Ann: FY2017 Results ASX Announcement, page-78

Elixinol Global (EXL)

First in Class Approval for Medicinal Cannabis
The development of the hemp CBD (Cannabidiol) products industry continues to gain momentum in the US with two key developments in recent days.
The US FDA appears to be on the cusp of approval of the first ever CBD based medicinal cannabis product. Epidiolex has been developed by the British pharma group GW Pharmaceuticals (NASDAQ: GWPH) for the treatment of severe epilepsy in children. A recent FDA Advisory Committee gave unanimous support for approval of the NDA. If approved, in our view it provides an important validation of CBD as therapy and further assist the progression of these therapeutics into main stream medicine. The flow on benefit for over the counter CBD products manufactured and marketed by Elixinol and others is expected to be considerable. The industry is already in a period of rapid growth with the Elixinol brand widely considered a market leader.
Hemp Farming Act 2018
Earlier this month Senate Leader Mitch McConnell introduced a new piece of legislation to the US Congress - the Hemp Farming Act 2018. If passed, the Act would remove the main federal roadblocks to cultivation of Hemp. The Bill proposes to remove Industrial Hemp from Schedule 1 of the Controlled Substances Act allowing it to be regulated as an agricultural crop. If approved we believe the shackles which constrain the industry today will begin to fall away. This may include access to mainstream commercial services including banking, insurance, advertising and distribution. The Bill appears to have significant bi-partisan support including that of the (not insignificant) leader of the United States Senate.
Finally, Elixinol has announced a modest investment in a JV to cultivate its own hemp. This investment of US$1.8m further dilutes the risk to revenues from crop shortages. Valuation is increased from $2.12 to $2.15.

Elixinol Global (EXL) 26 April 2018
New Legislation To Legalise Hemp
Recently in the US, Senate Leader Mitch McConnell introduced a new piece of legislation to the US Congress - the Hemp Farming Act 2018. If passed, the Act would remove federal roadblocks to the cultivation of industrial hemp, the non-drug agricultural varieties of Cannabis.
The Bill will not legalise high THC strains for either recreational or medical use at the federal level. It will merely allow the cultivation of various strains of hemp containing very low levels of THC.
This legislation is necessary despite the intent of the Farm Bill 2014 which legalised the cultivation of hemp containing less than 0.3% THC for research purposes. Since then, dozens of States have passed laws defining industrial hemp on the same basis. Notwithstanding these State Laws, the Federal Drug Enforcement agency continues to put forth guidance that conflicts with the legislative intent of the Farm Bill.
The Hemp Farming Act seeks to end, once and for all the conflict between the DEA and various stakeholders involved in the commercialisation of hemp. If passed the Bill would remove industrial hemp from Schedule 1 of the Controlled Substances Act allowing it to be regulated as an agricultural crop. The bill proposes that the US Department of Agriculture (USDA) would become the controlling body at Federal level, requiring State departments of agriculture to file their hemp program plans with USDA and allow them to regulate hemp cultivation per their State specific programs.
COMMERCIAL BENEFITS TO HEMP INDUSTRY
The consequential benefits of the bill are numerous. The removal of hemp from the Controlled Substance Act would clear roadblocks to federal research funding as well as removing restrictions on banking, water rights, and other regulatory barriers the hemp industry currently faces. The bill would also explicitly authorize crop insurance for hemp. It is likely the Bill will also pave the way for mainstream distribution and advertising. Access to these commercial services is either prevented or shunned at the moment because of the potential for providers (of these services) to be involved with illicit products.
The Hemp Farming Act has a number of other backers from both sides of politics including the leader of the US Senate. The Bill has been fast tracked through the US Senate which means that it will skip the committee process paving the way for the legislation to be bought up on the Senate floor where it may get a vote. The timing of a vote is not clear.
IMPLICATIONS FOR ELIXINOL
Market expansion - The reclassification of industrial hemp to an Agricultural crop is likely to lead to a further expansion of consumption and production of hemp based CBD products within the US. If hemp products become mainstream it is likely that the stigma currently attached to these products may further be diminished and eventually dissipate completely.
Almost any measure which leads to an expansion of the market for CBD products should be a boost to established producers. In these circumstances we would expect new market entrants including large corporates with significant resources. We anticipate this will create pricing pressure and for this reason maintaining the reputation of the Elixinol Brand becomes even more critical. None of the products in the over the counter sector have meaningful patents with product formulations kept as closely guarded trade secrets by each company.
Elsewhere, certain states in the US including Colorado, Washington and California permit the cultivation of high THC cannabis products for recreational use. It is apparent that the Federal DEA continues to turn a blind eye to these activities. The proposed Hemp
The Hemp Farming Act proposes to remove industrial Hemp from the banned substances list
Page 2

Elixinol Global (EXL)
26 April 2018
Farming Act would do nothing to resolve the ** between the States that have legalised marijuana and the Federal Laws which continue to classify it as an illegal substance.
Elixinol does not participate in the market for cannabis products for recreational use. All of its nutraceutical products are derived from Hemp with THC levels below 0.3%.
At the Federal level, the pathway for medicinal cannabis remains unclear. The proposed Hemp Farming Act does not legalise the growing of high THC strains for the purposes of development of medicines. In practice medicinal cannabis products containing high levels of THC are freely available in those states where it is legal to grow these products. These are available by mail order across the country.
Epidiolex Receives Advisory Committee Support
Last week an FDA Advisory Committee panel met to review the data supporting GW Pharma’s New Drug Application (NDA) for its CBD based product Epidiolex. The drug is effective for controlling severe epilepsy seizures (known as Lennox Gastaut syndrome and Dravet Syndrome).
The 13 member Advisory Committee gave a unanimous decision in support of approval of the Application. If approved Epidiolex will be the first cannabis derived FDA drug approved. The PDUFA date is set for 27 June 2018.
In our view the likely FDA approval of Epidiolex may become an important catalyst for growth of the hemp CBD industry and medicinal cannabis in the US and elsewhere. The FDA is widely regarded as conservative in the approval of new drugs, hence its approval of Epidiolex may be regarded as an important validation of CBD as a therapy.
The CBD derivatives that are the active ingredient in this new drug remain on Schedule 1 of the controlled substance list. GW Pharma expects that the drug will be reclassified as Schedule 4 – similar to many sleep and some pain medications. The US Drug Enforcement Agency (DEA) has so far remained silent in the issue of reclassification. The imminent approval of Epidiolex will force this issue to a head and most likely require the DEA to reconsider its guidelines for Industrial Hemp.
Earlier this year GW Pharma announced that 5 patents on this drug has been allowed by the USPTO. The patents will be listed if the NDA is approved. Once issued the patents will expire in 2035. These patents do not preclude the development of other CBD products for the treatment of epilepsy.
IMPACT TO EXISTING CBD SALES
Hemp CBD Products are widely available over the counter in the US.
It is estimated that relief from epilepsy represents less than 2% of CBD sales in the US. If approved, sales of Epidiolex will be covered by insurance and is expected to have an annual cost of US$30K or more. Prescriptions should be limited to epilepsy patients, however, some off label use is likely. Insurers have significant capability to interrogate prescriptions usage and accordingly off label use is likely to be targeted and kept to a minimum.
Conversely, sales of Elixinol CBD products and other brands are predominantly conducted on line without a prescription at a fraction of the cost of the FDA approved product. The products are easy to access and largely avoid regulation, hence we do not see the imminent approval of Epidiolex as a threat to conventional over the counter hemp derived CBD products.
The imminent approval of Epidiolex will force the US DEA to reconsider its guidelines for Industrial Hemp
Page 3

Elixinol Global (EXL)
26 April 2018
We conclude that the over the counter market for CBD products will continue as per normal irrespective of the approval of Epidiolex with the more likely impact the new patients may be encouraged to try OTC products.
Northern Colorado High Plains Producers
Elixinol has announced a small investment of US$1.8m in this newly formed Joint Venture. It will partner with Kersey Ag Company LLC to cultivate high CBD strains of hemp.
Kersey will contribute US$0.7m in addition to a long terms lease of the land with water rights. The water rights are a critical asset in the US where water management remains a high profile topic in the agricultural sector.
The JV will secure supply of raw materials for Elixinol products beginning immediately. The partnership will further dilute the supply risk for high quality raw materials.