The sector that’ll grow 480% this year, expert says

Can you smell that? That’s the fragrance of a booming industry, which is still in a startup phase in Australia.

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cannabis leaves on a rising line graph representing growth of ASX cannabis share price

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There is a sector in Australia that’s about to grow its revenue by 478% in the current financial year, according to one analyst.

Consumer research firm IBISWorld revealed Tuesday that the medical cannabis manufacturing industry is currently experiencing a boom despite the still-remaining legal hurdles.

“The strict regulatory framework regarding the manufacture of medical cannabis products has limited the sector’s growth over the past five years,” said IBISWorld senior industry analyst Will Chapman.

“However, the recent determination by the Therapeutic Goods Administration to allow over-the-counter [cannabidiol] products to be sold without a prescription is expected to drive significant revenue growth in the years ahead.”

The industry produces medicines and consumables based on one of two ingredients extracted from the cannabis plant: cannabidiol (CBD) and tetrahydrocannabinol (THC).

CBD is a non-psychoactive ingredient used as a pain killer and an anti-convulsant. THC is the stuff that gives you “a high” but can be used to treat pain and nausea, low appetite and insomnia.

Recreational use for cannabis has been legalised in Canada and some US states. There is no sign of such a development yet in Australia, but IBISWorld reckons this won’t stop local cannabis businesses from growth.

“It will take time for new medical cannabis products to be approved, but medicines derived from cannabis will eventually appear on pharmacy shelves,” said Chapman.

Banks are offering massive finance to cannabis companies

The sector in Australia is still very much in the startup phase – so it’s coming off a low base. 

Nevertheless, after seeing total revenue of just $5.4 million in the 2020 financial year, IBISWorld has forecast the current year will end with $31.2 million.

But there’s still plenty of growth to come, it reported.

“Overall, medical cannabis manufacturing revenue is projected to rise at an annualised 79.1% over the five years through 2025-26, to $575.2 million,” said Chapman.

“IBISWorld anticipates employment in this industry to reach 1,500 by 2025-26.”

There are a few cannabis businesses listed on the ASX.

The Motley Fool reported last month Zelira Therapeutics Ltd (ASX: ZLD) had a stunning 2020, with the share price spiking up 67%. Althea Group Holdings Ltd (ASX: AGH) returned a nice 14% to its investors over the calendar year.

IBISWorld singled out Cann Group Ltd (ASX: CAN) as a “major player” in the Australian industry, with a 24% market share in the 2020 financial year.

Privately owned Little Green Pharma was also named by the analysis firm as a player to watch.

Banks have already recognised the huge potential, according to Chapman, lending out large sums to cannabis startups.

“The growth opportunities in the budding cannabis industry have not gone unnoticed by Australian financiers. In March 2020, start-up CannaPacific secured a $3.5 million debt facility from Westpac Banking Corp (ASX: WBC). Cann Group secured a $50 million credit facility from National Australia Bank Ltd (ASX: NAB) in November 2020,” he said.

The ultimate milestone

Recreational legalisation may remain politically unpalatable in the near future in Australia. But the local industry’s current focus is to get a cannabis-based medicine on the Australian register of Therapeutic Goods for domestic supply.

There is currently none on that hallowed list.

“For many start-up cannabis businesses, the ultimate goal is to have the medical benefits of cannabis recognised and their products accepted among medical professionals,” Chapman said.

“Achieving the listing of cannabis products on the Pharmaceutical Benefits Scheme would be a major win for cannabis products.”

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Returns as of 15th February 2021

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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