Gone are the days of smuggling cocaine across state lines, today there is clean money to be found in the green stuff: marijuana.

Marijuana has a long history as a medicine. The Chinese used it as an anaesthetic, the Indians used it for anxiety and it has even been found on Viking ships, possibly for use as a painkiller.

Cannabis was brought to Australia on the First Fleet and for 150 years the growth of hemp seeds was widespread and used as a medicine and enjoyed by recreational users too.

That was until 1920 when Australia signed the Geneva Convention on Opium and Other Drugs, which saw Cannabis grouped with heavier drugs like morphine, cocaine and heroin, and its use restricted to medicinal and scientific purposes. In 1938, cannabis was outlawed completely and slapped with the labels by Australian newspaper Smith’s Weekly as an “evil sex drug that causes its victims to behave like raving sex maniacs” and a “gateway drug”.

Like any illicit substance, people kept trying to access it, with the most famous case being a festival in 1973 in Nimbin attended by 6,000 people openly smoking marijuana. The riot that followed sparked conversations to decriminalise the drug in NSW and a plan was drafted to remove jail sentences, which did not come to pass.

Once again, the conversation has changed with medical marijuana becoming legal in Australia in 2016. Marijuana for recreational uses though is still illegal in Australia, despite being legal across Canada, in several US states and even New Zealand planning to legalise the happy herb.

It is medicinal marijuana that is the gateway into the drug for investors at the moment, but there are growing voices that it is not the “green money” it has been made out to be.

Cannabis legislation is still incredibly complicated despite legislation passing in 2016. The 2016 amendments to the Narcotic Drugs Act allowed cannabis to be legally grown for medical and scientific purposes in Australia.

“This is an important day for Australia and the many advocates who have fought long and hard to challenge the stigma around medicinal cannabis products so genuine patients are no longer treated as criminals,” then minister for health Sussan Ley said when the law was passed.

The uptake of medicinal cannabis, however, has been slow, with access to the drug being incredibly difficult due to long waiting periods, high costs and uninformed doctors. That is starting to change, with new data from the Therapeutic Goods Administration showing a 42 per cent increase in approvals for medicinal marijuana and a doubling of cannabis patients.

Canada case study

Canada legalised cannabis on 17 October 2018 nationwide but medicinal marijuana has been available in the country since 2001. In 2015 alone, Canadians are estimated to have spent roughly CAD$6.2 billion on marijuana. It wasn’t just consumers spending on marijuana, investment firm Canaccord Genuity estimated that $700 million has been invested in Canadian marijuana companies since 2015.

In late 2017, Deloitte predicted that the Canadian recreational cannabis market would be worth close to $23 billion, however legalisation also brought business risks with it, according to an Ernst & Young report. The report by EY found that many cannabis companies would merge together, leaving only a few large players in the industry post-legalisation.

During 2016 and 2017, the stock prices of many producers increased significantly as retail investors became bullish on the sector, with some values increasing by 54 per cent. Investors in Canada warned that speculation and frenzy were fuelling the gains, with some notable investors like Barry Schwartz of Baskin Wealth Management saying he would never invest in marijuana.

Marijuana stocks soared in the days leading up to legalisation only to plunge post-legalisation. In fact, many pot stocks went down by a double-digit percentage. The drop has been attributed to a variety of factors, including the old adage of investors buying the rumour and selling the news, unjustified valuations, supply issues and even the ongoing black market for illegal cannabis.

Paul Rosen, chief executive of Tidal Royalty, a company that invests in cannabis firms, told CNN business that cannabis companies are just like any others and people had to look at the balance sheets before investing. Mr Rosen says that people needed to ignore the green rush and joked that not every company can become the Google of cannabis. Heading into 2019, many US investors are predicting it will be a better year for marijuana stocks, as supply-chain problems are solved, the US seems set to legalise it further and regulations for edibles and beverages are set to be finalised.

Australia’s potential market

In Australia, the industry is just getting started, but data suggests the total legal and illegal cannabis market is worth between $4.6 billion and $6.3 billion. The data from New Frontier was announced during the Cannatech conference in Sydney last year, but due to the unknown quantity of the illegal market it is hard to know how accurate those numbers are.

A larger international report by Prohibition Partners has Australia’s industry experiencing quadruple-digit year-on-year growth over the next decade. The report is collated through quantitative research involving socio-economic and consumption analysis and qualitative intelligence gathered through reports and papers.

Prohibition Partners head of insights Alexandra Curley says it was a challenging market to research due to inconsistencies and misunderstandings around definitions.

“At Prohibition Partners we dedicate considerable time ‘cleaning’ the data that we find to ensure that we are analysing like for like when we compare markets.  We have noticed errors in some of reputable datasets for example in terms of the cost per gram of cannabis, but we are able to draw on our expertise in the industry as well as our vast network of industry experts to cross-check anything that doesn’t look right to us,” she says.

The Oceania Cannabis Report by Prohibition Partners found that the industry would be worth in excess of $10.6 billion to the economy by 2028. To put this figure into context, the liquor industry is currently worth just over that at $15.5 billion and the tobacco industry less than that at $8 billion.

Ms Curley says that the global cannabis industry is just at the beginning of its legal journey to market.

“In the Oceania region, Australia is very definitely leading the way, but recreational cannabis still remains illegal and accessibility to the legalised medicinal cannabis is still not without its problems,” she says.

According to the report, the biggest cannabis vertical in Australia would come from the recreational market, which once legalised would be worth roughly $7.6 billion by 2028.

Ms Curley says that number could be higher or lower depending on a number of scenarios, such as production/supply, but the number was based off solid facts.

“As of 2016, the Australian Institute of Health and Welfare estimated that some 10.4 per cent of the total population used cannabis and that the tolerance for regular use had risen from 9.8 per cent to 14.5 per cent between 2013 and 2016. It is not completely unrealistic that the number of recreational users could double as a percentage of the population over the next decade, although this would be tempered by the fact that many users are likely to remain light or occasional users,” says Ms Curley.

By 2024, the report estimates the medicinal cannabis market would be worth over $1.2 billion and would quickly double to almost $3 billion by 2028.

The industrial market in the Oceania region would be worth $18.6 million by 2028 with Australia to be the largest market in the region, accounting for roughly 99 cents of every dollar of the region’s hemp industry.

Even moving beyond the private enterprise, the government could reap the benefits of a legal cannabis market.

In January last year, the government announced plans to become the fourth country in the world to legalise medicinal marijuana exports. Following the announcement, shares soared for the over 20 cannabis producers listed on the ASX. Cannabis Jobs Australia, a job board for the industry, estimates that by 2028 there will be 50,000 cannabis jobs in Australia.

Australia’s climate makes it the perfect place for growth with a potential for two crops a year in areas with high sunlight and countries are already lining up to buy.

“Australia boasts an optimum climate for growing some strains of cannabis that are expensive to produce in more established markets such as Canada. This, coupled with anticipated changes to the law, will create an environment that will enable the region to capitalise on strong growth within the industry. That’s going to make Australia a very attractive proposition to investors,” Ms Curley says.

However, currently growers are unable to use the outdoor environment according to Barry Lambert, chairman of Ecofibre, an industrial hemp company.

“On the growing side, we can only grow it indoors, so you have to arrange the grow shed where you have high manual labor costs, electricity costs, all that stuff. Compare that to where we (Ecofibre) grow in the US. In America, we grow it outdoors under the Kentucky sun,” he says.

With the 2017 changes, marijuana companies are able to export to other parts in the world like the US and Canada, both of which are growing markets.

Canada took five days to burn through its stock once it was legalised nationwide for recreational use and according to Statistics Canada, close to 5.4 million Canadians will buy cannabis over the next 12 months.

The US is also a growing market for exporters where sales grew by 30 per cent in 2016 to reach US$6.7 billion, and that is without it being legal nationwide. The US now makes up 90 per cent of the marijuana stock trade, which can only go up with federalised legislation.

However, Mr Lambert says there was no market in those countries for cannabis exporters.

“Who are they going to export it to? America, you can buy it over the counter at a fraction of the price. Canada it has been legal for some time to sell cannabis and they are trying to export it,” he says.

Top stocks

Like any stock, there are a number of differing opinions on “pot stocks”. Prohibition Partners’ Ms Curley reflected that revenue in Australia’s cannabis-related IPOs was low and was worth looking outside of the direct industry.

“Volatility and immaturity in the market play a part in this, but as the market matures, more segments will open up. It’s definitely worth looking outside of the sector for opportunities as more players and even consumer brands attempt to cash in on the dynamic growth of the cannabis industry. We don’t currently cover ancillary services in our reports, but specialised companies that will enhance and facilitate the cannabis industry e.g. in compliance testing, laboratory equipment, drug delivery products and even cannabis clinics, will become a growing area of opportunity for investors,” she says.

HLB Mann Judd (an accounting and financial firm) partner Marcus Ohm says there are a lot of uncertainties in the industry before there could be an informed view on the industry.

“Australia is at an early stage in relation to the regulatory environment relative to other jurisdictions. For example, countries vary on whether marijuana is illegal, permitted for medicinal purposes or permitted for recreational and medicinal use. Australia has eased some aspects (e.g. medicinal uses/cultivation licences etc) but compared to the US (state level) and Canada (federal), for example, Australia has narrower applications,” he says.

Mr Ohm says the industry needs regulatory certainty and the success of the current players in the market would dictate its growth.

“The medicinal marijuana companies will need to demonstrate a realistic path to profitability. This is difficult due to the fact there is a lot of uncertainty around the future regulatory environment, the demand side as well as efficacy. Companies are doing trials for applications such as insomnia and the results of these trials will influence whether or not there is future growth for shareholders and whether there are new entrants to the market,” he says.  

Mr Lambert says there are currently too many companies in their infancy, and it is hard to judge where they are.

“I personally haven't invested in any other company. And I look at all their reports and stock exchange and I see no reason why I would invest in them. Like I say, I don’t follow them enough. Most of that is companies if I do look at them are down 50-75 per cent in the last 12 months,” he says.

Mr Lambert says most of the companies on the stock exchange are just not making money yet but spending it.

“Australian companies will find it very hard ever to make a dollar. If you look at some of the Australian companies, none of them make any money. There’s no revenue and they’re spending millions of dollars,” he says.

One of the first ‘pot stocks’ to appear on the ASX was MMJ Phytotech, which has since become a cannabis investor named MMJ. The group now holds $66 million in assets under management in various cannabis companies across Australia, the US and Canada. In the groups’ investor prospectus on the ASX, it highlighted its allocation across the value chain of the industry, with the majority skewed towards consumer goods and extraction facilities.

Arguably one of the largest initial IPOs was Cann Group, which raised $60 million in capital in 2017 and last year applied for an export permit to allow it to access the overseas market. Its new facility near Tullamarine Airport is expected to hold 50,000 kilograms of marijuana and generate revenues of between $160 and $200 million. Cann Group chief executive Peter Crock in his AGM address last year said the group had raised $78 million that would fund the new facility to be opened by 2020. The group is also one of only three groups with a permit to grow cannabis locally.

There are a number of small cap companies on the ASX that have an element of operations in cannabis or hemp, with many following certain themes. 

One of the riskiest from an investment perspective are the biotech marijuana companies. These are the companies that are running clinical trials to eventually take to market drugs based off cannabis. According to the Biotechnology Innovation Organisation, only 9.6 per cent of drugs make it from the initial tests to market.

Some of the companies are Zelda Therapeutics, which is developing drugs for insomnia, autism and cancer nausea; Botanix Pharma, which is developing drugs for bone and joint disease; and CannPal, which is developing a drug for animals.

Adjacent to these is AusCann, which is a pharmaceutical company designed to do the next stage for biotechs, that is developing and manufacturing the products themselves. Earlier this year, AusCann acquired a facility that will allow it to research and develop hard-shell cannabinoid capsules, among other products.

THC Global is also in the growing game and recently obtained two permits that allow for the cultivation and production of the company’s proprietary high CBD strains at its Queensland facility. The group also has two separate manufacturing licence applications under review, which its chief executive, Ken Charteris, says was crucial to its growth.

“The receipt of these permits is a critical step in progressing our Australian farm-to-pharma strategy and confirms expectations that THC Global will be in a position to commence full-scale production in the near term as one of the only Australian companies to have production ready facilities with licencing and permitting at an advanced stage,” he says.

Queensland Bauxite, a traditional mining company, has diversified its offering through its subsidiary Medcan Australia into prominent Israeli cannabis company Pharmocann. The deal will see Medcan manufacturing Pharmocann’s range of products for the Australian and global market. Medcan recently secured a manufacturing and export licence and will use Pharmocann’s expertise to produce the products, as Israel does not allow for export of medical cannabis products.

Bauxite has also teamed up with Algae.Tec to develop cannabis-based products for the animal market. The agreement through the Bauxite subsidiary Medical Cannabis, of which it owns 55 per cent, will see the group provide low THC cannabis cultivars to Algae to assist in establishing a breeding program to produce stock for veterinary medications, supplements and therapeutics. When the deal was announced in 2017, Bauxite shares went up 16 per cent.

Where to now

Whilst many people are in different mindsets about investing in marijuana, one theme that links them all is the need for better legislation and for better access to medicinal marijuana.

Mr Ohm from HLB Mann Judd says the field of applications in Australia was too narrow and needed relaxing.

“There are already quite a few companies listed on ASX who are in the process of working through their plans. Further listings will likely take account of the results of the existing listed companies in the sector, and the regulatory/demand aspect before listing,” he says.

President of the Australian Industrial Hemp Alliance, James Vosper, says that there has been a lot of investment in the industry, but regulation made it difficult.

“There is a lot of investment in the industry but there have been some issues with people getting access to medicines so therefore the number of people being treated in Australia isn’t as high as it could be. The means of accessing medicinal cannabis, there's quite a lot of red tape to go through, from the patient and the doctor that prescribes it. That has caused some issues with the growth of the industry within Australia,” he says.

Mr Lambert from Ecofibre says legalising medicinal cannabis in Australia did absolutely nothing for the promotion of the industry.

“There are two reasons. One, there is no demand for the product because the rules around getting the product are unworkable. For example, no doctor understands it because they aren’t trained in it because up until 2016 it had been illegal,” he says.

“Secondly, there’s been no research in this country because it’s been illegal. So, doctors don't know about it, therefore they don’t prescribe it.”

On the business side, Mr Lambert says it would be a huge product, but Australian companies needed regulation to change.

“We will not operate in the Australian medicinal cannabis market until Australia adopts the American system,” he says.

Mr Lambert says that US system allowed for medicinal cannabis to be sold over the counter and it was a system that Australia needed to adopt for growth.

“The Americans passed legislation here before Christmas. It was federally legal since 2014, but it was in a convoluted way through various acts etc. But the Americans made it clear in the 2018 pharm bill passed and signed by President Trump just before Christmas that says, ‘Hemp grown in America is legal and everything that comes from it is legal’ i.e. medicinal cannabis,” says Mr Lambert.

Without that the industry was dead before it even began, says Mr Lambert.

“We don’t believe that the prescription system works. And, therefore, those medical cannabis companies are going to find it very hard or impossible to be successful and that their solution is adoption of the American system, which is legalising hemp and you can then buy this product over the counter because it’s safe,” he says.

Others remain more optimistic, with Mr Voster saying the future looked bright for the industry.

“I think Australia has a great future in this industry. The whole world is moving towards an organic model and Australia has half of the world’s organic farmland. Put that with a great reputation for products, and you have a great future in the medicinal cannabis industry,” he says.