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Can medical marijuana deliver potent returns? An interview with Ananda Developments (ANA)

As one of the only UK-listed businesses with exposure to medical cannabis, Ananda Developments (NEX:ANA) has enjoyed strong demand since debuting on the NEX Exchange earlier this month, with shares doubling to 0.9p on the first day of trading. The global market for medical marijuana is gaining serious momentum as the drug’s therapeutic qualities become increasingly accepted around the globe and estimates now value it at more than $30bn by 2021. We spoke to Ananda about plans to invest the £930,000 it raised at IPO into companies and projects associated with medical cannabis and how it could benefit from changing attitudes towards the drug in the UK.

Growing acceptance

The last few years have seen medical cannabis become increasingly recognised around the world for its ability to treat diseases and improve symptoms such as pain, inflammation, muscle spasticity, and nausea. Historically, the global regulatory environment has made it difficult to conduct research into, or offer, pharmaceuticals based on cannabis. But attitudes are changing, with nearly 30 US states and countries such as Australia, Israel, the Netherlands and Greece now permitting use of the drug for medical purposes. Even the recreational use of cannabis is gaining traction, with Canada recently legalising the drug entirely effective from October this year.

Thanks to this increasing acceptance and awareness, the global medical cannabis market is expected to have some serious upside potential. Indeed, estimates have suggested that it could grow from $7.7bn at the end of 2017 to $31.4bn by 2021. Ananda Developments plans to capture this potential by taking stakes in companies and projects that either carry out research on medicinal cannabis or develop products that contain the drug.

Initially, the firm will limit its exposure to private and public opportunities in Israel, Canada, and the Netherlands, but it is open to expanding its reach in line with the development of the global market. Ananda’s head of investor relations and marketing Jeremy Sturgess-Smith told us it has already identified numerous potential opportunities where it can add value:

‘Our initial focus has been on some of the technologies surrounding medical cannabis, and we have already found a few opportunities that we believe could generate real value for shareholders. We are also very interested in some of the scientific progress in Israel. They are really at the forefront of medicinal cannabis research and we have good relationships there. We are focused on finding the best ways to generate shareholder returns as the market continues to emerge.’

Busy market

Thanks to this anticipated upside, many medical cannabis stocks have popped up in recent years, and names like WeedMD, 22nd Century Group, and GW Pharmaceuticals are now well-known to investors. In December last year, over 80 Cannabis companies were listed on Canadian exchanges and a further 208 were nearly licenced. So, why should investors look at Ananda?

For one thing, Ananda is currently one of just two ways investors can get UK-listed exposure to medical cannabis. The other option is Sativa Investments, which also listed on NEX earlier this year. Sturgess tells us a NEX London-listing is by far the most accessible route to market for those in the UK:

‘The NEX Exchange has been very supportive of us and the other UK companies seeking to give investors exposure to the medicinal cannabis sector. They understand that this is an important and exciting emerging space for the UK and have taken a lot of care to ensure we are compliant with all UK laws. They took the time to interview all our Board members to ensure we have the right capabilities to enter the space, so their approach has been impressive.’

Ananda also boasts a strong management team. Executive director Melissa Sturgess is best known for her years of experience as a director of Africa-focused, AIM and ASX-listed natural resources businesses. More recently she reconstructed and recapitalised AIM quoted Messaging International and URA Holdings. Her counterpart Charles Morgan is a resources and tech venture capitalist with a track record of identifying early-stage commercial opportunities including Neuro-Bio, which makes drugs to treat Alzheimer’s disease.

Both senior managers own 18.4pc stakes in Ananda and are backed by a great deal of sector-specific experience. Non-exec director Dr Inbar Maymon Pomeranchik founded a private company called Biodiligence, which provides consultancy services within the medicinal cannabis space. Senior investment adviser Dr Eli David Schmell has over 30 years’ experience in Biotech and has focused mainly on medical cannabis in recent years.

Sturgess tells us Ananda’s management will use its collective experience and global contacts to identify, evaluate, and fund the best opportunities. They will also consider appointing additional directors and advisors with relevant expertise if needed.

Hype machine

Some commentators have already sounded the alarm over whether so-called ‘pot stocks’ are entering bubble territory. Indeed, despite having yet to turn over a profit, the average P/B ratio of cannabis firms Cronos, Aurora and Canopy in March was 11.6, or six times the S&P/Toronto Stock Exchange Composite Index’s P/B ratio of 1.8. Looking more widely, Bloomberg data suggests the Canadian medicinal cannabis companies alone have a pricey combined market value of more than $15bn after increasing by large share price multiples in recent years.

Despite this rapid growth, Sturgess does not think medical cannabis will follow the same trajectory as the oft-touted historical examples of hyped-sectors-gone-bad:

‘It is not like we are creating a new industry here. The dotcom bubble in the nineties was being developed from an entirely new idea, and it crashed. This industry has been on the black market for some time, and we are helping to bring it into the light and become properly regulated so it can run well, help a huge amount of people, and stop a lot of associated crime. Given what is happening in the wider political sphere around cannabis I think the share price has a lot of concrete, rather than speculative, support going forward.’

UK progress

Given that medical cannabis is currently illegal in the UK one obvious question is how Ananda can legally operate in Britain. Sturgess explains the firm has been advised that, under UK law, a corporation operating overseas may risk committing an offence if it conducts activity that is illegal in the country where it is running. So, as long as Ananda ensures it remains lawful in the jurisdictions in which it is conducting business – as it intends to do – it will not be committing an offence. An added requirement under UK law is that it must ensure the level of THC – cannabis’s principal psychoactive ingredient – remains below 0.2pc in any associated products.

Thanks to the high-profile cases of Billy Caldwell and Alfie Dingley – two children denied access to cannabis oil in the UK despite having severe epilepsy – concerns around Ananda’s legality may soon be irrelevant. Following widespread support for the two boys, the Home Office granted two short-term licences to allow them access to cannabis oil. Alongside this, Richard Branson has been using his Virgin platform to call for a fundamental reform to UK drug laws.

Although the use of medical cannabis remains illegal for the time being, the Advisory Council on the Misuse of Drugs is now assessing the ‘balance of harms and public health needs’ around the drug. The first stage of this review, which looked at scientific evidence, resulted in England’s chief medical officer confirming there was conclusive evidence of the therapeutic benefit of cannabis-based products. The government is now expected to decide within the next few weeks on whether the laws around medical cannabis will change.

For his part, Sturgess is confident that the outcome here will be positive: ‘Now people can see how challenging these children’s lives would be without medicinal cannabis, support will grow. We thought we were looking at a two-years before there was a real conversation around medicinal cannabis use in the UK, but now we think it could happen in the next six months. We believe we are right at the beginning of something pretty incredible.’

Start of something big?

To put it bluntly, Ananda’s focus on medical cannabis and the fact it hasn’t yet invested mean it will not be for everyone at this moment in time. But for those UK investors who believe the sector can deliver, it could be an exciting opportunity given its strong management team and the fact that cash currently covers a significant portion of its £2.5m market cap. What’s more, with more information around initial investments due imminently and the future legal status of medical marijuana in the UK hanging in the balance, plenty of potential catalysts lie on the horizon. If you fancy a punt on a somewhat unconventional sector that is enjoying numerous global, macro tailwinds, Ananda could be a good place to start at around just 0.7p a share.

Author: Daniel Flynn

Disclosure: The author does not hold positions in any of the stocks mentioned above

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