High Barriers, High Opportunities: Australia’s Cannabis Extract Market

The high-barrier to entry in Australia’s cannabis extract market is developing a foothold in the country’s medicinal cannabis sector and is a growing opportunity for investment.

Australia’s cannabis market is still in the early stages of growth, having just legalized cannabis for medical use in February 2016. Similar to Canada’s early-stage medical cannabis landscape, Australian lawmakers are still working through the best approach for implementing and improving the regulatory framework and licensing system.

The resulting short-term high barriers to entry in Australia’s medicinal cannabis sector are an opportunity for early-entry cannabis companies to establish a foothold into an industry that is on track to become the world’s fifth-largest legal cannabis market.

“While the valuations seem rather high in Australia, the country is in the early stages of its federally legal medical cannabis program — and it’s moving in the right direction,” said Alan Brochstein, the Cannabis Capitalist.

Australia’s cannabis extract market

In a country of 24 million, forecasts for growth in Australia’s legal cannabis industry show its value increasing from $52 million in 2018 to $1.2 billion by 2027. The significant size of this opportunity is also attracting Canadian cannabis companies looking to expand their global reach, especially in the cannabis extracts sector which is overtaking dried flower in the medical cannabis market.

In February 2018, Cronos Group (NASDAQ:CRON,TSX:CRON) launched Cronos Australia, a joint venture with New Southern Capital, which in June obtained a manufacturing license from the Australian Office of Drug Control. The license grants Cronos Australia the ability to manufacture value-added cannabinoid-based products, including those for Australia’s cannabis extract market. Tilray (NASDAQ:TLRY), through a distribution agreement obtained by its subsidiary Tilray Australia New Zealand Pty. Ltd., is exporting CBD extracts to three hospitals in the Australian state of Victoria for use by children with intractable epilepsy. MediPharm Labs Corp. (TSXV:LABS) has also completed the application process for a license to extract and import medical cannabis products in Australia which the company anticipates receiving in Fall 2018. These cannabis oil products will be used for research studies with healthcare and educational partners.

Cannabis oil extracts outdo dried flower

In a medical cannabis market like Australia, cannabis extracts have the potential to become a bigger market than cannabis dried flower. Medical cannabis consumers who are looking to ease pain, anxiety or inflammation to improve their health and wellbeing most likely want to avoid the negative health impacts of smoking cannabis, and prefer a more discreet treatment option. Cannabis extracts also allow medical practitioners to better control proper dosing for patients, and the extraction process allows manufacturers the ability to isolate specific cannabinoids meaning patients can get the medical benefits of cannabis without the high.

While stats are limited in Australia’s emerging market, we can look to Canada’s maturing medical cannabis market as an example of the medical cannabis consumer’s preference for cannabis extracts.

Health Canada’s most recent statistics show that sales of cannabis oil in the first three months of 2018 bested those of dried flower by 56 percent. In terms of year-over-year (YOY) growth, extracts surpassed dried flower with a substantial increase of 82 percent over the same period in 2017 compared to a scant 13 percent in YOY performance for dried flower.

What is attractive about Australia for a cannabis extract company?

While Canada’s cannabis climate has warmed to the point of legalizing recreational use nationwide this year, Australia is a country where cannabis is just beginning to emerge from the realm of the taboo. Not surprisingly, Australia initially took a conservative approach to cultivation, manufacturing and distribution licenses as well as stock exchange listing conditions. As of July 2018, the Australia’s Office of Drug Control (ODC) has only issued 18 cultivation licenses, 10 research licenses and 13 manufacturing licenses. At the same time, however, the ODC received 171 applications, most of which were new entrant cultivators. As most early-entrants are vertically integrated, this presents a significant opportunity for cannabis extracts manufacturers, as cultivators must now align to a manufacturing partner in order to obtain a license.

In January 2018, looking to reflect the country’s agricultural prowess, Australia joined the handful of nations that permit cannabis exports internationally, including Canada, Uruguay and the Netherlands. Australia’s medical products are quality controlled by the nation’s Therapeutics Goods Association (TGA), which is seen as the gold standard of GMP. As such, Australia is on its way to becoming one of the largest exporters of medicinal products globally.

For those cannabis companies that have been able to secure footing in the tight Australian market, the ability to export cannabis products into the Asia-Pacific region and other markets on the global stage offers further expansion opportunities. An export license also lowers the risk of a slow in the build of a domestic market for companies with Australian based operations.

Overcoming challenges and growing Australia’s medicinal cannabis sector

Long wait times for access being addressed

The absence of recognized qualifying medical conditions for cannabis treatment in Australia is one of the challenges holding back growth in this market. However government funded research is allowing Australia’s Therapeutic Goods Administration (TGA) — which oversees the country’s medical cannabis access framework — to better understand how cannabis can be used in palliative care as well as to treat epilepsy, multiple sclerosis and pain.

In March 2018, the New South Wales government reduced the approval process for medical cannabis access to a single clinical assessment by the TGA, drastically cutting the wait time for patients; additional Australian states are following suit.

Securing a domestic supply chain

While imports (such as those delivered by Tilray) are important to the nation’s nascent medical cannabis supply chain, medical cannabis supporters and industry leaders say it’s crucial that Australia further develop its domestic production. Doing so will bring about the reduced costs and improved access necessary to bring more patients out of the black market, away from dangerous opioids and into the Australian medical cannabis market.

Australian-produced medical cannabis would also improve access for the research studies needed to fully convince medical practitioners and policymakers about the safety, efficacy, and benefits of medical cannabis extracts for a wide range of indications.

“(When importing) you have to consider the laws of each state and countries and there’s so much extra paperwork and red tape,” said Australian Medical Association (AMA) Council of General Practice chair Dr. Richard Kidd. “If it was produced locally and rigorously and legally and was a great quality product then it might lead to good studies to help people in the future.”

Victoria, the Australia’s most populated state and the first to legalize access to medical cannabis patients, is becoming the major hub for medical cannabis in the country. An example of the state’s proactive stance toward improving access for medical cannabis, government leaders recently signed a MOU with Canopy Growth (TSX:WEED) “to further develop research and technical capabilities in the production of medical cannabis in Australia.”

MediPharm Labs Australia Pty Ltd is constructing a 10,000-square-feet state-of-the-art extraction facility near Melbourne, Victoria. The company is a subsidiary of MediPharm, the first cannabis company in Canada to become a Health Canada-approved licensed producer of cannabis oil without first receiving a cannabis cultivation license. MMJ PhytoTech Ltd. (ASX:MMJ), an Australian company with a diversified portfolio in Australia’s emerging cannabis market, is a strategic shareholder in MediPharm Labs.

MediPharm Labs’ Ontario, Canada based operation consists of a 70,000-square-foot facility designed and built to European GMP standards with ISO rated critical environment clean rooms. The Victoria, Australia based facility is designed to the same standards. MediPharm Australia anticipates receiving its cannabis oil manufacturing license from the Office of Drug Control in the fall of 2018 and the facility is slated to begin commercially producing pharma-grade cannabis oil extracts by spring 2019.

“There are different parts of this industry, whether it’s cultivating or growing these particular plants or turning them into the oils and other products that can be lifesaving,” said Victoria Premier Daniel Andrews. “We’ve seen very exciting announcements from some very big multinational companies who are making Victoria their base for medicinal cannabis production and medicinal cannabis growing.”

Looking forward

Australia’s leaders are serious about further decriminalizing cannabis use, as evidenced by a recent bill proposal aimed at legalizing cannabis for personal use. Australians themselves are becoming more open to cannabis as both a medicine and an adult-use product. A recent national survey, nearly 85 percent of Australians support legal medical cannabis, while support for recreational cannabis has increased from 26 percent in 2013 to 35 percent in 2016.

Australia’s legal medical cannabis market is in its early stages and the challenges its facing is par-for-the-course. Industry analysts expect regulators to slowly but surely open the pathway to further legalization of cannabis much in the same way as we’ve seen in Canada, the US and Germany. There are increased growth opportunities ahead, especially for domestic cannabis product producers and those interested in investing in cannabis extraction.

This article was written according to INN editorial standards to educate investors.