NZX-listed cannabis grower and processor Cannasouth says it has scored its first major deal - and one that its CEO Mark Lucas says "is a big step toward profitability".
It's also a milestone for an industry that Agriculture Minister Damien O'Connor says will follow in the footsteps of our wine sector - which is now a $2 billion export earner.
Cannasouth has inked a deal to be the exclusive New Zealand supplier to Germany's Weeco Pharma for three years. From the second year, Weeco has agreed to buy a minimum amount of cannabis flower - which runs to thousands of kilos and which Lucas said could be worth between $12 million to $15m per year over years two and three, based on current market prices.
The deal could also be a boost for Cannasouth investors, who have so far had a tough run. Cannasouth shares (the startup raised $10m with its June 2019 IPO, but also saw its shares slump from 50c to 38c on their first day of trading. A run-up to $1.07 was spoiled by the "no" vote in the 2010 recreational cannabis referendum.
Shares were up 9.6 per cent to 40c in early trading today.
The first year of the deal will be spent ramping up production.
Cannasouth, which only had its first harvest from its Waikato facility in June, has essentially been in a pre-commercial phase up until now. In the year to December, it lost $2.9m on $1.3m revenue - with all of its income coming from an acquisition: liquid health supplement seller Midwest, which it bought out for $1.5m last year. Cash on hand was a modest $5.5m as of December 31.
Lucas said Weeco approached around 100 cannabis cultivators worldwide as it looked to boost its supply. (Germany dominates the medicinal marijuana market in Germany, with some 128,000 people prescribed cannabis, according to an investor presentation). He said Cannasouth won on quality, and that although there are now dozens of startups with a licence to grow cannabis, his firm is one of the few that can do so at the grade required by the Germans.
Cannasouth and Weeco have also signed a genetics development agreement which will ensure future genetics will be best suited to the European market.
While the deal is exclusive, Lucas said the German firm can approach other NZ growers if Cannasouth can't supply its desired volume, or specified product.
Is it the start of a string of deals?
"We are actively engaged with customers in other international markets however Europe remains the biggest and most high-value market for premium flower," Lucas told the Herald.
"The intended volumes indicated in the Weeco agreement and our desire to supply New Zealand patients means that until we scale up our cultivation facility further it is likely that there will not be sufficient excess flower at commercial quantities to supply other jurisdictions."
Long term, some 70 to 80 per cent of Cannasouth product will be exported, the CEO said.
Are there any barriers to growth that the Cannasouth CEO would like to see removed?
"The New Zealand Minimum Quality Standard is set very high by international standards,"
Lucas said.
The standard is enforced by Ministry of Health testing.
"Having said that, when flower is used as the finished product, patient safety is paramount. The main challenge is around some of the testing requirements."
Some testing of finished products is repeated in multiple steps of the production process which adds unnecessary cost, Lucas said.
"Also, as the industry is not fully developed here there are some tests that need to be sent offshore adding considerable cost, time and complexity to the product registration process.
"These are ultimately unnecessary testing costs that don't add anything to product safety. They increase the cost to the patient, reducing patient access."
Australia is seen as a high-growth market. Medicinal cannabis sales across the Tasman increased from $19m in 2019 to $95m in 2020 and $230m in 2021 with $423m sales forecast for this year. Patient numbers have increase from just under 50,000 in 2021 to just over 100,000 this year.
In New Zealand, where relatively few GPs have prescribed medicinal cannabis, the total commercial market was put at $5m in 2021. The Drug Foundation's State of the Nation 2022 report estimated 94 per cent of patients access cannabis through the black market.
Efforts by Green MP Chlöe Swarbrick to make medicinal cannabis more affordable and accessible have so far been resisted by Health Minister Andrew Little.
Swarbrick has also criticised Pharmac. The Crown drug-buying agency does not currently fund any medicinal cannabis products.