Industry braces for change in pursuit of long-term success

Management shake-ups, a new investor base and consolidation should all be expected in the cannabis space over the next 24 months as calls emerged for external stakeholders to step up support for the sector.

But while the short-term future remains unsettled as funding dries up and valuations sink, the industry was told it has laid the foundations for a bright future.

From left: Moderator Patty Holmes, Jo Patterson, Bod Science; Tim Evans, Morgans Financial; Peter Koetsier, Cann Group and Oliver Zugel, FoliuMed (photo: Medicinal Cannabis Industry Australia)

In a wide ranging panel discussion at the ACannabis conference in Melbourne, delegates heard that as regulations loosen and the evidence base builds, the sector will prosper, in large part because of work that is taking place now.

In the immediate future, however, the industry was warned to brace itself for significant change as it pursues future stability and long-term success.

According to Oliver Zugel, founder and chief executive of manufacturer and cultivator FoliuMed, a “clean up” of shareholders and management is on its way.

Investors who once dreamed of a quick return will not wait much longer, he predicted, with the old guard replaced with a fresh shareholder base capitalising on the “all-time low” valuations of cannabis companies.

“Prices cannot go down much further…so for people who have money and have a vision – not a financial vision but a long-term vision of what companies are trying to build – it’s actually a very good time,” he said.

Oliver Zugel: The industry as it is now “could cease to exist” in five years

Furthermore, the current “disgruntled” investor base is already “kicking out management teams”, he said.

“Every day I am getting messages from colleagues in the industry who are looking for something new to do. It’s the nature of the beast. I think there will be a clean-up of the shareholder base as well as management.”

Zugel suggested that as the industry evolves, new entrants will emerge, including “speciality pharma people” and nutritional and food supplement companies, who will shake-up the status quo.

“They have looked at the game for a while, they have figured out who is playing and I think now is the time for these guys to show up. To use a poker analogy, new cards will be dealt and a lot of new people will be sitting round the table. A different set up is coming our way over the next two to three years.”

The conference heard how the evolution of cannabis will be partly driven by the emergence of the legal adult market. As regulations ease across the world, the sector will split with the existing medicinal landscape likely to be unrecognisable from how it looks today.

“The more we hear about providers with registered products, the more we’ll become a pharmaceutical industry, Zugel said.

“I think there’s a very realistic chance that the medical cannabis sector, as it has been defined for the last five years, will cease to exist and with the actors we currently have around the table.

“The adult use legislation is moving so fast – much faster than anyone would have expected 10 years ago – that by the time we’re going through clinical trials and the registration process, patients will be self-medicating.

“The industry is coming to an important crossroad.”

Whether you’re a private company or a public company…there has to be a horizon for what commercialisation looks like

jo patterson, bod science

Not that the existing industry has failed, Zugel told the audience. Defining success on the whims of financial markets is a mistake for such a young industry, he said, arguing that a bigger picture is emerging.

Likening cannabis to the boom and bust – an analogy also favoured by Althea chief executive Josh Fegan – Zugel said: “I see a depression setting in among colleagues who have raised lots of money but who have not produced the value the shareholders expected. But that in itself is not the definition of success. Financial markets are not a good judge of early mover sectors.

“We saw the same situation in the dotcom area. We judged the billions which were burned as a failure but completely fail to recognise that the dotcom boom created the largest digital revolution for mankind after the industrial revolution and the invention of the printing press.

“The reality is that work done by everyone in this room….has been extremely valuable. If you’re looking at the world today, a country which doesn’t have a medical cannabis regulation is the outlier. Just 10 years ago that was unimaginable.”

Cann Group chief executive Peter Koetsier told the debate it was time for stakeholders who have been watching from the sidelines to back the sector.

Stakeholders should “take a few more risks”, said Cann Group’s Peter Koetsier

The longer pharmaceutical companies and the investment community sit on their hands, the slower the progress in developing treatments, he said.

“I think that’s a shame. There is a time and a place now where I’d like to see a few more stakeholders stepping in. The Government has taken some bold moves to help…but I think generalist pharma and investment community perhaps need to help this fledgling industry grow a bit faster and speed up the process for the benefit of patients.”

He called on them to “take a few more risks” rather than waiting for the industry to either “consolidate, fail or succeed”.

Describing medical cannabis as “a very misunderstood industry”, Koetsier suggested its “many voices and history” do not help its cause as he urged the industry to speak with one cohesive voice.

Responding to the low valuations and financial struggles of the sector, Morgans Financial private client advisor Tim Evans acknowledged the difficulties faced by young industries who are “funding growth with cash”.

But it is not unique to cannabis, he stressed, adding that investors and listed companies have always struggled to accept the cyclicality of the market.

“It’s been very tough for all small cap industries,” Evans said. “But it will turn, it always does.”

Financial advisor Tim Evans

He said individual companies, and the wider industry, should articulate a “pathway to profit” or demonstrate a “profit focus”. Such positioning “removes the risk around the uncertainty of your valuation and ability to raise capital”, he told delegates.

He added that the difficulty for the sector will not lie in reengaging with capital markets, but proving sustainability, a task not helped by the need to release quarterly cash flow reports “where everyone can see how much cash you’ve got left”.

“That is hugely distracting for a CEO,” Evans said. “You want to take the risk out…and consolidation is probably a likely pathway forward on that. But again, you don’t want to be consolidated at a time when you are vulnerable at the wrong time of the cycle.”

Despite the current issues, Evans said there was reason for optimism for an industry that is likely to experience “huge tail winds and greater acceptance”.

“I think there’s going to be some well-funded, innovative and passionate people who want to join this industry and support it,” he said.

Jo Patterson told the panel there must be a commercial “horizon”

According to Bod Science chief executive Jo Patterson firms need to identify what they want to be and demonstrate how they intend to monetise their chosen pathway. The days of being “all things to all people” are gone, she said.

“If you look back at the way the industry grew, it came out of an agricultural play,” she told the discussion. “It’s time now to refocus on what you’re really good at and stick to that. Don’t try to be all things to all people. Where is my strength? Where can we win short-term and in the long-term?

“Whether you’re a private company or a public company….there has to be a horizon for what commercialisation looks like.”

For Cann Group’s Koetsier, the biggest challenge for the Australian industry, and where its success will ultimately lie, is in ramping up local production while maintaining the required quality.

More Australian-grown and manufactured product is gradually coming online – welcome progress that will reduce the reliance on imported cannabis – but the test will be the ability to satisfy demand, he said.

“Most of the product is still coming from overseas, but I think that is about to change and that’s not just a result of the change in legislation in July,” Koetsier said, in reference to reforms to the TGO 93 regulations. “Locally we are starting to get capacity right and that’s very positive for the industry overall. But companies will I think face the challenge of the increasing requirements for quality, particularly as we start to scale up and demand increases.

“Most of our success is going to come from the ability to scale up production and maintain the highest quality standards. That’s going to be a huge challenge and it’s one the industry and certainly companies like Cann Group are going to need to focus on.”  

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