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Why medicinal cannabis shares have been smoked this week

It hasn’t been a great start to the new financial year for many of Australia’s leading cannabis companies.

Here is the state of play so far in FY 2019 for four of the larger players:

The Auscann Group Holdings Ltd (ASX: AC8) share price has fallen 4% since the start of the financial year. A $33.4 million share placement to institutional and sophisticated investors from North America and Australia at $1.10 per share has weighed on its shares and led to a 7% decline on Thursday.

The Cann Group Ltd (ASX: CAN) share price has tumbled almost 17% so far in FY 2019. This means it has given back almost all gains made at the back end of FY 2018 when its shares rallied following an agreement to lease and build Cann Group’s Stage 3 cultivation and GMP manufacturing facility near Melbourne airport.

The Hydroponics Company Ltd (ASX: THC) share price is down almost 4% so far in FY 2019. Earlier this week the company advised that it had entered a binding term sheet for the exclusive leasing rights of organic certified land in northern New South Wales. Hydroponics Company intends to use the land to grow medicinal cannabis, subject to necessary statutory and regulatory approvals.

The MMJ Phytotech Ltd (ASX: MMJ) share price has dropped 3% since the start of the new financial year. At the start of the week MMJ Phytotech announced that it has invested C$5 million for a 6.9% shareholding in privately-held MediPharm Labs as part of its C$22.3 million funding round. MediPharm owns Canada’s largest medical cannabis oil production facility that will support 100,000kg of annual dry cannabis processing.

So why are cannabis shares sinking lower?

This week the University of New South Wales released the results of a four-year study into medicinal cannabis use for the treatment of chronic pain.

The study, conducted by the National Drug and Research Centre (NDARC), found “that participants who were using cannabis reported over a series of assessments they were experiencing greater pain and anxiety, were coping less well with their pain, and reported that pain was interfering more in their life, compared to those not using cannabis. There was no clear evidence that cannabis led to reduced pain severity or pain interference or led participants to reduce their opioid use or dose.”

While this is of course just one study, it is arguably a major setback for the industry and potentially a reason for concern. Especially given how lucrative the chronic pain market is and how many were targeting it.

I would suggest investors keep their powder dry and wait for supportive data and sales before investing in this high-risk industry.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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