ELLXF - A Guide to Investing in CBD Stocks on the ASX
The increased popularity of cannabidiol (CBD) has allowed markets for the extract to pop up across the globe, and Australia is no exception.
CBD, a derivative found in the cannabis plant, is now used in everything from pain relief medication to topical face creams, creating a lucrative investing space for marijuana stocks on the Australian Securities Exchange (ASX) as companies attempt to cash in on both national and international financial opportunities for the drug.
Here the Investing News Network (INN) takes a look at the projected growth of CBD stocks on the ASX and some of the players investors may want to keep their eye on as CBD takes root in the country.
Pros and cons of investing in CBD stocks on the ASX
The global cannabis sector was hit hard over the past summer, and Australia marijuana stocks faced the same sharp decline in value as their international contemporaries.
Canaccord Genuity’s Australian equity analysts Cameron Bell and Matthijs Smith said in a note sent to investors in November that Canaccord’s Australian Cannabis Index fell about 40 percent over four months.
There’s also the issue of the relatively small size and young age of the cannabis market in Australia. The pair from Canaccord called it a case of “smoke without fire.”
The issues facing the Australian cannabis markets lead to a shifting of expansion plans for some Canadian marijuana firms that had previously invested into the country.
Western-Australia-based AusCann Group Holdings (ASX:AC8) lost the backing of Canopy Growth (NYSE:CGC,TSX:WEED) last year after the Canadian company sold off its 13.2 percent interest in AusCann for C$6.3 million.
Althea Group Holdings (ASX:AGH), another Australian company, took a hit after it was discovered by Australian Financial Review that Aphria (NYSE:APHA,TSX:APHA) was looking to sell its stake in Althea after investing in the firm in 2018.
In an interview with Small Caps, Sud Agarwal, CEO of medical cannabis company Cannvalate, said that the challenges facing the cannabis market are tied to a shift in investor strategy.
“The reason I think most of the Australian values have dropped is partly because of a market pivot to more sophisticated plays, recognizing that cultivation is likely to be done by lower cost countries overseas and we’re going to be an import country rather than a grower,” said Agarwal.
There is also the fairly strict federal control of medicinal cannabis to consider, something Agarwal said has proven to hinder the growth of the sector. In his view, local cannabis cultivation isn’t feasible.
“Because we’ve got so much regulation here and the cost to get anything done is so expensive, I think … it will never become cost-effective to grow locally in Australia and use our product to turn into a final product here,” he said.
There have been some wins for the sector, though, despite the setbacks.
Bell and Smith said that, while the early state of the sector in Australia has been marked with the kind of volatility that comes with any nascent industry, medical marijuana has been quickly adopted and patient numbers have soared.
Up until the end of November, the Therapeutic Goods Administration (TGA) has approved over 24,000 SAS Category B applications for unapproved medicinal cannabis products.
And when it comes to CBD, the use of the extract for medicinal purposes has been high.
FreshLeaf Analytics reported that though CBD is only available via doctor prescription, it still makes up one-third of all prescriptions for cannabis-based medicine in its Q3 2019 report.
The report also stated that doctors said they were more likely to prescribe CBD to patients initially before moving onto products with tetrahydrocannabinol (THC).
Product competition has been up as well. FreshLeaf reported that there were 76 products available for doctor prescription in the Australian market in Q3 2019, representing a jump of over 40 percent from the 54 products available in Q1 2019.
Top CBD stocks on the ASX
With the steady growth of the CBD industry locally and internationally, several Australian players have come to the fore to grab a piece of the market while it’s still in its early days.
One crucial cannabis play listed on Australia’s stock exchange has a particularly strong presence in the hemp industry: EcoFibre (ASX:EOF).
The Queensland-based biotech stock boasts a market capitalisation of AU$803.2 million and produces and sells hemp-derived products across the four parts of its business portfolio: Ananda Hemp, Ananda Food, Hemp Black and Ananda Professional. Ananda Professional products are the first fully compliant and legal hemp-derived CBD oil offerings that target the needs of independent pharmacies and healthcare professionals, according to EcoFibre.
EcoFibre’s business also extends to markets outside of Australia through its operations in Kentucky, California and Pennsylvania.
The wide variety of EcoFibre’s offerings, from pharmaceutical hemp extracts and hemp textiles to hemp food products such as hemp flour and hemp protein powder, has made it a key player in Australia’s CBD industry.
There’s also Elixinol Global (ASX:EXL,OTCQX:ELLXF), which has a market cap of AU$93.8 million.
Elixinol Global is benefitted by its large global footprint, which includes its subsidiary, Elixinol USA, a manufacturer of hemp products — from hemp-infused skincare to hemp dietary supplements — in Colorado.
It’s US-based operations have a wide range of CBD offerings, including tinctures, capsules and powders, and the firm is now taking its interest in CBD to the pet care industry.
In August, Elixinol Global announced a manufacturing and supply agreement with Pet Releaf, which produces hemp-derived CBD oils, topicals and treats for pets, following the purchase of a 25 percent equity stake of Pet Releaf in April 2019.
As part of the deal, Pet Releaf will buy a minimum of US$18 million worth of products over 18 months.
Another big player in the CBD space in Australia is Botanix Pharmaceuticals (ASX:BDA), a clinical stage CBD exploration company with a market cap of AU$98.1 million.
Botanix is another of the biotech stocks with ties to the cannabis sector as it seeks to find treatments for skin diseases including acne, psoriasis, dermatitis and rosacea with its transdermal delivery system using CBD. The company is in the process of preparing the first human trials of a proprietary drug system that delivers synthetic CBD-based medicines to the skin.
Botanix recently teamed up with pharmaceutical-grade CBD provider Purisys in a supply agreement that covers Botanix’s need for synthetic CBD as it continues its clinical trials for products in its pipeline.
The company’s research efforts were helped by a grant from the federal government’s AusIndustry department in October, which will be used to create new synthetic and patentable versions of the extract and explore its antimicrobial properties.
Investor takeaway
CBD in Australia will continue to offer an impressive investment opportunity to individuals looking to get in on a budding industry. As the industry for legal cannabis in Australia begins to develop further, marijuana companies will begin to position themselves to take on market share.
With the massive growth of the global CBD market — projected to reach US$22 billion by 2022 according to research firm Brightfield Group — Australia’s marijuana stocks that have zeroed in on CBD as a focus could prove to be an impressive investment option in the stock market.
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Securities Disclosure: I, Danielle Edwards, hold no direct investment interest in any company mentioned in this article.