Big Read: Inside the only cannabis firm on the NZX

Despite all the knowing smiles and sly digs about cannabis, there's nothing flippant about Cannasouth chief executive Mark Lucas.

When it comes to cannabis for medicinal use, he's deadly serious.

And he talks passionately about the drug's potential for people who suffer from seizures, or for those with terminal illnesses.

Lucas says the day may come when demand for medicinal cannabis is greater than the demand from recreational users.

For NZX-listed Cannasouth, it has been a battle of perceptions about cannabis, particularly since it is THC — the part of the plant that provides the high — that tends to get all the attention.

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The other main compound, cannabidiol (CBD) has also been in the limelight in recent years.

CBD is seen as having potential for the treatment of anxiety and seizures — minus the narcotic effect produced by THC.

Cannabis companies are a dime a dozen these days, but the most often quoted example is Canada's Tilray, which at last count had a market capitalisation of US$2.4 billion ($3.8b).

While the jury is still out on cannabis for recreational use in New Zealand — the issue will be the subject of a referendum in conjunction with next year's general election — medicinal cannabis is already on its way.

The Ministry of Health is leading work to develop a scheme that will enable domestic commercial cultivation and manufacture of medicinal cannabis.

The scheme has three main elements: a licensing regime; introduction of standards for the quality of medicinal cannabis products and all stages of production; and the establishment of a medicinal cannabis agency.

Public consultation on the regulations closed in August. The ministry is analysing the feedback and will consult the Medicinal Cannabis Advisory Group before providing advice to the Government.

Expectations are that the regulations will be written by mid-December and the Medicinal Cannabis Scheme will be operational in the first quarter of next year.

For the moment, Cannasouth is a medicinal cannabis research company only.

Despite the uncertainty over exactly what the regulatory framework will look like, the company went ahead with its sharemarket listing in June. The 50c shares debuted at 51c, but then fell away sharply on day one.

Since then the shares have recovered ground to trade at a solid premium to their issue price, closing yesterday at 66c.

No time to wait

Given that the industry is still in its infancy, did Cannasouth go to the market too early?

"The reality is that if you are going to be competitive in this space, you had better get your skates on," says Lucas. "You can't sit and wait for everything to be in place and then turn up — you actually have to be ready to go.

"When the market is fully developed and doctors are fully informed, and ... clinical data continues to catch up, there is potential for it to become a very big market.

"But it's a marathon, not a sprint."

That said, Cannasouth hasn't just been jogging along since the $10 million initial public offering of shares.

In July it received Callaghan Innovation funding to support two medicinal cannabis research programmes.

The same month, it appointed scientist David Gill to drive its first products to the market.

In August the company formed a long-term strategic joint venture with businessman Aaron Craig and his family interests to construct and develop a 40 hectare cannabis cultivation facility in the Waikato. And this month, Cannasouth entered into an agreement to buy a 60 per cent stake in Hawke's Bay-based Midwest Pharmaceuticals NZ for $1.32m.

Others are lining up to occupy the same space, which is increasingly being regarded as a "sunrise" industry.

Dual-listed drug developer AFT Pharmaceuticals and New Zealand medicinal cannabis company SETEK this week announced that they had signed a memorandum of understanding to work together on researching, developing and commercialising medicinal cannabis products.

The agreement seeks to combine, and take advantage of, AFT's expertise in pharmaceutical development, commercialisation and distribution, and SETEK's knowledge of cannabis cultivation and the extraction and processing of pharmaceutical grade cannabis compounds.

SETEK is the fourth New Zealand company to get a licence from the Ministry of Health to cultivate cannabis for research.

It is developing an organic cannabis propagation, cultivation, processing and manufacturing facility at Rotokawa, near Taupo.

Tilray and Trojan horses

Those in the industry talk about companies like Tilray, which start under the medicinal banner, then branch out into recreational use as the law becomes more liberal in some jurisdictions — the so-called Trojan horse effect. But for now, the recreational cannabis debate in New Zealand is not a track that Lucas is prepared to walk down.

"We are focused on medicinal products," he says at the company's Hamilton laboratory.

"Everything we are doing here is about the high end science around medicinal cannabis."

Companies like Tilray, he says, reflect what has happened in their jurisdiction.

"Adult use may or may not come along to New Zealand. It's not on our horizon. We don't comment on it, other than to say that we support the debate.

"But really, the investment that we are making is at the high end of science and is not focused on recreational use."

But does he rule out a Tilray-style progression?

"If the New Zealand public and the Government decided that it wanted a regulated cannabis base, then I guess like any other business, the board would consider whether that was appropriate at the time, but it's not something we have discussed at board level."

Lucas says Cannasouth believes there is more demand from people who want to be well than from those wanting to use cannabis recreationally.

"Even though the recreational cannabis market is a very large market, we believe that advancements in medicinal products will create far more demand than the demand from people wanting to get high."

Quest for consistency

For now, Cannasouth is growing its own cannabis on a small scale, and has a special licence to do so.

Once the material is dried and ground, it is put through processes to extract the active compounds.

Then it goes though a process of "winterisation" — a refining technique.

Many of the compounds are similar, so there's a lot of work in getting them into individual pharmaceutical-grade compounds.

"It's complex in that there are so many different compounds within the plant. THC and CBD are the most prevalent compounds," says Lucas.

"THC has some therapeutic value and it has value in the black market as a recreational product.

"CBD has gained some prominence for its anti-spasmodic, anti-inflammatory uses, and a whole bunch of other things.

"But behind that there are a host of other compounds that are often only present in very small levels in the plant."

Research from around the world is showing that some of those lesser known compounds may have a variety of uses.

Cannabis researchers talk also of the "entourage effect" — when one compound can be less effective if it is not surrounded by some of the other compounds that are also found in the plant.

That can create difficulties because in the pharmaceutical world, you need consistency every time.

"If you can separate as many active compounds that are available within the plant material to a pharmaceutical level, then you've got the ability to potentially put them back together and create a synergistic effect, but within a pharmaceutical model so that you have got a precise key and the key is the same every time."

Beating the stigma

Lucas says that until recently, the stigma surrounding cannabis has thwarted research.

"In music, there are only so many notes, but there is almost a limitless way that you can put them back together ... it's similar with these compounds. The first thing is actually getting to them."

Cannabis has been bred for specific reasons over many, many years — for THC production, and in recent years for its CBD content.

"The other compounds are not in big quantities when you refine them, but once you understand that there is a particular therapeutic value in a specific compound, then your genetic breeding can come into play.

"CBD is really interesting and gets a lot of publicity, but I think there is much more beyond that."

And while THC has a narcotic effect, "the reality is that many medicines that we produce today produce a narcotic effect. We give them to people for palliative care, for example.

"We are quite happy to dose people up with morphine right to the end and it really knocks people around, whereas there are many people out there who are accessing cannabis on the black market for palliative care."

What has been stopping the research, says Lucas, is the view that "all cannabis is bad".

"THC has created all the interest, but it has created all the barriers too."

Long road ahead

Developing cannabis for medicinal use, he says, will be a long, slow haul.

"There is a long journey ahead. A lot of people think New Zealand has missed the boat, but the reality is that there is so much more to be uncovered.

"We have a big opportunity in New Zealand to produce high quality compounds for what is looking like being a very big emerging market all around the world."

Lucas says the Waikato growing facility will have a heavy emphasis on provenance in New Zealand's open air environment, with an eye to the export market.

It won't involve Fort Knox-style security. Much of the material will grown outdoors, but it will be the low-THC, high-CBD varieties — more akin to industrial hemp.

The facility will also include a high-tech, high-security greenhouse.

Cannasouth is working through the final processes for the facility's design and will soon announce a date for the start of construction.

Once the regulations are in place, the company will apply for commercial licences.

When it has developed the intellectual property, it will transfer that into production.

For Lucas, who with partner Nic Foreman was at the forefront of the industrial hemp business in 2002, it is frustrating that some people regarded them as cashing in on the medicinal cannabis craze.

"There is overwhelming support for medicinal cannabis," he says.

It won't be the be-all and end-all for every condition, he says, but it will be another item in the toolbox for doctors.

In New Zealand, a lot is going to depend on how willing doctors are to write prescriptions. "Over time, you will find that as it becomes more available, we believe doctors will become more willing to prescribe."

Cannasouth's first harvest yielded some high quality material. It now has the equipment to refine it and produce high purity compounds.

Lucas says it is now a matter of seeing what the regulations look like and trying to break down the misconceptions surrounding the drug.

"All the pieces are falling into place."

Rewriting the law

Medicinal cannabis is on its way.

The Ministry of Health is leading work to develop a scheme that will enable domestic commercial cultivation and manufacture of medicinal cannabis.

The scheme has three main elements: licensing; quality standards for medicinal products and their production; and the establishment of a medicinal cannabis agency.

After analysing public feedback, the ministry will consult the Medicinal Cannabis Advisory Group and provide advice to the Government, including any proposed changes.

The ministry will then seek approval from Cabinet on the regulatory proposals and work with the Parliamentary Counsel Office to draft the proposed Misuse of Drugs (Medicinal Cannabis) Regulations.

Regulations will be made by mid-December and the Medicinal Cannabis Scheme is expected to be operational in the first quarter of next year.

Separately, there will be a non-binding referendum in conjunction with next year's general election, on the question of whether to legalise the personal use of cannabis.

The latest possible date for the election and the referendum is November 21, 2020.