ASX cannabis shares have proven to be susceptible to coronavirus, with valuations slashed in the recent market downturn. This is the second crisis to hit cannabis shares in the past year, after the "vape crisis" in late 2019.
The current downturn has sparked a capital crunch which will make fundraising more difficult. ASX cannabis shares that had plans to fundraise this year will struggle to gain backing. Those with sufficient cash on their balance sheets, however, will be better placed to ride out the crisis.
Some have speculated the coronavirus crisis could prompt a rise in medical marijuana prescription levels in Australia, as people suffer increased stress from isolation. Those cannabis companies that survive the economic downturn will be well placed to cannibalise the customers of any that do not.
So, let's take a look at how ASX cannabis shares are riding out the downturn.
Althea Group Holdings Ltd (ASX: AGH)
Althea has seen its share price steadily increase since late March after the company announced it was on track to record its highest ever monthly revenue. Shares are up 67% since the announcement was made and are currently trading at 35 cents.
The company is an early-stage business in an early-stage industry. Investment is required to spur growth. Luckily, Althea is in a good financial position with no debt and more than $15 million cash. It is also generating revenues which puts it in an enviable position compared to some competitors. Nonetheless, Althea is conscious of the need to carefully monitor expenditure in the current environment, and ensure every dollar counts.
Patient needs unabated
While coronavirus has brought the economy to a shuddering halt, it doesn't stop patients needing access to medications. "What Althea's products are doing for people across a number of different indications, mainly pain, is unbelievable," Althea CEO Josh Fegan said, "that pain doesn't simply stop because coronavirus has arrived. Patients need their medicines, just like any other medication that people are utilising, and so Althea's products are going to be required."
Numerous products available
Founded in 2017, Althea holds a full set of licenses from the Office of Drug Control and Agriculture Victoria, which allows the company to supply patients with pharmaceutical grade, full spectrum medicinal cannabis products. Since it was founded, Althea has released 5 branded products to the market, the most recent being CBD100, a highly concentrated, full-spectrum cannabidiol oral oil product.
Patient numbers increasing rapidly
In March, Althea announced it had surpassed 5,000 patients the previous month, up from just 500 patients in March 2019. In Australia as a whole, there were 10,595 medical cannabis patients at the end of 2019, up from 1,608 at the beginning of 2019. Althea, therefore, lays claim to a large proportion of the market.
The company has been aided in gaining market share by the large number of healthcare professionals prescribing its products – these numbered 440 at the end of February. The medical profession are the gatekeepers for access to medical marijuana in Australia. Those prescribing Althea products represent an impressive 40% of all medical professionals in the medicinal cannabis space.
Offshore operations
Althea's Australian operations are now close to breaking even, but it also has interests in the UK and Canada. Shipments of Althea product to the UK have expanded following a loosening of import restrictions.
The UK Home Office changed import restrictions to ensure people with prescriptions for cannabis-based products for medicinal use do not have treatment delayed or interrupted. Althea is now able to import larger quantities of cannabis-based products to the UK and hold enough supplies for future use by existing and new patients.
In Canada, Althea recently completed its Peak Processing Solutions facility, which will be capable of contract manufacturing cannabis-infused products for consumer-packaged goods companies. Once licensing is completed, the facility will be one of the first in Canada capable of doing so, closing a gap in the Canadian recreational cannabis market.
Peak Processing recently submitted its evidence package to Health Canada, the final step in the licensing process. Health Canada aims to process these applications within 60 days. Peak Processing is projected to achieve revenue of $25 million within 18 months of its license being granted. The facility is capable of manufacturing canned beverages, topicals, powders, concentrates, vaporisers, and medicinal products.
Cann Group Ltd (ASX: CAN)
Cann Group shares have lifted over 40% since late March, with the Group announcing at the start of April that its first product formulations will be released to the market. Dried cannabis flower and cannabis oil from its Australian-grown cannabis have completed shelf-life stability testing and are now available to fulfil specific customer orders.
Essential service
In the context of the coronavirus pandemic, Cann Group's operations are considered an essential service as it supplies medical products to Australian patients. The company expects to continue to operate throughout the pandemic. A business continuity plan has been enacted which includes moving to a shift-based operation for cultivation facilities.
Mildura production facility
Cann Group has continued to evolve plans around the construction of its Mildura greenhouse facility. A staged approach was announced earlier this year with stage 1A to increase production capacity to 12,500 kilos annually. Two additional stages will be dependent on demand growth.
A funding package for the stage 1A development was expected to be finalised by the end of Q1 2020, with the company in talks with a Tier 1 Australian bank. As at 1 April, however, no package had been agreed. Cann Group has said it will continue to progress funding options with the objective of putting the company in a position to proceed. Given current economic uncertainty, however, the Board now says it may not make a decision on funding until the end of the financial year.
Cann Group's financials
Cann Group is generating revenue, but is not yet close to breaking even. A loss of $8.4 million was reported for 1H20. At the end of the half, Cann Group had $8 million in cash and cash equivalents. Although the company had no debt, it had over $5.8 million in current liabilities attributable to trade and lease liabilities.
In February, Cann Group issued $8 million in convertible notes, proceeds of which are to be used for working capital requirements. The notes were issued to sophisticated and professional investors and are convertible on or before 10 February 2022. This will serve to dilute the holdings of retail investors.
Foolish takeaway
Current market conditions make capital management more difficult for ASX cannabis shares. Nonetheless, demand for medicinal cannabis products continues to grow unabated. Those that survive the downturn will be well placed to increase market share as conditions improve.
