Is there really an export industry in medicinal cannabis?

Recreational users would bump up profits but it's a weed anyone can grow

As Australia joins other nations in legalising medicinal cannabis, there are hopes from the government and investors that legally growing, processing and selling marijuana will turn into a profitable business sector and export earner.

“Our goal is very clear: to give farmers and producers the best shot at being the world’s number one exporter of medicinal cannabis,” health minister Greg Hunt told reporters in January last year, after the government moved to become the fourth country in the world to legalise the export of medicinal cannabis.

Shares in the more than a dozen Australian cannabis producers listed on the ASX soared after the announcement.

The March 2017 prospectus from one of those companies, Cann Group, stated it would not earn any meaningful revenue in the short-term and was unable to provide financial forecasts given uncertainty about how cannabis is to be distributed and the outcome of future clinical trials.

Nor was it able to state the size of the market, except to say “there is growth potential”.

Even so, investors clearly expected a profitable enterprise, with the 30c shares rising to $4.01 in the wake of Hunt’s announcement last year. Cann Group shares were trading recently at around $2.40.

But Alison Ritter, director of the drug policy modelling program at the Social Policy Research Centre at UNSW, questions whether a large and profitable medicinal cannabis industry will develop in Australia.

First, there is the issue of market size. The market for recreational cannabis is huge, but the market for actual medicinal cannabis is much smaller. However, Ritter sees a large overlap between the two markets.

“Most people blur the boundary between what is a medicine and what is stress relief or pleasure or relaxation,” she says.

“There has been a large conflation in the US, for example. If you’re talking in market terms, you can’t talk about a medicinal cannabis market and a separate recreational cannabis market.”

'Most people blur the boundary between what is a medicine and what is stress relief or pleasure or relaxation'

– ALISON RITTER

Efficacy questions

People using cannabis for a specific medical condition to which it responds, such as pain or childhood epilepsy, form only a very small part of the potential market.

There is also the issue of the gatekeepers, who, as the law presently stands in Australia, are general practitioners. And the scheme is “highly restrictive”, says Ritter, with the doctor needing to make an application to prescribe the product.

But GPs are inherently conservative and will likely prefer to prescribe other medicines that have proven safety and efficacy and are supported by the Therapeutic Goods Administration (TGA) and hence subsidised to consumers via the government’s Pharmaceutical Benefits Scheme.

“There might come a point where there is an elite small number of doctors who become cannabis prescribers, who become specialists in the business of cannabis, but it is highly unlikely that regular GPs will be prescribing cannabis, and that’s where the market is,” Ritter says.

Since March last year, only 3000 patients have been prescribed medicinal cannabis, according to official data recently uncovered by the ABC.

Certainly, there are questions about the efficacy of medicinal cannabis and there is very little clinical evidence to change conservative doctors’ minds about the drug.

Megan Weier, a research fellow at the Centre for Social Impact at UNSW Business School, was part of a team that worked on a series of reviews of cannabis research on behalf of the TGA to help inform the guidance it provided for doctors on the use of cannabis.

The reviews looked at evidence for its efficacy in palliative care, non-cancer pain, epilepsy and multiple sclerosis.

They found mild to moderate evidence of the effectiveness of cannabis, but many of the studies they reviewed were conducted in the 1970s and 80s and compared cannabis with a placebo – and found that something was better than nothing – or with drugs that are no longer being prescribed.

New drugs are often more effective, but haven’t been compared with cannabis.

'There is nothing about Australia that suggests that it could be a world-producer of cannabis'

– ALISON RITTER

Filtered out

The reviews found the strongest evidence for the effectiveness of cannabis was for rare types of epilepsy which occur primarily among children, such as Dravet syndrome, says Weier.

Against this are the many anecdotal stories from individuals who say it has helped them or a family member, such as Lucy Haslam, who became a passionate campaigner for medicinal cannabis after seeing the relief it gave her late son Dan as he fought bowel cancer.

“There’s a real tension between what the TGA views as evidence versus what various cannabis activists in Australia who are using it for medicinal purposes are seeing as being evidence for themselves,” Weier says.

While she says clinical trials are needed to test the efficacy and safety of medicines, Weier notes that these individual positive experiences tend to be “filtered out” in the trial process.

Along with questions about the efficacy of cannabis and laws that restrict its prescription to doctors who are unlikely to prescribe it in large numbers, there is another reason why Ritter questions whether we will have a significant cannabis industry.

“The third problem is almost anyone can grow cannabis. This is not a high-tech industry. It can be grown in most climates. There is nothing about Australia that suggests that it could be a world-producer of cannabis.

“There are large producers in Canada, the US, Israel, South America, so there are already big companies out there farming or growing cannabis,” says Ritter.

The fact that cannabis can be easily grown also effects the control cannabis producers have over pricing – and hence their potential profitability – and also governments’ ability to raise taxation revenue from the product.

Put simply, if legal medicinal cannabis becomes too expensive, people will simply grow their own or obtain it on the black market.

In fact, in South Australia, the ACT and the Northern Territory, individuals can cultivate up to three plants for personal use, so those regions already have a legal, individual supply. (Ironically, using legal, home-grown cannabis for medicinal purposes instead of obtaining it from a legal supplier in theory constitutes a black market.)

Full legalisation

US-based cannabis industry forecasting and analytics consultancy New Frontier Data has also looked at the issue of whether consumers will turn to the black market or grow their own if the price of legal cannabis is too high.

“Consumers are extremely price-sensitive just for that very fact that they have an alternate supply,” says Beau Whitney, a senior economist at the firm.

It has found a “sweet spot” – a premium that consumers will pay for legal cannabis – of 10% to 15% above the black-market price.

New Frontier Data estimates the “total addressable market” for cannabis in Australia could be between $4.6 billion and $6.3 billion – but there is a caveat. That figure assumes full legalisation of cannabis and so includes recreational users.

The medical market would be much smaller, somewhere between $800 million to $1.1 billion. Even so, this assumes 330,000 patients using the drug, many more than the present 3000.

Whitney agrees that doctors are conservative but says: “What we’re seeing at New Frontier Data is that, as doctors become more and more educated on cannabis in general, there is a great propensity to be open towards prescribing it or making that type of recommendation.”

He notes there are companies in the US making sustainable profits from cannabis supply, but only if the market doesn’t become saturated.