially huge. The global opioids market was estimated to be valued at US$34,888 million ($44,476 million) in 2015, and is anticipated to reach US$42,159 ($53,745) million revenue by 2021, registering a compound annual growth rate of 3.2 per cent during the forecast period.

Opioid drugs are most commonly used for pain relief, but they are highly addictive and can lead to drug dependence or death. The many problems with opioid addiction are opening the way for more effective pain relief from medicinal cannabis.

On the ASX on January 5, one day after the Government’s announcement that it will allow medicinal cannabis exports, Cann Group was the most bought stock on the CommSec retail broking website. The stock jumped to as high as $4.55, well up on its May 2017 float price of just $0.30, delivering a heavy windfall to investors. The stock had settled to $3.72 by 10 January. Cann Group was the first Australian company to be granted a license to research and cultivate cannabis for human medicinal purposes.

The next most-bought stock on CommSec was The Hydroponics Company, a medical marijuana and hydroponics supplier which floated on the ASX last year at $0.20. The stock soared to a high of $1.12 after the Government’s announcement, representing a huge windfall for those investors in the company’s initial public offering (IPO). The Hydroponics Company had eased to $0.97 on 10 January.

The third most popular stock on January 5 was AusCann Group Holdings, a Perth-based company whose aim is to produce and provide cannabis medicines. Its shares jumped as high as $1.75, up from $0.82 just before the announcement and well up on its IPO price of just $0.20 in February 2017.

On 10 January, the stock had added to its gains to be quoted at $1.78. The company is part-owned by Canadian giant Canopy Growth Corporation, the world's biggest producer of medicinal cannabis.

Some institutional investors have also bought in to the sector on the expectation of strong gains. Merchant Opportunities Fund has long been a backer of select medicinal cannabis stocks. The fund’s top ten holdings include AusCann Group, Zelda Therapeutics and CannPal Animal Therapeutics, whose main business is cannabinoid derived therapeutics for animals.

Andrew Chapman, the managing director of Merchant Opportunities Fund, says as AusCann and Cann Group both have export licenses, these companies stand to be the biggest beneficiaries of the Government’s decision to allow exports.

“I think [they] will continue to do well in the future,” he says. “I think the [medicinal cannabis] industry is starting to attract the large institutional investors that were previously big pharma investors.

“Opioids are a national crisis according to the US Administration, with addiction rife. The issue though is that people are still suffering from pain, so the logical replacement for opioids will be cannabinoids,” Chapman says.

He believes "big pharma" is now waking up to this fact, "and we are seeing the market caps of some of these companies responding appropriately…this is also why we have invested in CannPal, as the same issues apply to the animal market,” said Chapman.

Evolving viability is key

Chris Kallos, Morningstar’s healthcare equities analyst, says the success of so-called pot stocks “depends on medicinal cannabis being accepted by clinicians [doctors] as being a viable option for pain management, and that is still evolving.”

“The more mainstream medicinal cannabis becomes as an option for doctors, the more upside these companies have,” says Kallos.

In the US, prescription drug overdoses are the leading cause of accidental death, much of this due to opioid overdoses. Cannabis greatly reduces the chance of dependence and eliminates the risk of fatal overdose compared to opioid-based medications, says Kallos. Some medicinal studies report that medical cannabis is just as effective, if not more, than opioid-based medications for pain.

Kallos, a former pharmacist, notes that from February 1, codeine, a commonly used opioid, will become a prescription only medicine rather than available over-the-counter at pharmacies. Moves such as this represent a crackdown on opioid misuse.

Australian government response

The Federal Government has gradually legalised the market for medicinal cannabis. In October 2016, the government legalised the cultivation, production, and manufacturing of medicinal cannabis products in Australia. In February last year, the Federal Government relaxed restrictions over the controlled importation of cannabis for medicinal purposes.
Health Minister Greg Hunt said that opening up exports in this area will expand the domestic production of medicinal cannabis, which is facing increasing competition from imports.

“Allowing the export of medicinal cannabis products will help the developing domestic market to grow further,” he said.

But Australians will also benefit from the move. “By helping the domestic manufacturers to expand, this in turn helps to ensure an ongoing supply of medicinal cannabis products here in Australia. It will be a condition of any license authorising export that medicinal cannabis products be made available, when and if required, to Australian patients first,” Hunt said.

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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.

© 2018 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.

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