Phytotech Medical Ltd (ASX: PYL) is now Australia's first listed medicinal marijuana company after a highly oversubscribed launch yesterday.
Using marijuana grown in legal jurisidictions like California and Uruguay, the company is partnered with Yissum Institute in Israel and aims to research a number of oral, nasal, and topical applications for medicinal marijuana.
Over the past two decades, scientific research has identified a number of potential applications for medicinal marijuana. PhytoTech claims that there are 'several hundred'; I don't know if I would go quite that far but the number of potential uses is definitely both myriad and growing.
Growing awareness of the potential benefits of marijuana has lead to a rapidly growing, albeit fragmented market in parts of the US, Canada, Israel and the Eurozone where medicinal marijuana is now legal.
PhytoTech is aiming to become a world leader in the sector, both in terms of therapies and in the production/distribution side in order to take advantage of opportunities for consolidation and scale advances through acquisition.
The timing certainly appears to be fortuitous, and with just under $5 million cash in the bank, the company is well funded for the short term.
However, the risks associated with PhytoTech are enough to give even the most risky investor a heart attack.
First, since most of PhytoTech's shares are held by institutions with only a tiny percentage available for regular customers, demand has sent shares soaring to well over double their issue price of $0.20.
This is similar to what happened with Freelancer Ltd (ASX: FLN) over a year ago, and that company has since sagged basically back to its offer price – less than half the heights it reached on the first day of trading.
Second, there are huge risks associated with pharmaceutical/medical startups.
Just look at Prana Biotechnology Limited (ASX: PBT) and Pharmaxis Ltd. (ASX: PXS). Look at their share prices now versus what they were at launch. Take really careful note of the fact that Pharmaxis shares are still languishing over five years after their debut.
Third, there are a whole pile of company-specific risks, which PhytoTech does a good job of covering in its IPO booklet:
'Our proposed products contain controlled substances, the use of which may generate public controversy', and incidentally potentially lead to bans and all kinds of backlash, making it very difficult to do business.
'We expect to face intense competition, often from companies with greater resources and experience than we have'. Speaks for itself, really.
'We will rely on the continued reliable operation of third parties' systems and networks and, if these systems and networks fail to operate or operately poorly, our business and operating results will be harmed.' As they say, if you want it done right, you have to do it yourself. PhytoTech isn't in a position to do that, making it largely reliant on external factors to grow its business. This is not the sign of a company likely to deliver market-beating returns.
'Clinical trials… are expensive, time consuming, uncertain and susceptible to change, delay, or termination… There is a high rate of failure for drug candidates proceeding through clinical trials.'
Again, this one speaks for itself. As an aside, if you are investing in companies like PhytoTech, PLEASE make sure you know how to read a scientific report.
You need to know what a correlation is, what probability is, and what implications p<0.05 or p=0.064 might have for a therapy in clinical trials. You can't rely on the accompanying market release because companies have a bad habit of glossing over the negative implications of having developed a treatment that simply doesn't work. This is the whole ball game. Make sure you know how to play.
'Our company was only recently incorporated (14 August 2014) and has no material operating history and limited historical financial performance'.
This is another item of concern since there is absolutely no track record regarding management's spending habits or ability to develop a business. Investors have basically handed over $5 million dollars to a bunch of strangers with limited experience in the medicinal marijuana industry, and said: 'Here! Build me a world class marijuana company!'
It sounds like the beginning of a joke, but I don't think shareholders are going to be left laughing.
