A new world beckons for the listed medical cannabis stocks, but liberalisation is not what it seems

Tim Boreham

Independent Investment Research

Having been subject to a harsh reality check over the last year or so, the ASX listed cannabis sector is applauding the local medicine regulator’s endorsement of the weed as an effective therapy that should be more freely available to the ailing masses.

But the path to the pharmacy is likely to be harder than they think, with an emerging supply glut pushing prices to record lows.

In an interim ruling this month, the Therapeutic Goods Administration (TGA) said it intended to downgrade low-dose cannabidiol (CBD) formulations from a schedule four poison to schedule three.

Effective from next July, this reform will allow CBD formulations to become an over-the-counter (OTC) pharmacy medication. The patient does not require a prescription, but the chemist acts as a gatekeeper to determine whether a particular product is suitable for the condition.

In case you’re wondering, the formulas need to contain no more than 2 per cent of tetrahydrocannabinol, THC, the psychoactive component of cannabis. Advertising the drugs is also banned and the medicine has to be in tablet form, not vaped or topically applied.

Auscann (AC8) chief Nick Woolf dubs the pending ‘down scheduling’ as a “major change for Australia and Australian patients”, offering “better access to quality controlled, scale and efficacious pharmaceuticals”.

The University of Sydney’s Professor Iain McGregor says the move is an “unprecedented global phenomenon” and a “huge exercise in self medication”.

The decision follows recommendations from the National Advisory Committee on Medicines Scheduling and the Advisory Committee on Chemicals Scheduling. And yes, it was a ‘joint’ effort, initiated by a Senate committee hearing.

At face value the decree suggests the authorities have accepted that low-dose CBD formulations won’t do any harm for less serious conditions.

Another interpretation is that the proposed regulatory loosening is, in fact, a disguised tightening of the rules.

Why? Crucially, the CBD formulation has to be approved and on the Australian Register of Therapeutic Goods (ARTG), which requires “high quality” clinical evidence.

In other words: they will need to produce similar clinical data to a developer of a prescription CBD medicine.

Bear in mind the TGA has approved only one marijuana drug: Sativex (nabiximols) to treat multiple sclerosis spasticity. Another one Epidiolex (also known as Epidyolex) is under priority by the regulator and is expected to get the green light.

Medlab Clinical (MDC) CEO Sean Hall argues most companies have missed the point that ‘schedule three’ remains a national poisons scheme rating for an approved drug – not a free-for-all.

“It’s the latter bit they miss out on – it must be approved,” he says. “This hurdle rate is going to be the sticking point for many of them.”

Then there’s the degree to which chemists will be willing to stock – and recommend – CBD medications. As one could imagine, casual or curious customers are likely to be given the short shrift – or the third degree.

In reality, some cannabis companies will be much better prepared than others to get their substances on the chemist shelves when the change becomes effective in mid 2021.

“It’s one thing to persuade chemists to stock a medication,” Althea Group (AGH) chief Josh Fegan says. “But it’s another to persuade them to advocate it to the customer.”

“The relationship with the pharmacist is going to be very important. Just because it’s available it doesn’t mean they are going to support it.”

If you think Althea is talking its own book in this regard: the company already has a range of prescription formulations that are likely to meet the over the counter requirements.

The company also has an education program called Concierge, which has trained doctors and pharmacists on the wonders of the weed.

Little Green Pharma (LGP) chief Fleta Solomon says expectant customers flocking to the nation's apothecaries might be disappointed, with little available product.

“Regardless of these challenges, I still think it’s a very positive outcome.”

She adds the 60 milligrams limit is likely to be controversial because such a low dosage is likely to be ineffectual for certain conditions.

“For example, you would not want to put a child suffering seizures on to this; you would need 300-500 milligrams and sometimes up to 1000 mg of CBD a day.”

“But there could be conditions such as anxiety and insomnia where a small amount might assist. But if they consume and it doesn’t have a therapeutic effect, there could be some backlash towards CBD and medical cannabis.”

Then there’s the issue of cost of the elixirs, which needs to stack up against non CBD alternatives and – we dare say – the illegal cannabis market.

Sativex – which is not subsided under the Pharmaceutical Benefits Scheme – sells for around $745 for a four to six week supply.

Althea’s Fegan estimates the OTC versions will sell for $100-200 for a month’s supply, but much depends on the extent of clinical costs that needs to be recouped.

But he cautions that as with most over the counter treatments, they should only be used for mild or sporadic ailments. “They should not be a substitute for prescription in the case of more serious diseases. It’s a case of ‘if pain persists, see your doctor’.”

In the meantime, the key conduit for patients to access cannabis treatments via the TGA’s Special Access Scheme (SAS), which enables authorised doctors to prescribe unapproved medication in cases of unmet need.

This month Zelira Therapeutics (ZLD) announced its clinically proved CBD insomnia drug Zenivol would be available under the SAS, which paves a global rollout.

In the year to August 31, the TGA approved 61,000 applications for cannabis use, covering conditions such as cancer induced nausea and vomiting, childhood epilepsy, neurological pain, spasticity and anorexia and wasting disorders.

In the month of August the agency approved 5270 applications, 82 per cent higher than the August 2019 run rate.

These stats show that despite the lack of hard clinical evidence demanded by the TGA, medical cannabis is winning recognition from the medical fraternity.

But according to Fresh Leaf Analytics, the pot suppliers are vying for market shares at a time when prices have dropped to record lows.

In its latest quarterly report, the firm estimates the number of available products doubled to 150 over the last year and could double again over the next 12 months.

Put another way, 37 companies vying for less than 100,000 prescriptions, compared with 23 opioid drug suppliers compete for 15 million scripts.

This “suggests the Australian cannabis market is saturated and that the current product growth is trajectory.”

Nonetheless, the form believes the OTC market could quickly exceed two million people and generate $200 million in annual revenue.

Perversely though, the section three downscheduling could stymie the scheme because as the number of approved OTC treatments grow, there will be fewer available to be prescribed under the looser, experimental auspices of the SAS.

Medlab’s Hall sees the downscheduling as actually “tightening the reins on what they see as safe and very low risk to the public.”

As he explains, the SAS was designed to access novel treatments for difficult diseases such as cancers and HIV. “But if there’s an ARTG registered drug, that should void any incoming SAS request for a product that looks and feels similar.”

In reality, the key beneficiaries could be the established Canadian cannabis plays that already have production and distribution down to a fine art.

The owner of both Sativa and Epidiolex, Britain’s GW Pharmaceuticals is tipped to devise a low-dose version of the latter to meet the OTC requirements.

As one industry participant notes: “Those already in the medical cannabis space will be better positioned than new players who think it’s an easy avenue to sell cannabis product.”

Not already a Livewire member?

Sign up today to get free access to investment ideas and strategies from Australia’s leading investors.

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

Tim Boreham
Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.