Shareholders in many of the cannabis companies to have listed on the Australian sharemarket in recent years are licking their wounds after the initial euphoria surrounding medical cannabis gives way to disappointment.

Cannabis has been one of the hottest sectors of the market, after rapid growth in consumption of medicinal cannabis and legalisation of its recreational use in some parts of the world.

The local industry started to gather steam after the government legalised patient access to Australian-grown and manufactured medicinal cannabis in 2016.

The sector last year received a further boost when Australia lifted legal restrictions on the export of medical cannabis. That sent share prices sky high as day traders and short-term investors looked to cash in on the action.

Dozen of cannabis companies – from cultivators to those developing medical cannabis – raised capital by conducting initial public offerings on the Australian Securities Exchange. Their shares initially made stellar gains for those who invested in the companies.

However, the share prices of most of the companies in the sector have since dived. Many do not produce any revenue, let alone make profits or pay dividends to shareholders.

Even so-called high-quality operators, such as AusCann Group, have been caught up in the sell off, with its share price falling by more than 40 per cent since the start of the year, despite the sharemarket overall lifting by about 20 per cent over the same period.

After trading at more than $1.50 in first half of 2018, its shares are now changing hands at about 40 cents – a fall or more than 75 per cent.

AusCann is developing a cannabisbased pill for chronic pain control, potentially a huge market given the opiates used to control pain today are addictive and can induce respiratory failure.

A factor in the demise of cannabis companies is that shares in some of the most popular pot stocks have come out of ‘‘escrow’’ – a period in which the original investors are not allowed to sell their shares – in the first half of this year.

When the two-year escrow period for AusCann ended earlier this year, for example, large parcels of shares were sold, contributing to downward pressure on its share price.

Developing medical products requires huge investments in clinical trials that can take many years.

Stewart Washer, one of the original founders in AusCann, who no longer has a role with the company but remains a shareholder, says its prospects remain good as ‘‘medical cannabis has proven itself to be a real sector’’. Dr Washer says AusCann is not a ‘‘big risk [for investors] as it is making a hard capsule pill and we know that doctors and patients want the pills’’.

AusCann made its debut on the ASX in early February 2017, with an issue price of 20c a share.

Technically, it was a ‘‘reverse takeover’’ of another company that was already listed. Those who bought at the issue price have doubled their money in two years.

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After highs, pot stocks have come back to earth