Canadian firm Hexo has linked with Molson Coors Brewing to make cannabis-infused drinks. Photo / Bloomberg
COMMENT:
The cannabis sector continues to be in the spotlight as more and more countries legalise its use, particularly medical cannabis.
Marijuana was legalised in Canada last year and the Canadian Government is expected to sanction cannabis infusion edibles in the next 12 months. These edibles, which can be consumed through cookies, chocolate bars, drinks and snacks, are viewed as healthy alternatives to marijuana smoke and are attracting big brand companies to the sector.
Canada is one of only six countries to legalise cannabis for recreational use, with the others being Uruguay, South Africa, Guam, Georgia and the Northern Mariana Islands.
Medical and recreational marijuana have been legalised in several US states, but remain prohibited at the Federal level.
The New Zealand Government will hold a referendum on cannabis use at the 2020 general election with a simple yes/no vote based on draft legislation. This legislation is expected to include the following clauses:
• A minimum age of 20 to use and purchase recreational cannabis
• Regulations and commercial supply controls
• Limited home-growing options
• A public education programme
• Stakeholder engagement.
In early May, Justice Minister Andrew Little was quoted as saying: "Officials are now empowered to draft legislation with stakeholder input, and the Electoral Commission will draft the referendum question to appear on the ballot. The voters' choice will be binding because all of the parties that make up the current Government have committed to abide by the outcome".
He went on to say: "We hope and expect the National Party will also commit to respecting voters' decision".
The outcome of the referendum is uncertain as a poll in early May concluded that 52 per cent would vote yes while a poll last month found that 52 per cent would vote no.
How have listed cannabis stocks responded to the legalisation of medical and recreational marijuana, particularly in Canada?
This column last looked at the sector in mid-May 2017 when the North American Marijuana Index, which included 32 listed companies, had appreciated 101 per cent in the previous 12 months.
The intervening period has been much more subdued with the Marijuana Index, which now contains 47 companies, down 6.2 per cent over the past 12 months and more than 40 per cent below its January 2018 all-time high.
In general, the larger companies have outperformed the smaller entities as the former are more likely to have the production and marketing capabilities to take advantage of cannabis legalisation.
For example, this column looked at eight small ASX-listed cannabis companies in May 2017 and only two of these have had positive sharemarket returns in the past 12 months.
Botanix Pharmaceuticals has been the outstanding performer with a positive 12-month return of 160 per cent as the ASX company has focused on the use of cannabidiol to treat acne, psoriasis and atopic dermatitis.
The disappointing performance of the other ASX-listed marijuana stocks is consistent with the newly listed NZX cannabis company Cannasouth, which has fallen from its IPO price of 50c to 37.5c.
Nevertheless, there is huge interest in the cannabis sector, with an MSCI blog earlier this week containing the following comments: "The universe of companies with cannabis involvement — ranging from direct production to minority stakes in cannabis-related operations — is expanding rapidly. We (MSCI) identified 148 global publicly traded companies, as of June 3, 2019 — nearly double the 86 companies with cannabis involvement as of November 2018".
The blog noted: "As of June 3, 2019, most companies involved with cannabis were in the healthcare (71 per cent) and consumer-staples sectors (11 per cent) — primarily pharmaceuticals and beverage firms, plus a handful of tobacco companies. With continued high growth expected for both the medical and recreational markets, as well as continued deregulation, medical cannabis companies may also be preparing to launch or ramp up recreational operations.
"As the cannabis business likely continues to grow, understanding the associated environmental, social and governance-related (ESG) risks may be increasingly important for investors. Ethical investors wishing to limit their investments to medical cannabis may face a heightened need for monitoring and due diligence. Other investors may be concerned about exposure to companies facing potential liabilities, both in the short and long term."
These potential liabilities include the ability of cannabis companies to meet strict regulatory requirements and avoid overstating therapeutic claims and understating negative health impacts in their marketing material.
The accompanying table includes information on eight of the largest listed North American cannabis companies ranked by market value. They are all based in Canada, although Tilray is only listed on Nasdaq while the others are listed on the Toronto market.
The revenue figures have been calculated by multiplying the latest quarterly revenue figure by four, mainly because revenue is growing rapidly following the legalisation of cannabis in Canada.