FreshLeaf Analytics’ latest report reveals an industry at a crossroads. Martin Lane reports.
Australia’s legal medicinal cannabis industry will treble in size in 2020 and finish the year with 30,000 active patients and $95million in sales. But increased access, oversupply and falling prices will lead to significant consolidation next year, according to the latest report from FreshLeaf Analytics.
The market intelligence company’s Q3 Patient, Product and Pricing Analysis, released this morning, found the number of products available for doctors to prescribe has doubled in the last year to 150.
Meanwhile prices have continued their downward trend, with a new floor price that is only 25% of the level the market started at following legalisation in 2016 and bringing prices for legal medicinal cannabis in line with products sourced on the green market.
While forecasting the prescription market will be worth more than $150 million in 2021, FreshLeaf predicted the year will be a turning point for the industry, with consolidation, regulatory reform, product and pricing changes paving the way for sustainable growth.
Managing director Cassandra Hunt said: “The last 12 months has seen huge change in the industry. Record numbers of new products, rapid price declines and new regulations that will improve access and reduce patient prices. The next 12 months we expect significant industry consolidation and the emergence of long-term sector leaders.”
The report described a future state where informed patients could easily access affordable, high-quality medicinal cannabis products to meet mild to severe medical needs.
However, it warned in order for this to happen, medicinal cannabis companies will need business models that generate sufficient profits to reinvest in R&D, clinical data, new formats, jobs, technology and education.
“We believe 2021 will bring industry consolidation and changes in the regulatory, product and pricing landscape that will help make this happen,” it added.
FreshLeaf predicted SAS-B approvals will overcome a sluggish start to 2020 and a Covid-induced April blip to finish the year at around 60,000, up from 25,000 in 2019, although it noted an average 2.3 approvals per patient.
It said there were a reported 2,343 new patients added by Authorized Prescribers in the first half of 2020, representing more than 10% of the total of new patients in the period.
While describing growth in patients accessing pharmacy-compounded medicine as anecdotal, it estimated the total number of active patients in the legal market, regardless of means of access, to be around 25,000. Based on current growth rates, it predicted that number would grow to more than 30,000 by the end of the year, up from just over 10,000 in 2019.
Dangers of over-supply
Despite the positive growth in patient numbers, the report warned there was a danger of over-supply, with the potential for more than 300 products being available to doctors by the end of next year.
It said: “It’s difficult to identify other prescription categories with such a wide range of choice and with such a large number of companies fighting for a piece of the pie. FreshLeaf analysis identifies 37 companies vying for a share of less than 100,000 prescriptions this year.
“These data points certainly suggest the Australian cannabis market is saturated and that the current product growth trajectory is unsustainable. It would be reasonable to conclude that in the next 12-18 months we will begin to see a reversal in growth of prescription product numbers and consolidation in the number of players.”
Race to the bottom
The report described an escalating price war, with the minimum recommended retail price (RRP) sitting at around 6 cents per mg, similar to the notoriously over-supplied Canadian market and only 25% of where it was in 2017.
“Australian pricing dropping to similar levels [to Canada] is great for patients but the ‘race to the bottom’ raises questions about industry sustainability,” it said.
Hunt warned companies which have made big capital investments, but not built ongoing price deflation into their business models, are in for a tough 2021.
“In the next 12-18 months, some of those companies will probably go out of business,” she added.
However, she said while the over-supply of commoditised products meant the only way for some companies to compete was on price, those offering more innovative delivery formats such as wafers and patches were able to charge a much higher RRP than for oil and flower.
“The products that have come on to the market in the last six months – lots of flower and oil – they’re the lowest priced. One of the changes I would hope to see over time is more product coming in at that innovative, higher-priced end,” Hunt added.
The drop in wholesale prices has been similarly steep, with the cheapest products selling at under 5 cents per mg, less than half what they could command a year ago and 25% of where the market started.
Despite the difficulties in making like-for-like price comparisons with the illegal market, the FreshLeaf team assessed the cheapest illegal products to be priced at 7 cents per mg.
CA Clinics medical director Dr Mark Hardy said the trend was good news for patients: “It’s encouraging to see the recent product price decline, bringing illegal and legal markets to parity. This will hopefully enable more patients to gain access to legal medicine pathways, with confidence in the contents and dose.”
Hunt agreed price parity represented an opportunity for the industry “as long as patients see they can access these products easily through legal channels”.
Impact of down-scheduling
In a finding which will be of particular interest to companies looking to capitalise on the likely down scheduling of CBD next year, FreshLeaf’s analysis of patient-reported dose data found 20% of patients take a schedule 4 CBD product at less than 60mg per day. This group would no longer need a prescription if the TGA’s interim decision on down scheduling is confirmed in November and products are successfully registered.
Hunt said there were 17 products currently available to this cohort under schedule 4: “The manufacturers are going to have to think very carefully whether they want to go for a schedule 3 submission because the 20% of people who are taking those products now will be more inclined to get them over the counter, if they become available, than they will through their GP.”
However, she warned: “Just because they’ve got a product that fits the dosage profile doesn’t mean it’s going to be easy for them to register.”
Based on the UK experience, FreshLeaf estimated the market for low-dose CBD could quickly exceed 2.25 million people and $200 million in revenue
New Zealand boom won’t happen overnight
FreshLeaf estimated the New Zealand market is growing at more than 6% per month and predicted it will generate up to NZ$10 million in revenue in 2020.
However, while acknowledging recent findings from the New Zealand Institute of Economic Research which calculated a positive vote in the forthcoming referendum to legalise recreational cannabis would result in a $490 million annual tax boost, it said the economic benefits would take time to realise.
It added: “Should ‘Yes’ achieve more than 50% of votes, recreational cannabis wouldn’t become immediately legal although the incoming government would be in a position to introduce a bill to parliament that would legalise and control cannabis. This is a process that takes time. If it comes to pass. FreshLeaf expects licenses to be hotly contested and the first products to be available no earlier than 2022.”
While the world waits to see which way New Zealanders vote, Hunt said the referendum would reignite the conversation around adult use cannabis in Australia.
This, added to the social and economic challenges brought on by Covid-19, might eventually force a change in Australia’s conservative position on legalising recreational use.
While the global pandemic had only a limited and short-term impact on the Australian market – mostly as a result of the lockdowns in Q2 – ongoing economic pressure could make the case for legalisation too compelling for the Government to ignore.
Hunt said: “The industry employs about 240,000 people in the US, a 15% increase year-on-year, which makes it one of the fastest growing industries from an employment perspective. That’s compelling stuff in today’s environment.”
The report concluded: “Looking at tax revenue generated by the cannabis industry around the world, it wouldn’t be unreasonable to conclude that legalisation of cannabis for recreational use in Australia would produce tax revenue in the billions.”
To access the full report, click here.