Cannabis - a gold rush ?

Cannabis - a gold rush ?

by Pininvest Analysis

Cannabis meanderings on pininvest.com

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  • 1.5% 1y performance
  • 27.8% volatility
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Pin-insights

The nascent cannabis industry is seen by some investors as the not-to-be missed, once-in-a-lifetime opportunity

Start-ups committed to large investments are happy to oblige

Federal legislation is expected to evolve, as medical cannabinoid applications become attractive, and evolving social behavior more pressing

But this hardly suggests that the responsabilities of the FDA to guarantee safe access to a regulated substance should be ignored 

Normally long delays for formal approval will only get longer while the industry consolidates, develops reliable supply chains and expands capacity to meet mass demand

This conservative stance may prove over-cautious but it cannot be a bad thing to weigh  over-hyped investment opportunities against regulatory - and market - realities

 

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Following the legalization of cannabis at federal level in Canada in June 2018, investors focused their attention on the US where many states have approved either medical use or recreational use

Approval of medical cannabis use is widespread around the world, notably in Europe (while still prohibited in Spain, France, Belgium, Sweden and most of Eastern Europe) and in 33 US States

But vastly diverging regulatory frameworks weigh on market potential, heavy-handed in Italy (a 2018 sales est. of $7 milliion) or in California, light-footed in Germany (a 2018 sales est. of $263 million)

Recreational use however is very significantly restricted worldwide – with legalization in only 2 countries – Canada and Uruguay

This is where American legalization at state level (not federal level) stands out, with approval in 10 States, including the West Coast (incl. Alaska and Nevada), Michigan and 3 East Coast States (Vermont, Maine and Massachusetts)

While marijuana is classified by federal law as a highly restricted Schedule 1 substance, the Obama administration choose not to intervene in states that had legalized marijuana

credit - Get Budding at unsplash.com

The Trump administration has taken the same route, giving up on the original intention to enforce federal restriction, after heavy lobbying

Evolving federal legislation is widely expected to devolve the power to regulate to the States, in a singular convergence of left leaning liberals and an active minority of Republican Senators

But the health risks of over-consumption may hold back some of the more determined lobbying efforts

 

Marijuana, use and abuse

A 2017 review of medical research from the the National Academies of Sciences, Engineering, and Medicine put down some markers

As summarized in a Vox article, the report outlined

  • “substantial evidence” in favor of marijuana for treating chronic pain, probably a decisive factor in light of the opioid painkiller epidemic, and to improve patient-reported multiple sclerosis spasticity symptoms
  • as well as “conclusive evidence” that marijuana is effective for treating chemotherapy-induced nausea and vomiting

Coupled with the findings on pain, this suggests that marijuana really is a potent treatment for cancer patients in particular, who can suffer from debilitating pain and severe nausea as a result of their illness

But the report also finds “substantial evidence” of marijuana’s negative effects for a few conditions

  • for long-term marijuana smokers, a risk of worse respiratory symptoms and more frequent chronic bronchitis episodes
  • for pregnant women, a risk of lower birth weight for the baby
  • for marijuana users in general, a greater risk of developing schizophrenia and other psychoses
  • and there’s a link between marijuana use and increased risk of car crashes

While the report emphasized the need for further research, the effect of marijuana consumption is not entirely bland, flagging

  • the risk of dependence - the need for repeated doses of the drug to feel good or to avoid feeling bad
  • and the effect on young people given that their brains are still developing up until the age of 25
    •  cannabis affects the brain's frontal cortex, which is responsible for judgment and decision-making
    • the Canadian Paediatric Society states the area changes rapidly in adolescence and is more vulnerable to damage from THC, the main psychoactive component of the marijuana plant

 

A regulatory minefield

Going mainstream, the nascent cannabis industry has to secure a reliable supply chain

credit - Karen at unsplash.com

The issues range from guaranteed product availability (by long-term contracts) to credible medical research to monitoring distribution networks

All of which takes time ... and any of which may disrupt legal availability, not precluding the as-yet unknown consequences of industry consolidation 

But investments, running into $100 millions, are still being committed, seeming to take impending overhaul of the law on trust

It is true political support has been gaining momentum, following legal approval for medical and recretional use in Canada (Oct. '18)

But the legal and regulatory environment remains uncertain, certainly more so than the latest start-ups like to suggest

The regulatory process of turning a free-wheeling fringe activity into a U.S. Food and Drug Administration (FDA) regulated industry could, in our (non-expert) opinion, be painful

  • the costs, extensive clinical research and test procedures, familiar to the healtcare industry, are indicative of probable developments

Under the FDA’s purview, established state markets for legal cannabis will come under review and there is hardly any doubt that fairly liberal state regulations, adopted with little medical oversight, will be rolled back by regulators erring on the side of prudence

The reasons to anticipate such an outcome are inescapable

  • the long-term effects of cannabis consumption have not been fully evaluated
  • the medical applications, still under-researched, remain partially a matter of conjecture
  • state regulations run the whole gamut of loosely defined requirements - making the strictest state rules (such as implemented in California) a likely blue-print for a federal framework

 

The cannabis industry is backing federal legislation leaving regulatory responsabliity to the states, but this outcome, supported by the most liberal states (such as Colorado), remains improbable

Our follow-up review of the strategic options explored by cannabis firms may offer some guidelines to ponder by prospective investors