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Little Green Pharma rides the local medicinal cannabis boom but keeps its eyes on the European prize

Little Green Pharma (ASX:LGP) chief executive Paul Long attests to official data showing the rapid uptake of medical cannabis in Australia – albeit with some informal anecdotal observations.

The Perth-based, ASX-listed grower and provider of cannabis oils and flowers estimates that seven years after medicinal cannabis was legalised under stringent conditions, 2.5 to 3 per cent of the populace is accessing scripts from authorised prescribing doctors.

This tallies with Therapeutic Goods Administration (TGA) data showing authorised prescribers dealt with 318,774 new patients in the January to June period of 2023, 130 per cent higher than a year previously.

More than 800,000 users have signed up since 2016, when medical cannabis was legalised under strict access conditions.

“The Australian medical cannabis market currently is one of the highest-performing in the world in terms of take-up,” Long says.

“It has become a very large market with significant growth yet to come.”

As always, medical cannabis trends are blurred with illicit usage – and the company believes that as much as 10 per cent of Australians are accessing the latter.

Long believes that 70-80 per cent of illegal users in effect are self-medicating, typically for pain, insomnia and anxiety. After all, obtaining supply illicitly including over the internet has been cheaper and easier than accessing the cannabis via prescription.

But a fundamental change is happening: the price of the legal material and the contraband has reached parity over the last six months, partly the result of the legal products falling in price because of intense competition and better economies of scale.

“Once you get to the point of parity and [legal] access becomes easier, people ask why they should buy poor-quality product of unknown provenance when they can get quality assured legal supply for the same price?”

Depending on the product, Little Green estimates it has a 5 to 10 per cent of the market, which has trended to flower product over oil derivatives.

This makes Little Green a leading local supplier, with company deriving about 85 per cent of its revenue from these shores.

Despite Australia’s ongoing potential, Europe has been a key focus for Little Green and that staunchly remains the case.

Since listing in February 2020, Little Green has produced from a compliant facility in WA’s Busselton region. In mid 2021 the company paid a knock-down $21 million to Canada’s Canopy Growth for a state-of-the-art facility in Denmark, thus turbo-charging its European adventure.

Long points to several positive trends, including an overall tightening of European Union quality standards that play into the hands of certified incumbents such as Little Green.

In France, the government plans legislation that will change substantially how medical cannabis are integrated into the healthcare system.

The key ramification is that legal medical cannabis would be available only via a small number of highly scrutinised providers, with reimbursement available.

Little Green has the inside running, because it has been one of only three providers during a three-year pilot period that ends in March next year. In a nine-month transition period beyond that, supply will remain limited to these providers.

Beyond that, new contenders will need to submit a substantial dossier.

Meanwhile, Germany proposes to legalise recreational cannabis use. But politics are at play and the Bundestag (Parliament) this month postponed a vote on the enabling legislation, pushing the effective date to at least next year.

Given the ‘self-medicating’ effect, any eventual legislation is likely to have a flow-on effect on medicinal cannabis demand.

But Long is not buying the hype about German cannabis volumes rising up to tenfold with sanctioned recreational usage.

“We’re sticking to our swim lane as a really trusted medicinal cannabis brand,” he says. “We have done that since day one and have a strong rapport with the regulators.”

The company’s chief operating officer since 2018, Long succeeded company founder and major shareholder Fleta Solomon as CEO in August, after her seven-year stint. Solomon remains an executive director.

Little Green’s strategy is unchanged – to build the local business while unlocking high-value European markets – but there’s been a tweak or two.

“We saw the Australian market as ticking along, but the growth has been larger than we thought it would be,” Long says.

“Meanwhile, those emerging European markets have taken a little longer to open up, but the timing is fantastic for us now.”

After a soft September (second) quarter, management has also intensified its focus on achieving consistent profitability and cash flow.

Little Green recorded revenue of $6.22 million, down 5 per cent on the June quarter but 30 per cent higher year-on-year. The company recorded cash outflows of $1.97 million.

Long admits that revenue was “underdone”, although a one-off payment from a research partnership boosted the June quarter comparison.

Little Green ended the stanza with $6.2 million cash in the bank and a $3 million research and development tax rebate yet to come.

Then there’s the proposed demerger of the company’s psychedelic drug arm Reset Mind Sciences, which is subject to a shareholder vote at its December 11 AGM.

By way of an in-specie distribution, the bifurcation stems from management’s belief that the market was ascribing little value to the business, which is developing a variant of synthetic psilocybin (magic mushrooms) as a depression treatment.

As well as refocusing Little Green on cannabis, the spin-off will reduce Little Green’s mainly fixed cost base by $100,000 per month. Little Green’s coffers will also be bolstered after Reset repays a $2 million loan to the former mothership.

Currently, Little Green gleans about 85 per cent of its revenue from Australia and the remainder from Europe.

“For the foreseeable future the focus will be on revenue growth in Australia, but in 18 months to two years we would expect it to flip the other way with Europe contributing the lion’s share,” Long says.

Despite the strong medicinal cannabis take-up locally, Long expects the market to rationalise, given about 100 suppliers are competing with 600 to 700 brands.

In contrast to the rush of five years ago, few new players are applying for cultivation licences.

“In talking to the prescribing doctors, we know they only have the headspace to understand and prescribe five or six brands,” he says.

“We don’t think things are sustainable the way they are and there will be consolidation. But being vertically integrated gives Little Green a big advantage so we are well placed to manage that.”

Long says the local and European tailwinds and the Reset demerger bode well for Little Green shares, which have lost 70 per cent of their value since listing in February 2020 and are trading at about half of the company’s net asset backing.

Long-time investor Thorney investments is the biggest shareholder with an 11 per cent stake, while Gina Rinehart’s Hancock Prospecting accounts for 9 per cent and Solomon has just over 7 per cent.

“Investor sentiment has been soft for the last two years, but it feels like strong tailwinds are developing,” Long says.

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