Legalization of cannabis has been at the forefront of the news as both a social and medical issue for the past few years. The issues are complex, and many countries have held serious public debate about whether and how to legalize marijuana and cannabis. Driven by medical research, countries are relaxing their stands and the market has responded with a significant uptick in cannabis-related growth and research. Companies that specialize in growing marijuana, companies that modify cannabis to maximize health benefits, medical marijuana suppliers and the like, have all grown with the increased opportunities afforded, as legalization and medicalization increase demand.
A snapshot of the US market gives an intriguing picture of the state of cannabis. To date, there are nine states, as well as the District of Columbia, that have made recreational marijuana use legal. For its use as a medicine, it is a legal substance in 29 states. However, at a federal level, it remains illegal. The situation where it can be legal at the state level but not at the federal level was made possible by the Obama administration's decision to grant the states autonomy over marijuana legalization. However, this situation may not continue for long. There are rumblings that current Attorney General Jeff Sessions will rescind the “non-interference” rule, and impose stronger restrictions on its use.
From an investment perspective, it is an interesting time in the history of cannabis. As the US shows, there has already been a move toward legislation for recreational use, opening up markets for growers and distributors. This market has reached a certain stage of maturity, but increased worldwide legalization will allow this to increase substantially, although there is no assurance that this will occur. Should legalization continue, it is possible that the growth and distribution market should grow substantially, likely mimicking the pathway shown by other items that share similarities - Coffee and Nicotine. Despite its growth being dependent on its continued legalization, current activities, like the recent drop in the Canadian Cannabis LP Index, shows that it may not all be smooth sailing. In Canada, despite price increase of 83% since last October, the index has dropped nearly 40% from its peak in January. This is due to a variety of factors, the primary one is that the expected legislation timeframe was pushed from July to September and a political bloodbath occurred during parliamentary deliberations on the bill.
These issues give a snapshot of the current state of the industry, providing an indication that investment thinking should have a longer-term focus. Canada’s challenges have also been impacted by new players coming into the market, making it difficult to assess which will be around for the long haul.
This is also true in the pharmaceutical space. However, with the high cost of R&D, it appears that the winners in this space are likely to be those companies that have added a cannabis division or product to their existing pipeline, rather than a cannabis only company. Certainly the early reports indicate that companies like AbbVie (NYSE:ABBV) and Insys (NASDAQ:INSY), established pharmaceutical companies with the funding and expertise to bring a drug through the long haul to market, have seen an uptick from their cannabis investments. Pharmaceutical cannabis will create an interest and funding for smaller cannabis dedicated research companies, but their ultimate success will be an exit to big pharma after clinical phase II or III. Finding those companies with the most promising commercial cannabis product will increasingly become equivalent to finding a needle in a haystack, as the interest cannabis has drawn will bring increasingly more research companies to the funding that it will offer. Pharmaceutical Cannabis is very much at the early stage of its market cycle. Investors need to recognize the long challenging road of pharmaceuticals approval and recognize the risk in early phase investment even for the most promising product.
All things considered, the cannabis market is still in its infancy, making it a great time to invest before the market takes off. However, newcomers must be cautious in choosing their stocks, diversify, and keep track of legalization news worldwide.
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