The steady bloom of Australia's canna-biz
Amid the pandemic the medicinal marijuana industry is approaching maturation, as bankers and regulators cautiously take a toke.
Cann Group has taken a 2% stake in iuvo.
The retired accountant – who sold his business Count Financial to the Commonwealth Bank for more than $373 million and reportedly had never smoked a joint before becoming the plant's most notable (if unlikely) advocate – hoped the record donation would help more people like his four-year-old epileptic granddaughter, Katelyn.
Five years later, there are 600,000 Australians using marijuana for medical purposes, according to the Australian Institute of Health and Welfare.
Granted, that is still a fraction of the 1.9 million who used the substance for non-medical purposes. Plus, of those using for medical reasons, just 3.9 per cent obtained it via a doctor’s prescription.
But nonetheless, the number is something of an achievement given the industry’s long and arduous path to legality, says Rhys Cohen, a self-described “cannabis nerd” and former project officer at the Lambert Initiative for Cannabinoid Therapeutics, which was made possible by the donation.
Analysing the AIWA data and other sources, Cohen estimates there were about 15,000 patients using prescribed cannabis at the beginning of 2020. That number is now probably at about 30,000 and is likely to double again in the year ahead, he anticipates.
“That is the primary metric by which you would judge the success of a product sector – how many people buy the product,” he says. “And it’s still the primary source of revenue.”
But rapidly rising (if still nascent) patient usage is just one milestone for the cannabis industry in its quest to achieve acceptance.
It has also began to secure real finance, not just from wealthy individuals like the Lamberts with an emotional tie to the product, but the conservative risk-conscious stalwarts of Australia’s financial system. Budding bankers
In March, before it had even been granted licences to cultivate and research cannabis from the Office of Drug Control, early stage cannabinoid pharmaceutical company CannaPacific quietly secured a $3.5 million debt facility from Westpac.
Rich Lister Barry Lambert, pictured with granddaughter Katelyn, donated $33.7 billion to medicinal cannabis research. Louie Douvis Chris Gilmour is a relationship director in Westpac’s commercial business, where he looks after debt funding for large companies before they join the institutional side.
He says the bank is looking to grow its exposure in the space with the right kind of companies.
“All my customers are health related, so we see this as a healthcare play, not agricultural play,” he says. “We can really see the benefits. We not only provide debt funding but also transactional risk products to other customers as well.”
About four years ago, Westpac initially got exposure to the medical cannabis sector, with Gilmour revealing that Westpac’s executive team signed off on the progression in to this industry.
“Watch this space over the next five years. If it keeps growing at 600 to 700 per cent, it is going to be enormous in five years.“
Westpac is not the only big bank now dabbling with cannabis.
National Australia Bank in November provided a $50 million credit facility to ASX-listed Cann Group, the first company to be issued with a cannabis research licence by the Office of Drug Control (ODC) in 2017, as well as a cultivation licence.
Melbourne-based Cann Group will use these funds to continue building a large-scale production facility in Mildura, Victoria, with its with first stage capable of producing 12,500 kilograms of dry flower per annum.
Cann Group chief executive Peter Crock says the licensing regime for cannabis needs improvement. This new site will add to its two cultivation facilities in suburban Melbourne, already capable of producing 1200 kilograms of dry flower per annum. It has completed more than 70 harvests at the existing facilities.
Chief executive Peter Crock says the debt funding from NAB is positive, given there are few tier-one banks globally willing to play in the medical cannabis space.
“Because of the US banking position, it does have an impact around the world, even to where some of the trading houses decided to step away from medicinal cannabis because there were concerns about some moving into recreational [use], which would not be acceptable to certain jurisdictions,” he says.
Despite the progressive moves of many US states to legalise or decriminalise recreational and medicinal use of cannabis, it remains prohibited at the federal level, hindering the finance industry's ability to provide services. It has also kept the US-domiciled Big Pharma companies at bay, providing a gap for specialist players to emerge around the globe.
Crock explains that Cann Group is not setting up to be a commodity cannabis producer. Instead, it’s a biotech play with scale, allowing it to take plant genomics capability into a highly controlled environment to produce a specialised medicine.
“We are going to be fully integrated – producing precision medicine – that happens to be plant-based starting material,” he says.
Cann Group – along with other players – is hoping to capitalise on the mainstreaming of the medical cannabis industry, which is tipped to reach a value of $US1.2 billion ($1.7 billion) in Australia by 2024.
Canada is the most advanced medical cannabis market in the world, having been at it for nearly 20 years.
Medical conditions where cannabinoids, or CBD, are used mostly relate to pain management. CBD can be obtained through an authorised prescriber or the Special Access Scheme in Australia.
Crock, who is chair of the peak body Medical Cannabis Industry Australia, says Australia is not so far beyond in terms of public acceptance, and those who wish to have access to medical cannabis, but regulation needs to catch up.
"The regulatory approach taken here has been conservative,” he says."It’s been a very bureaucratic and difficult process, often taking doctors over a half an hour for an initial consultation to prescribe medical cannabis, while other drugs take just minutes online. Having said that, there are clearly some interested doctors and it’s expanding."
Crock adds that the Special Access Scheme is actually “forward thinking by the government", although it has been “clunky”.
Seeds of reform
That same description has been applied by multiple players to the licensing front as well, with the ODC inundated with requests from would-be cannabis cultivators and researchers.
Unless a group is operating under a licence, growing pot for any use is illegal in Australia. It is considered an illicit substance, along with harder drugs like heroin and cocaine.
This classification restricts the research that is possible in universities.
“We have to tidy this up in Australia and make it more efficient, but at this stage, if it's not being produced under a ODC licence, it’s a jailable offence," says Crock, a 30-year veteran of ASX-listed chemical company Nufarm.
“So a university was told they couldn’t have more than 200 grams of cannabis, which is crazy because if you are going to be analysing and doing lab samples, there are all sorts of things they have to put in place."
For Rhys Cohen, Australia's "inefficient management of licences and permits" has been the primary reason why the majority of companies involved in the market have been focused on importing product grown abroad.
But he says that is starting to change.
A review of the medicinal cannabis amendments to the Narcotics Act by legal academic Professor John McMillan was tabled in September last year. It made 26 recommendations for reform, many of which were aimed at improving inefficiencies in the licensing process. Federal health minister Greg Hunt has accepted all 26.
Another milestone came in mid-December this year, as the Therapeutic Goods Administration (TGA) rescheduled CBD, downgrading it from Schedule 4 to 3, which enables greater access to patients, with products directly available at pharmacies. The ruling will allow CBD containing products with up to 150 milligrams per day. Products will be available for adults, and will not need a prescription.
And just before Christmas, the Department of Health, which has been increasingly supportive of the burgeoning cannabis industry, initiated a consultation looking more broadly at the rules governing manufacture, labelling and packaging of medicinal cannabis.
Cannabis isn’t interesting because it's the new kid on the block. It's interesting because of what it might be able to do for people.
— Rhys Cohen, former project officer, Lambert Initiative for Cannabinoid Therapeutics
Cohen says the scope of the consultation was wider than expected and has the potential to "transform the sector, most likely to the benefit of local cultivators and manufacturers".
Though he has been an outspoken critic of Australia's over-zealous regulation of the industry in its early stages, Cohen says in hindsight it has been a prudent approach.
"We weren’t able to become victims of our own over-enthusiasm," he says, pointing to markets like Canada, where over-enthusiasm about liberalisation of the rules governing cannabis inflated the valuations of many listed companies such as Aurora Group, triggering major asset writedowns and lay-offs in late 2019 and early 2020, as well as the sale of its 12 per cent stake in Cann Group.
Given the steady flow of incremental milestones, and warmer tones from regulators and politicians, Australia's ambitious cannabis companies are positioning themselves for a more liberal regime.
Tommy Huppert, an economist turned CEO of cannabis company CannaTrek, says the prospect of an entirely local supply chain "from seed to patient" is exciting after years of importing product from overseas.
CannaTrek has raised more than $1.6 million from individual investors to bankroll the build of a major greenhouse in Shepparton in Victoria, which is due to commence early in 2021.
Emily Rigby and Tommy Huppert of CannaTrek want to list on the ASX within two years.
Huppert's ambition goes beyond the growing number of Australian patients using cannabis and doctors willing to prescribe it.
He hopes to be part of a lucrative new push to export Australian cannabis overseas, with dreams of an ASX listing over the next two years off the back of the strategic pivot.
CannaPacific chairman Peter Gunning is also eyeing new revenue streams.
"We are also seeing interest from other industry players who want us to provide cultivation and research services for them now that we are able to do that," he says.
The company in December announced the start of its pre-clinical trials at the University of Newcastle relating to the development of its cannabinoid medicines for palliative care pain.
In addition to the Westpac facility, and a long-term loan from the Rural Assistance Authority, it has $7.5 million from wealthy families including the Libermans, Smorgons and Waislitzs. The capital injections will allow CannaPacific to complete the remaining capital works required at its 18-hectare site outside Byron Bay.
Others are starting to jockey for a potential recreational market on the horizon, buoyed by the arguable success of cannabis industries in US states such as Colorado and California and the tantalising prospect that President-elect Joe Biden's administration may end the federal prohibition.
"There are some players setting up for the recreational pivot down the track … but that will not help the development of the medical market,” says Crock.
Much of the voting public is still concerned about the perception of medicinal marijuana as a "Trojan horse" to legal recreational use or decriminalisation of harder drugs, he says.
Cohen agrees some companies are salivating at the prospect of a recreational market opening up in the near or distant future, given the considerably larger portion of the community using marijuana for non-medical purposes.
"It would be commercially remiss not to at least keep on eye on new markets for your product," says the consultant, who does not hold shares in cannabis companies in order to maintain his integrity as a market analyst and expert.
But he says for many others the end game is not a thriving recreational market where pot smokers can purchase the product with ease on shop corners around Australia.
Rather, it is the increasing acceptance of the therapeutic properties of cannabis by doctors and governments, with the holy grail eventual inclusion in the Pharmaceutical Benefits Scheme, subsidising the cost for patients.
"That's where the real money is," he says.
From his perspective, the industry would be wise to continue to present its medical bona fides, having worked so hard to establish them.
“Relieving pain and suffering is the main thing," Cohen says. “Cannabis isn’t interesting because it's the new kid on the block. It's interesting because of what it might be able to do for people.”
Music to Barry Lambert's ears. Originally published here: https://www.afr.com/companies/healthcare-and-fitness/the-steady-bloom-of-australia-s-canna-biz-20201217-p56oe3