Canberra cannabis breakthrough: A sign of change or just hot air?

Written on the 26 September 2019 by Matt Ogg & David Simmons

Canberra cannabis breakthrough: A sign of change or just hot air?

The majority of leading ASX-listed cannabis stocks rose in value this morning after the Australian Capital Territory (ACT) passed a bill yesterday to legalise the possession, consumption and cultivation of cannabis for recreational use.

But is the excitement justified? Opinions vary within this booming industry with some viewing Canberra's move as a harbinger for other states, but others are sceptical about the true impact and whether the development may even damage the progress made by medicinal cannabis companies.

Dr Sud Agarwal, co-founder and CEO of Australia's largest cannabis industry services provider Cannvalate, believes the playbook in Australia will be very similar to what is happening in the US market.

"As attitudes towards adult-use cannabis use soften and learnings about how to regulate this market in a safe manner are made, then I would expect other states to pass similar legislation as it is likely to be an easy tool for political parties will use to win over large numbers of the Australian electorate," says Agarwal, who is also chief medical officer at Impression Healthcare (ASX: IHL)

"Victoria is the state most likely to change next, with a medicinal cannabis-supportive Labor government and a very active Greens Party led by Senator Richard Di Natale, who has historically been very vocal about his desire to legalise adult-use cannabis."

The law is expected to come into effect in late January, allowing the cultivation of two plants per person or four plants per household, and possession of up to 50g of dried cannabis. Smoking of the substance will not be allowed in public places, and it cannot be grown hydroponically.

Agarwal notes that while Cannvalate focuses on medical and research-driven cannabis, it is highly likely that developments in Canberra will increase demand for the company's services.

"We are already developing cultivation and manufacturing facilities for several large Canadian industry stalwarts who have entered the Australian cannabis industry with $20-50 million investments," he says.

"We expect these companies to potentially increase the footprint of their projects and we also expect several more Canadian and international players to engage with us due to the increased demand for cannabis products in Australia."

Despite this optimism, Agarwal and many other experts have raised concerns the law may have unintended consequences.

"One of the unusual aspects of the recently passed ACT legislation is the allowance to grow two plants per person within your own private property," he says.

"Whilst I understand the intention behind this law, this does carry the risk of having low quality, unregulated, home grown cannabis enter the market which may end up in both the medicinal and recreational markets.

"There is a risk that this level of deregulation could create a parallel grey market allowing patients to choose home grown, non-medical grade products over high quality products made under pharmaceutical conditions because of financial drivers."

Agarwal's perspective is shared by Josh Fegan, founder and managing director of Althea (ASX: AGH), one of the country's leading cannabis companies by market capitalisation.

Fegan says Althea's concern is that individuals who are facing difficulty in accessing medicinal cannabis products due to the high level of regulation may view this as an opportunity for self-treatment.

"As evidenced by media reports, individuals from the ACT are already crossing the border to NSW in order to access medicinal cannabis products given the difficulties to access it within the ACT," he says.

"Needless to say, the end product of what an individual grows at their home will be largely unknown to the individual. Further, this would be without the oversight of a healthcare professional."

Fegan does not believe an individual growing plants at home will be able to achieve the high-quality, consistent and pharmaceutical-grade medicinal cannabis products that Althea produces in consultation with healthcare professionals. 

Cannabis Access Clinics medical director Dr Sanjay Nijahawan emphasises the ACT's recreational cannabis legislation is a separate issue to medicinal cannabis and "should not be seen as a substitute for those with legitimate medical needs".

"Australia currently has a robust framework to allow legitimate patients obtain high quality pharmaceutical products with the necessary medical expertise on appropriate dosing and ongoing treatment and monitoring," says Nijahawan.

"We estimate that two to three million people in Australia currently use cannabis recreationally, so there is certainly a market for personal use that sits alongside patients who have legitimate medical needs," adds Tim Drury, director of Southern Cannabis Holdings, the parent company of Cannabis Access Clinics.

"If a legal framework is going to be rolled out, in our view it needs to be consistent across all states and territories and at the federal level."

These views are echoed by Sholom Feldman, managing director of Cann Global (ASX: CGB), another major force in the listed ASX cannabis space.

"Although Cann Global is pleased with the significant social benefits and commercial opportunities this development gives to enable widespread responsible use of high-quality medicinal cannabis products, we do not believe that the cannabis plant that contains the high THC psychoactive should be used by those who do not need its medicinal properties," says Feldman.

"The health benefits of the low THC cannabis varieties otherwise known as hemp can already be accessed legally by all Australians through our wide range of high-quality Australian produced hemp-derived T12 products, which is safe and beneficial to be consumed regularly by the entire family."

Nonetheless, Feldman is pleased his important plant will now be more widely available for those who will need it most, and awareness of its significant medicinal properties are becoming more widely acknowledged and accepted.

"CGB look forward to being able to tap into this new market to provide high quality targeted scientifically backed and quality controlled formulated medicinal products to those who need it most, and applaud all efforts to ease access to those who would be medically assisted by medicinal products produced from the cannabis plant," he says.

Josh Fegan of Althea is also positive despite some of his concerns around the new ACT law.

"The change in attitude toward cannabis is certainly not limited to the ACT and we look forward to the extension of this attitude to the medicinal cannabis sector," he says.

"At this stage, there is still debate over the proposed changes in terms of how they conflict with Commonwealth law as well as concerns around the health and safety of cannabis. For these reasons, it is too early to tell whether these changes will lead to similar proposals being passed in other states.

"It is our view that, as we are already seeing in the case of Queensland with the removal of state based approvals and NSW removing state based approvals in the near future, there will be a national relaxation with respect to the medicinal cannabis sector prior to any national legislation regarding recreational."

A source close to Business News Australia who asked not to be named says the passage of the bill may be symbolic, but the reality is that Australia is socially conservative and that makes it difficult to build an industry.

"If investors are looking for an investment in cannabis they should look offshore rather than in Australia because the reality is that the regulatory regime is not friendly," the source says.

"I think that the ACT thing, it's very much a one-off, and as it's been noted is subject to federal government overrule.

"There's a lot of hot air in the Australian cannabis investment space."

The source notes a stark difference to Canada, where medicinal cannabis can be given out by a dispensary compared to the Australian system where a referral is needed.

"They've improved the actual timeliness of it, but here it's seen as dishing out a drug of dependence," the source says.

"If you look in Canada, what you see there is that valuations have come down significantly. And that's because they're in the phase now where companies are being measured on near-term profitability.

The source says the cannabis industry can be summarised into three categories - agriculture, processing and retail.

"It's not retail in Australia, and there is some small amount of processing, but it's really in the agricultural space. In the processing space you're competing against multiple countries in the world," the source says.

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Author: Matt Ogg & David Simmons

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