The cannabis collapse: ASX marijuana shares going cheap

Investors have pulled back from marijuana shares as the sector begins to mature and the adverse publicity surrounding vaping takes its toll. But has the sell down been overdone?

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Listed cannabis stocks worldwide have pulled back from their highs lately, tainted by the vaping crisis in the US. Canopy Growth has seen its share price drift down to just above US$20 from highs of over US$50 in April. Rival Aurora Cannabis has likewise seen its share price fall from over US$13 in March to around US$4.80.

Australian stocks have not been immune either. Auscann Group Holdings Ltd (ASX: AC8) has lost 65% of its value to sit around 27 cents from 77 cents in January. Cann Group Ltd (ASX: CAN) is down to $1.22 from highs of $2.57 in April. Likewise Creso Pharma Ltd (ASX: CPH) is languishing around 28 cents after reaching 55 cents in June.

Have pot stocks gone to pot?

The gloss has well and truly come off cannabis stocks, as it seems the next big thing has become passé. But the fundamentals of the worldwide cannabis market haven't changed over 2019. The global legal marijuana market is expected to reach US$66.3 billion in size by 2025, spurred by increased legalisation and the use of marijuana in medical and recreational applications.

New Zealand is set to hold a referendum on the legalisation of marijuana in 2020. Meanwhile, in Canada, where marijuana was legalised in 2018, legalisation 2.0 has just occurred – next generation cannabis products such as edibles, drinks, and topical forms are now available. In Australia, the Australian Capital Territory recently passed legislation legalising the possession of small quantities of marijuana for personal use.

Blazing highs

So have the pot stocks been oversold? Sure, the sector is not as hot as it once was, but that doesn't mean it doesn't still have potential. Althea Group Holdings Ltd (ASX: AGH), for example, debuted on the ASX a little over a year ago at 20 cents and is now sitting at around 54 cents.

Althea holds a number of licenses and permits allowing it to import, cultivate, produce, and supply medicinal cannabis in Australia. The IPO, which was oversubscribed, raised almost $20 million with a portion earmarked to construct a 3-tonne per year grow facility in Victoria. Already distributing five products, Althea's plan is to grow current revenue and sales and commence domestic production.

Expertise is being supplied by listed Canadian grower and strategic shareholder, Aphria. Althea distributes products supplied by Aphria in Australia. Once the production facility in Victoria is built Althea intends to produce Australian versions of these products, named 'Capilano', 'Champlain Indica', 'Jasper', and 'Rideau'. Althea will import clone starting materials to do so.

To connect patients and prescribing doctors, Althea has created an app called Althea Concierge. Althea Concierge contains a directory for patients of all registered medical practitioners able to prescribe Althea products. For medical practitioners, the app assists in obtaining relevant approvals and permits to supply medical cannabis.

As at the date of Althea's prospectus, 57 patients had been prescribed Althea products in Australia. By October this year, 2,329 patients had been prescribed Althea medicinal cannabis products in Australia, and 463 new patients were on boarded in September 2019 alone. That's equivalent to 22 new patients per business day. There are now 334 health care professionals prescribing Althea products in Australia. Revenue for the September 2019 quarter was up 184% compared to the previous quarter.

In July, Althea agreed to acquire Canadian extracting and manufacturing company Peak Processing Solutions, with the acquisition approved by Althea shareholders and completed in October. Funded via an institutional placement, the acquisition is designed to take advantage of new Canadian regulations allowing for the sale of cannabis infused edibles, drinks, nutraceuticals, and cosmetic products. Canada's cannabis industry is expected to double in size to AU$5.4 billion by 2020.

Botanical healing

Another bright spark in Australia's cannabis landscape is Botanix Pharmaceuticals Ltd (ASX: BOT). Shares in the synthetic cannabinol company have been on the tear in the later half of this year, up 140% since June to 24 cents from a low of 10 cents, before crashing down to 11 cents today.

Botanix focuses on the development of topical treatments for serious skin diseases and has successfully completed its first acne patient studies. Last night, however, the company released the results of its Phase 2 acne studies, which found the primary endpoint reduction in inflammatory lesions was not statistically significant, sending the shares into a nose dive today.

The company leverages a proprietary drug delivery system under exclusive license to enhance topical delivery of synthetic cannabinoid by delivering high doses of the drug to the skin without the use of preservatives or irritating levels of alcohol or petrol derivatives.

CBD is well suited to treating skin disease with anti-inflammatory properties and antimicrobial effects. Clinical programs are underway to assess the efficacy of Botanix products in the treatment of acne, psoriasis, atopic dermatitis, and rosacea. Acne is the most common skin condition in the US, with more than 50 million sufferers. The atopic dermatitis market is estimated to be worth US$25 billion by 2027, while rosacea is estimated to impact 16 million Americans.

The release of interim results from a psoriasis study on 19 June showed significant anti-inflammatory and immune modulating activity. On 20 June Botanix released data showing its antimicrobial product was able to kill superbugs and had a potency similar to powerful antibiotics. As a result, the Botanix share price leapt from 14 cents on 19 June to 21 cents the next day.

Botanix conducted a $40 million institutional placement in August at 21 cents per share to fund clinical development programs and accelerate the commercialisation strategy. The company had AU$40 million cash on hand at the end of August and is well funded to execute its clinical studies.

Yet another medicinal marijuana company, Cronos Australia, is eying a November listing on the ASX, after backing out of an earlier listing attempt in 2018. Cronos focuses on the distribution and supply of medical marijuana.

Leveraging an 'asset light' model by outsourcing cultivation and manufacture gives Cronos the flexibility to focus on products, brands, distribution and IP, according to the company's prospectus. A memorandum of understanding has been signed with Sigma regarding the potential for Sigma to distribute Chronos products, which may be documented in a binding distribution agreement.

Foolish takeaway

Reports indicate that worldwide sales of legal cannabis have experienced growth rates of over 40% in recent years. Global demand for cannabis is predicted to grow by 17% to 23% per annum over the next decade. Australia's marijuana industry is still in its infancy, but it is attracting a flurry of listed competitors eager to make the most of green fields opportunities.

Motley Fool contributor Kate O'Brien 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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