The New Criterion: pot plays mull over their strategies as sector goes off the boil

Tim Boreham

We wouldn’t say it’s gone to pot, but the ASX-listed cannabis sector is facing a much-needed reality check as investors realise that the medical marijuana aspirants need more than a ‘grow it and they will come’ strategy.

The charts of most of the dope stocks show a sharp retraction from their ‘highs’ attained between November last year and January this year, although most of them are still well up on their levels of a year ago.

Yes, medical dope is now legal here - as it is in most other key jurisdictions -- but access is strictly controlled. While there’s a broad acceptance that cannabis is useful for indications such as epilepsy and cancer pain, there’s a dearth of formal clinical evidence and innately conservative doctors need to be convinced.

Rather than going through the bureaucratic hoops, many patients will continue to ‘self medicate’ illegally with less than desirable therapeutic outcomes.

Reflecting the difficulty of the medical caper, the trailblazing MMJ (MMJ, 26c) is now focused on the recreational Canadian cannabis market via its minority-owned Harvest One.

1-Page (1PG, 16c) has also smelt the skanky breeze of change. The cashed up shell of a failed recruitment house, 1-Page is to abandon the ASX in favour of a European domicile after buying a dope company there.

One dope stock that’s found favour is the natural supplements outfit BOD Australia (BDA, 51c), which is pursuing a two pronged strategy of developing over the counter products as well as a dissolvable wafer to deliver medical cannabis products.

BOD executive chairman George Livery says that despite the awareness of the benefits of cannabis components -– hemp oil is a source of desirable omega 3 and omega 6 acids -- wellness groups such as Swisse and Blackmores have refused to inhale.

Livery should know: until recently he was Swisse’s strategy and corporate director.

“I guess it’s the stigma attached to the word cannabis,” he says. “They just don’t have their eyes on what’s happening in the space.”

BOD already had a range of skincare products on market, but only found market favour after announcing its cannabis foray with Swiss group Linnea and Singapore’s iX Biopharma.

Describing its products and research as “evidence based”, BOD has commenced an early stage trial of a sublingual wafer to deliver cannabis derivatives to the blood stream more efficiently.

BOD chief (and 10 percent shareholder) Jo Patterson says BOD has a “clear point of difference” to the crowded medical dope stock sector.

“We started business with a vision of bringing natural medicines to the market. A pharma drug is a singular molecule solution while natural medicines are complex molecules working in harmony.”

BOD has exclusive rights to the wafer, developed by iX Biopharma, which could be applied to any number of cannabis therapeutics.

The local Therapeutics Goods Administration in July gave permission for an early stage clinical trial, to test how much of the active substances get into the blood stream relative to the standard injected delivery.

“Our hypothesis is water will slow efficient absorption of the drug into the blood stream,” Patterson says. “Intravenous delivery is the gold standard but what else can we deliver more efficiently into the blood stream. We want to avoid the organs breaking it down.”

Meanwhile, BOD continues to chalk up modest revenues from its current range that includes the pregnancy supplement MamaCare, Bright Brains (anti dozing), SediStress (irritable bowel syndrome) and the Uber Secrets (an alternative to Botox, not a certain ride share operator’s surge pricing formula).

The deals with API and Symbion cover two-thirds of the country’s chemists, or about 3500 outlets.

In conjunction with Manuka Pharma, BOD also hopes to market a hemp honey replete with the antibacterial agent methylglyoxal.

Meanwhile BOD shares have also been helped along by the $800m – but now messy -- takeover offer for skincare rival BWX (BWX, $5.42). BWX owns the Sukin and Trilogy brands, while BOD sells a range called Pommade Divine and has the local rights to Dr Roebucks.

“The move showed the market value of these businesses and we got a little bit of a rub-off effect,” Patterson says.

Despite this, BOD remains valued at a mere $23m.

MGC Pharmaceuticals (MXC) 5.6c

Our second oldest listed ‘pot stock’, MGC is also in the cosmetics game with posh British department store Harvey Nichols now stocking 18 of its cannabis-based skin care products that sell for $50 to $100 a pop.

MGC chairman Brent Mitchell said the company saw the success The Body Shop was having with its hemp-based products.

Beyond that, though MGC’s cosmetics business – in joint venture with an Israeli company called Dr M Burstein – is likely to remain a sideline as MGC pursues its broader “seed to sale” strategy in Europe.

Unlike its ASX-listed peers MGC focused on Europe from the outset, creating manufacturing facilities in Slovenia and the Czech Republic where the regulators were most amenable.

“We wanted to set up a cultivation operation in Europe but with a pharmaceutical-grade processing facility to sell to European pharma companies as well as make our own medicine,’’ Mitchell says.

“That’s been our vision since we relocated from Israel to Slovenia and Czech Republic three years ago.”

Now, the company plans to build a four times bigger facility in Malta, where the hot weather reduces the cost of propagation and allows for three crops a year instead of two.

“It will be one of the most operationally advanced facilities for certification purpose is Europe,” Mitchell promises.

But where does all the cannabinoid-rich greenery go?

MGC expects to supply the certified raw product in Europe, especially to Germany which currently bans cultivation within its own borders but otherwise has a booming medical cannabis sector.

But first and foremost, MGC plans to launch a line of approved pharmaceuticals for ailments such as post chemotherapy nausea, adult and child epilepsy and anorexia.

It’s already developed Cannepil, a treatment for sufferers of drug resistant epilepsy.

MGC has approval to supply Cannepil in Australia, where it has lined up a base of 100 registered users.

Mitchell describes the local market is small but lucrative.

“If we can capture less than half a per cent of the available market for drug-resistant epilepsy that equates to $1m of revenue a year,” he says. “If we can grow that to 3-5 per cent then it’s a serious business.”

Of the 18 MGC products gracing the Harvey Nix shelves, 15 of them are non-clinical stuff like day creams and face washes, while three are for the symptoms of conditions such as acne, eczema and psoriasis.

Achieving scale in the cosmetics game requires deep pockets and deep distribution. Rather than taking pot luck, MGC is amenable to a partnership with a more substantive industry operator.

Tim Boreham edits The New Criterion

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.

ENDS


Tim Boreham

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.

Expertise

small caps asx:1pg ASX:MMJ ASX:MXC medical cannabis ASX:BDA

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