Cannabis in Australia: The Case Against Enthusiasm

Cannabis in Australia: The Case Against Enthusiasm

Flickr / Indigo Skies Photography / CC BY-NC-ND 2.0

Marijuana Industry News magazine — Issue 1 — Bonus Content

The Narcotics Drugs Act of 1967, the statute that underlies the “war on drugs” in Australia, that country’s implementation of the U.N.-sponsored Single Convention of six years before, swept very broadly in its condemnation of a wide range of substances, inclusive of cannabis and cannabis resin.

Australia amended the NDA on Feb. 24, 2016. This amendment created a cannabis cultivation scheme to provide for the supply of the stuff for medicinal purposes. In the words of Sen. Fiona Nash, of New South Wales, the amendment put health care professionals “at the center of clinical decision making, where they should be,” allowing cannabis to be prescribed for “patients with particular conditions by medical practitioners authorized to do so.”

As Nash’s careful language indicates, the law was designed to be quite limited in scope. That didn’t stop some observers from responding enthusiastically; for example, journalist Dana McCauley wrote in March that medical marijuana was “tipped to become a billion-dollar industry” and that “key players are ready to pounce.”

Notably Wary Investors

Not everyone is so enthusiastic. Gaelan Bloomfield and Ram Venkay, partners in a new investment fund that will be managed from Australia and will focus on Calif.-based cannabis investment opportunities, are notably wary about the prospects at home, Down Under.

Their perspective is this: the new Aussie system for medical marijuana entails a strict production chain from cultivation to end use. The Office of Drug Control has taken the view that only two hectares, roughly 5 acres, of greenhouse space need be devoted to cannabis cultivation. If one wants a share of that space, one has to become a licensed cultivator by establishing that one has producers/processors willing to buy one’s crop. Those licensed producers, in turn, are parties who have shown that they have lined up medical buyers.

There isn’t a lot of room within this rigorously controlled system for the pursuit of a generous return on investment. Think about those two hectares for a moment. For purposes of comparison, some single growers in Colorado operate 16-hectare, or 40-acre farms.

At the other end of the production chain, there will be no legal direct marketing to possible patients. This isn’t specific to cannabis. It is true of medicines in Australia generally. Bloomfield, in an interview, referred wistfully to the advertisements in American television in which an actor tells the viewing audience how his depression cleared up once he started taking drug ZYX, and that if the viewer is depressed too, he should talk to his doctor about ZYX. In Australia, though, patients who are depressed have to take it upon themselves to talk to the doctor, and pharma companies market discreetly to doctors and druggists.

In general, for such reasons, Bloomfield and Venkay are skeptical that the tightly constrained market that Australia is now permitting for cannabis is or will soon become a promising investment space. Bloomfield suggests that in 2017 the “whole Australian market for medical marijuana will at best be between $75 and $100 million Aussie dollars.”

PhytoTech

Still, even a market of that size on a product growing out of a mere two hectares, could be the start of something big, and some will take a flier. Indeed, roughly a year before the February amendment to the NDA, the Australian Stock Exchange listed MMJ PhytoTech Ltd. (ASX:MMJ) on the strength of its plans to cultivate cannabis on a commercial scale.

MMJ began trading at $0.78 and climbed to $0.92 on its second day. But this didn’t last, and the price immediately dropped down into a range between $0.20 and $0.40. It has stayed in that range ever since. On Nov. 4, 2016, it closed at $0.215.

There was one brief moment when MMJ got above the aforementioned trading range: at the end of July 2015 it briefly reached $0.50. That was on the strength of its acquisition of a bioscience company, allowing it to declare itself a vertically integrated “Pharm to farm” concern. That upward bump, though, didn’t last.

What is most important to note about PhytoTech is that its business plan doesn’t really imply any disagreement with Gaelan Bloomfield’s skepticism about Australia’s domestic market. Its plans have long been heavy on the manufacture of vaporizers for sale in Europe, the United States and Canada. Ancillary to that, its business plan involves the spin-off of businesses.

Since PhytoTech

Other marijuana oriented enterprises have joined MMJ on the ASX. Just as the government was amending the NDA, a company called MGC Pharmaceuticals (ASX:MXC) arranged a backdoor listing, merging with Erin Resources, a penny stock. MGC had already worked with the University of Sydney on a white paper that advised the government on marijuana liberalization.

The mood of optimism generated by the amendment produced an immediate price increase over the first couple of months, from late February to late April. The stock price of Erin, now MGC, tripled in that period, from $0.03 to $0.09. It didn’t stay there long, and since July its price has been stuck between $0.04 and $0.05.

We should also mention in this connection AusCann (ASX:AC8), which acquired its ASX listing much as MGC did. It merged, in May 2016, with TW Holdings (ASX:TWH), at the same time it announced a strategic partnership with Canopy Growth Corporation (TSE:WEED).

Trading began on Feb. 3, 2017, and AC8 ended that day at $0.22, with more than 7 million shares trading hands. The following trading day, Feb. 6, the volume was less than half of that, 2.9 million, and the closing price went to $0.195. On the third day, the volume fell to less than 1 million, and the price stayed nearly flat, at $0.20.

In general, the ASX-listed cannabis enterprises are not acting like growth stocks. They are acting like low-priced, low-volatility, lottery tickets. They have not rewarded enthusiasm.

The ASX is the tenth largest stock exchange in the world and is cannabis-stock friendly. This substantially increases the potential for a burgeoning cannabis industry in Australia. As a consequence, the ASX is building institutional experience as a platform for the industry; experience that will serve it, and the cannabis industry, well, especially in the event of a further liberalization of the nation’s policies.

Christopher C. Faille, a Jamesian pragmatist, was one of the first reporters taking the hedge fund industry as a full-time beat, at the turn of the millennium, with HedgeWorld. His latest book, Gambling with Borrowed Chips, treats of common misunderstandings of the crisis of 2007-08.

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