It's been a year of highs and lows for cannabis shares. Marijuana shares were favourites of investors earlier this year but have since suffered setbacks: the vaping crisis in the United States (US) as well as issues on the home front have burned ASX marijuana shares, with prices pulling well back from their recent highs.
As the reality dawns that marijuana is a commodity like any other, investors have started to reassess cannabis stocks. With the market maturing in the US and Canada, fears of increased competition and price compression have reset investor expectations.
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 $1.01 from highs of $2.57 in April. Likewise Creso Pharma Ltd (ASX: CPH) is languishing around 20 cents after reaching 55 cents in June. Althea Group Holdings Ltd (ASX: AGH) has pulled back to 38 cents from highs of over $1.20 in July and Botanix Pharmaceuticals Ltd (ASX: BOT) is down to 11 cents from 27 in September.
With prices having pulled back to less exuberant levels, is it time to consider taking a punt on the cannabis stock party? After all, 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.
Legalisation 2.0 just occurred in Canada, allowing for the use of cannabis in edibles, drinks, and topical forms. New Zealand is set to hold a referendum on the legalisation of marijuana in 2020. In Australia, the Australian Capital Territory recently passed legislation legalising the possession of small quantities of marijuana for personal use.
So, which ASX marijuana stocks could be worth taking a second look at in November? Let's take a closer look at 3 of the main players in the cannabis sector.
Auscann Group Holdings
Auscann seeks to harness the properties of cannabinoids to utilise in medicines targeting neuropathic and chronic pain. Focusing on product development and clinic studies, as opposed to cultivation, manufacture or dispensing, Auscann specialises in what it sees as the high value parts of the supply chain.
Auscann intends to release its pharmaceutical cannabinoid-based product to clinical trial by the end of 2019. The hard-shell capsule provides doctors with a stable cannabinoid-based medicine for the treatment of chronic pain. Key objectives for upcoming quarters include educating healthcare professionals about the characteristics of Auscann's product and providing selected physicians with capsules for prescription to a controlled body of patients.
Auscann is constructing a product development facility in Perth, which is at an advanced stage. The facility will enable Auscann to create a product pipeline to accompany and improve the cannabinoid-based pharmaceutical capsules. Partnerships have been established across the supply chain to ensure the supply of raw material and aid the distribution of end products.
FY19 was a year of transition for Auscann as the company progressed from medical cannabis startup to pharmaceutical company. Income in FY19 was $1,532,376. Total expenses were $9,181,597, resulting in a loss of $7,649,221 before tax. A placement was conducted in July 2018 that raised $33.4 million from institutional investors and $1.9 million from retail investors. Auscann is funded until FY20 with $25 million in cash as of 30 June 2019.
Althea Group Holdings
Shares in Althea dropped 23% to 40 cents on Friday after Althea confirmed that strategic shareholder and supplier Aphria had sold 36,697,000 shares in the company, equivalent to 15.7% of the company's issued capital. Aphria sold its shares to institutional investors at a price of 40 cents per share, a steep discount to the 52 cents the shares were trading at before the trading halt was called on Wednesday.
Althea holds a number of licenses and permits allowing it to import, cultivate, produce, and supply medicinal cannabis in Australia. It raised nearly $20 million in its IPO and nearly tripled in price from 20 cents on its debut on the ASX a little over a year ago. Aphria, a cornerstone shareholder, was supplying expertise and the products Althea distributes in Australia.
The Aphria supply agreement has now been extended to 2027. Althea is set to take over the production of products once its facility in Victoria is completed – $3 million in funds from the IPO were earmarked for its construction.
In October Althea completed its acquisition of Peak Processing Solutions, a Canadian extraction and manufacturing company. The acquisition is designed to leverage Canada's legalisation 2.0, which allows the sale of cannabis-infused edibles, drinks, nutraceuticals, and cosmetic products.
Cann Group Ltd
Cann Group Ltd has licences allowing it to cultivate cannabis and produce cannabis for medicinal purposes. Works are underway on the company's third cultivation and production facility which is on track to be commissioned in the third quarter of calendar 2020. The facility is expected to have a production capacity of 70,000 kilograms of dry flower per annum and is being funded with a mix of debt and existing cash reserves. An offtake agreement with Canadian-based Aurora Cannabis Inc was entered into in FY19, which offsets the risk of the expanded production footprint.
The increased capacity is expected to generate revenues of $220 million to $280 million based on cannabis dried flower. A term sheet for debt financing has been signed with an Australian bank, which will be announced once the revised project budget is confirmed. Revenues currently remain highly variable as local manufacturing capacity comes online.
Revenue in FY19 was $2,347,668 and other income was $1,904,975. Administration and corporate costs were $13,466,524 while research and development costs were $1,047,608 in FY19. Total losses were $10,926,317. Cash at hand end of FY19 was $46,388,192.
During FY19, a minority investment was made in Pure Cann NZ in order to expand the regional position ahead of regulatory changes expected to legalise medical marijuana in New Zealand shortly. A small investment was also made in Emerald Clinics, which intend to build a network of medical cannabis clinics in Australia.
Foolish takeaway
The highs that cannabis shares reached earlier in the year have definitely come back down to earth with a thump. Over time, marijuana will become a product like any other, subject to the same competitive forces that drive outcomes in other sectors.
None of the 3 ASX marijuana shares discussed above have yet turned a profit, but each shows potential. Althea dipping below 40 cents may be an indication that it has been oversold, while for Auscann, much rests on the outcome of its clinical trial. Cann Group's future looks promising once the new greenhouse facility commences production; however, current variability in revenues may be deterring investors.
