Is It Too Early to Invest in Cannabis Stocks?

What is Medicinal Cannabis?

Medicinal Cannabis, also known as medical marijuana, refers to cannabis when it is used to treat or relieve a symptom, ailment or condition with a prescription from a licensed doctor. Any cannabis containing an effective amount of active cannabinoids, can be considered medicinal cannabis if used for that purpose. Reasons for a medical cannabis prescription includes but is not limited to muscle spasms caused by multiple sclerosis, nausea  from chemotherapy,  poor appetite and weight loss caused by chronic illness such as HIV or nerve pain seizure disorders, and Crohn’s disease.

Medical cannabis is only legal in the United States in 28 states and Washington DC. The only difference between medicinal and recreational cannabis is that recreational cannabis is used for recreational purposes which are more likely addictive.

Cannabinoids Are the Story. 

Cannabis contains hundreds of chemical substances, and over 100 compounds called cannabinoids.  It is the cannabinoids that are responsible for the effects of cannabis. They combine with protein molecules on the surface of cells, called receptors. This system of receptors found in the human brain and throughout the body is referred to as the end cannabinoid system. Cannabinoid receptors support a number of physical functions, such as modulating brain and nerve activity, including memory and pain, energy metabolism, heart function, the immune system, and reproduction. The most common reason for prescription is for pain. Cannabidiol, also known as CBD, is a chemical in cannabis that has a wide scope of medical applications with a lack of side effects. CBD is not to be confused with Tetrahydrocannabinol, also known as THC. THC is the psychoactive chemical that people use for recreational purposes. CBD is an anti-diabetic and bone stimulant. It also reduces pain and nausea. THC increases appetite, reduces pain, and relieves spasms.  Medicinal cannabis has very low percentages of THC and high percentages of CBD (Figure 2).

fig2

Why Invest in Medicinal Cannabis?

  1. First-time “Legalized Addiction”

Cannabis has been consumed for thousands of years dating back to the early days of the Ancient Greeks in 440 BC. Humans have a natural tendency to become addicted to substances that they can use for medicinal or recreational purposes.  Human addiction is inescapable. Extraordinary profit can be made from this vulnerability.  For the first time in history, cannabis is becoming legal for medicinal and recreational use in the United States and Canada.  It is becoming one of the most rapidly growing industries that the market has yet to see.

  1. Major Shift in Public Sentiment towards Cannabis

Recent polls conducted by Gallup suggest that 80% of Americans approve the legal access to medical cannabis and 60% approve the recreational legalization. To put this in perspective, in 1969 the approval for medicinal cannabis was only 10%. The documented beneficial uses for medicinal cannabis have been the main reason for this massive increase of approval.  It is not a coincident that the increase in approval corresponds to the speed of legalization of medical cannabis (Figures 6-9) and the significant growth in industry revenue (Figure 3).

fig3

  1. Growing Demand for Pain Management Alternatives

Approximately one in five Canadians suffer from chronic pain, which is currently primarily treated through the use of prescription opioid medications. Opioids are considered effective, but also pose risks of abuse and addiction. Physicians are under increasing pressure to rely on them less. The US has seen a 25% decrease in opioid overdose mortality in states that allow the use of medical cannabis.

  1. Supply Shift from Black Market to Legal Market

The black market for cannabis in the United States is on average 90 times larger than the legal market. For the last 10 years, legal cannabis sales only accounted for 3%-8% of the total cannabis market in the United States. Since only 8 states have legalized recreational cannabis, the result is that the majority of cannabis is sold illegally. The difference between the total amount of cannabis sold and the total amount of legal cannabis sold is the potential revenue that the United States can gain from legalization.  In 2016, the total legal cannabis sale was $7.1 billion, compared to the total illegal and legal sales of $87 billion. The $80 billion difference is how much the United States could have made if cannabis was legal nationwide last year (Figure 4).

fig4 

  1. Early-entry Monopolistic Industry

The cannabis industry is still in its infant stage. Young industries come with a lot of regulations, licensing, fees, and laws protecting the future of the industry. It is difficult to start a company in the cannabis industry due to the heavy regulations. It is virtually a monopoly because there is an enormous market entry barrier for companies to overcome.  In Canada, there are only 23 licensed producers of medicinal cannabis.

  1. S. Legalization Process Speeds Up.

In the United States, cannabis has been taboo since it was prohibited in 1937 on the federal level. Ever since California legalized cannabis for medicinal purposes in 1996, states have been speeding up the pace of the legalization.  Between 2012 and 2014, seven states have been legalized cannabis for medicinal use and four for recreational use. As a result, the revenue growth is 15% and 35% for 2013, and 2014, respectively.

fig8

 

fig9

States legalization creates a one or two years’ delay in generating revenue.  Once it gets legalized, sales do not begin until 12 to 18 months later (Figure 5).  In 2016, four states legalized cannabis for recreational use and six for medicinal use. This has been the largest increase of state legalization in the history of cannabis. The revenue estimated in 2017 is expected to be $8.5 billion which is a 20% increase from 2016, and a 47% increase from 2015. This is a result of a large number of states legalizing cannabis in 2016.

fig5

Forthcoming Legalization

In 2017, six states may legalize cannabis (two for medicinal use and four for recreational uses), and two more states for each purpose in 2018 (Figures 6 & 7). This is the basis for the 46% forecasted increase of revenue for 2019, which is expected to reach $18.2 billion (Figure 1).

fig6

fig7

For the ten-year period between 2000 and 2010, for every new state legalizing cannabis, the revenue would increase approximately 50%.  As more and more states start legalizing cannabis, revenue is estimated to increase 24% annually between 2020 and 2026.

By 2026, 43 states are expected to legalize cannabis for medicinal purposes, and 23 states for recreational use (Figures 6 & 7). Total revenue will reach $79 billion, which is a 1,000% increase from 2016’s revenue. 

Rapid Increase of Medical Cannabis Patients 

The number of patients registered for medicinal cannabis in Canada has increased approximately 1,200% over the last two years.  This is due to the nationwide legalization of medicinal cannabis and the amount of successful medicines from CBD that are newly available.

Therefore, the amount of kilograms sold in Canada has risen proportionally to the amount of patients that have signed up under Health Canada. For the last five years, the amount of kilograms of cannabis sold has grown 715% (Figure 10).  It is estimated that the amount of kilograms sold in 2017 will double the amount in 2016.  The demand for medicinal cannabis in Canada far exceeds what the licensed producers can provide at the current capacity.

fig10

In conclusion, just two years prior to Canada becoming the first G7 nation to fully legalize cannabis use, the industry has already seen explosive growth (Figure x).  And, it is estimated that the total sales in Canada is about the same as California.  No wonder every single graph we show above seems to suggest that the sky is the limit.  An investable and trade-able Cannabis Index is created to monetize the legalization of thousands’ years’ of human addiction (see figure below). In the next article, we will discuss the construct of the Cannabis Index.

Cannabis PP

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s