The New Criterion: investors rush veterinary cannabis listing

Tim Boreham

For investors, too much medical dope is never enough as they rush a new veterinary cannabis listing. In the more traditional industrial sector, a packaging minnow chaired by ex Aussie Post boss Ahmed Fahour has the flexibles market all boxed up.

CannPal Animal Therapeutics (CP1, not yet listed)

The latest aspirant to the bulging listed medical cannabis sector is bow-wow-wowing to a new trend of developing veterinary drugs over human therapies. But there are regulatory implications for all the pot stocks.

Putting a new slant on the term dopey animals, CannPal is girding to list next month with a focus on cancer-related pain, which means leaving in the psychoactive component tetrahydrocannabinoil (THC).

The ‘hounds on hooch’ play shapes up as a stern test of the listed dope sector, which has seen a reality check on sky-high valuations in last few months. But given CannPal’s $6m raising is likely to close early and oversubscribed, punters are still receptive to a decent pitch.

CannPal will be the first ASX-listed pure-play animal health pot stock and – as far as we can see – the only one globally.

Despite the hype around the medical dope sector, there are no approved animal drugs and only one authorised whole-of-plant human drug, the multiple sclerosis spasticity treatment Sativex.

Animal health has the advantage of a faster route to regulatory approval, while still being a huge addressable market. The truth about cats and dogs is that pets are living longer, which means that close to half of all dogs and one-third of cats die from cancer.

In the US alone there are 78m dogs, 86m cats, not to mention several hundred million cat memes. Doting owners spend $US60bn a year on these four-legged dependents, yet there’s a paw-city of treatments for many ailments.

CannPal has launched an offer to raise $6m at 20c apiece, ascribing a total market valuation of $18.5m.

Company founder Layton Mills says pain is the obvious target because the current non-steroidal treatments “come with a huge laundry list of side effects and toxicity.”

CannPal’s lead candidate, CPAT-01 is targeting osteosarcoma (bone cancer) pain in dogs, but is also investigating broader canine pain as well as appetite stimulation and joint health (no pun intended).

CannPal awaits ethics approval to begin a local safety pilot study in collaboration with the veterinary research organisation Invetus. The study will treat at least 48 dogs (beagles and fox hounds if you really need to know) with THC and cannabinoils.

In the US CannPal has won the confidence of the Centre for Vet Medicine, the Food & Drug Administration’s animal health arm that waived the usual $US100,000 new drug application fee.

Mills says US medical cannabis regulation is at an inflection point because a new human epilepsy treatment called Epidiolex is in advanced phase-three trials (while European regulator approved Sativex in 2010, it is not FDA approved).

Results from a phase-three clinical trial for GW Pharma’s Epidiolex focused on Dravet syndrome, a rare form of childhood epilepsy and showed impressive results in reducing the incidence of seizures.

If the FDA approves the drug after an expected application, the whole legal status of cannabis in the US may have to be reviewed.

While several states have legalised weed for medicinal and recreational purposes, cannabis remains classed as schedule one: the most serious category of illegal substances along with the likes of heroin, ecstasy and LSD.

Meanwhile, plenty of pet owners are treating their pets on the sly with either legally or illicitly procured dope. As for the vets, the dearth of clinical research means they’re reluctant to voice an opinion on whether mulling up for Molly is a good idea or not.

Locally, fellow ASX-listed Creso Pharma is also pursuing animal health applications, but in hemp-derived nutraceuticals (such as food additives).

CannPal itself has a “strategic collaboration” with the ASX listed Zelda Therapeutics to share clinical data, but with Zelda pursuing human applications.

Further reflecting the tight nature of the sector, Zelda’s co-founder, Mara Gordon is on the CannPal board.

The CannPal offer is backed and advised by the Perth-based Merchant Opportunities Fund, which holds 27.5 per cent of CannPal and a likely 19 per cent post-listing

The fund also invested in the first ASX-listed cannabis stock Phytotech (now MMJ Phytotech).

The offer was to have closed on Oct 6, with a proposed Oct 19 listing date.

Pro-Pac Packaging (PPG)

Manufacturing isn’t dead in Australia: it’s just employing far fewer workers.

But we’ll come back to that one.

A feature of the niche packager’s acquisition purchase this week of a bigger private rival is that it transforms Pro-Pac from mainly an importer and distributor, to the proud owner of eleven local manufacturing sites plus one in New Zealand.

Controlled by Anthony Pratt’s brother in law Raphael Geminder, Pro-Pac is paying $177.5m in cash and scrip for Integrated Packaging Group (majority owned by private-equiteer Advent Partners).

Chaired by former Australia Post boss Ahmed Fahour, the thinly-traded, $95m market cap Pro-Pac will emerge as a substantive player in flexibles – the fastest growing game in packaging.

“We become a market maker rather than a market follower,” CEO Grant Harrod says.

Turnover wise the enlarged company will account for about 25 per cent of the flexibles sector, which in turn accounts for about 10 per cent of the $20-22bn a year domestic packaging sector.

When it comes to everyday boxes, PET bottles and cartons, the broader sector remains the preserve of the much bigger Amcor, Amcor spin-off Orora, Pact Group (also controlled by Geminder) and the unlisted Visy Industries.

Flexibles are the unsexy cousin to consumer-oriented covering such as printed laminated chip packets. Think of the shrink-wrap around a six-pack of stubbies, meat trays or sheathing around hay or cotton bales.

But the real growth is in what Harrod dubs the “unitisation” of fresh food” pre wrapping items such as a bunch of grapes or a handful of carrots.

This trend won’t leave the greenies ‘rapt’ at all, but Harrod argues the practice means that far less food is wasted and the produce is protected from tampering.

For the food makers, shrink wrapping can mean huge savings: it costs a brewer about 20c to wrap the bottles in those fibre carry crates, but only about 2c to shrink wrap them. Yet only 20% of beer is plastic wrapped and that implies market share upside.

As for those labour costs, workers account for only about 5% of Pro-Pac’s cost of goods, compared with 15% for energy and 70% for the resins.

Because rivals who import buy the same $US-denominated resins, they can really compete on labour and the cost difference is marginal.

A former CEO of L.J. Hooker, Salmat and Corporate Express, and Harrod was hired in May to bulk up Pro-Pac – and one has to say ‘mission accomplished’.

But the flexibles sector remains fragmented across dozens of specialist suppliers, so Pro-Pac is likely to open its cheque book again.

Pro-Pac is an ASX rarity because the other smaller packagers have been acquired and delisted: Colorpak early last year after being bought by Graphic Packaging of the US; and National Can Industries in 2012 after the minorities were soaked up by Geminder’s Bennamon Pty Ltd.

Pro-Pac has underperformed, with two earnings downgrades this year: not a state of affairs the billionaire Geminder and fellow director Gary Weiss would tolerate.

But with the merger expected to deliver immediate earnings per share growth of 18%, Harrod may well have found the ideal packaged solution.

Tim Boreham authors The New Criterion

Tim.boreham@independentresearch.com.au

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.


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eric wells

Tim is a great analyst. None better. Eric Wells

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