Marijuana’s future

The Future of the Marijuana Industry in America

Marijuana is currently categorized by the U.S. Drug Enforcement Administration (DEA) as a Schedule I restricted drug, the most tightly restricted category.

That means the DEA considers marijuana, together with heroin, LSD and other mind-altering substances, a drug with no currently accepted medical usage and high potential for abuse. Despite this label, four states have now legalized marijuana for recreational use, and 23 states in total have legalized it for medical use. Polls by the Pew Research Center have reported that Americans generally favour legalization across the country, and recent studies on the effects of legalization in Colorado and Washington state have bolstered the case for federal legalization. Furthermore, on the medical front, studies have shown that marijuana can be used to treat a host of mental and physical ailments. Despite all this, the marijuana industry still faces many hurdles before it can reach full legalization.

Promising Numbers

The legalization of marijuana has benefited Colorado both economically and socially. Official statistics show that the state collected $23.7 million from taxes, licenses and fees year-to-date for FY 2015-2016, an increase of 70 per cent ($13.9 million) from the prior fiscal year. In Washington state, one year after the legalization of recreational marijuana, sales have been averaging $2.4 million a day in September 2015 (up from $420,000 a day in October of 2014). This translates to expected tax revenues of $65 million in FY 2015 for Washington state (Washington State Liquor and Cannabis Board).

But Colorado and Washington have not just benefited from collecting tax dollars. Since the passing of Washington Initiative 502 on the November 2012 general ballot, Washington has seen its violent crime rates decrease, while the overall crime rate continues to remain at a 40-year low. Colorado has also experienced similar decreases in crime. In addition, Colorado has improved its bottom line, saving money on reduced arrests and traffic fatalities.

The example set by Colorado and Washington no doubt impacted voters in Oregon and Alaska who soon voted to follow suit in legalizing marijuana. These combined actions of Colorado, Washington, Oregon and Alaska have contributed momentum to the federal legalization effort.

Harvard economists estimate that legalizing marijuana for the entire country would result in savings of $13.7 billion.

Medical Marijuana

It’s not just the government’s coffers that benefit from legalization. On the medical front, both public and private institutions are busy studying the effects of cannabinoids (the chemicals that give marijuana its active drug effects) for a whole slew of physical and mental ailments. Multiple studies have pointed to efficacy of cannabis in everything from alleviating pain in sufferers of multiple sclerosis and arthritis to helping to slow the spread of cancer or the progression of Alzheimer’s disease.

Furthermore, anecdotal evidence of marijuana combating symptoms of post traumatic stress disorder (PTSD) and other psychological maladies have long been documented amongst the veteran community as well as other survivors of violent events.

In the private sector, the potential pain-relieving effects of the compound tetrahydrocannabinol (THC) in marijuana, has led companies like Arena Pharmaceuticals Inc. (ARNA) to study THC for the development of new treatments. Arena's leading pharmaceutical drug candidate, ADP371, is currently in clinical trials in the Phase 1 single ascending dose stage. Arena is not alone in this growing field of cannabis-derived pharmaceuticals. In April 2015, GW Pharmaceuticals plc (LON: GLC) of London received orphan drug status for Epidiolex, a drug based on the cannabinoid CBD. It has shown promise in trials for helping to reduce the number of seizures in those suffering from severe epilepsy.

An Uncertain Future

With marijuana's many social, fiscal and medicinal benefits, why isn't full-blown federal legalization happening now? And should investors jump in on companies that will profit from the national legalization of marijuana? Before making any investment decisions betting on the future of cannabis, consider a few important caveats. On the federal level, a case can be to keep medical marijuana illegal based on its increasing potency over time and properties that can lead to misuse or dependency (Whitehouse.gov). And despite its mild reputation, marijuana is a powerful drug with both positive and negative effects. Studies have shown cannabis can cause short-term paranoia and exacerbate symptoms of psychosis for those suffering from or susceptible to psychotic disorders.

And how about those medical properties of marijuana that have long been touted by its supporters? Based on a meta-analysis conducted on 79 trials and 6462 participants, The Journal of the American Medical Association (JAMA), concluded that evidence for cannabis in treating chronic pain and spasticity was moderate. But JAMA went on to conclude that there was low evidence for suggesting the use of cannabis to treat nausea and vomiting during chemotherapy, weight gain in HIV infection, sleep disorders and Tourette's syndrome. Finally, the much-cited tax benefits of legalized marijuana may be overstated. A study by the non-partisan RAND research group on the effects of legalization in California concluded that after legalization of recreational use, the price of marijuana can fall dramatically (California currently allows only medical use of marijuana). This can lead to lower tax revenues for the state.

A report by Convergex has recently confirmed the Rand study’s predictions that after full legalization of marijuana in Colorado, there was a spike in large sales that also resulted in increased tax revenues. After the initial spike, however, marijuana prices fell dramatically in Colorado, mostly due to increased competition among suppliers.

The Bottom Line

While the legalization of cannabis in Colorado, Washington, Oregon and Alaska are major breakthroughs for a possible federal legalization, it is still too early to cite the experiences of these states to support national drug policy decisions. That said, the evidence from Colorado and Washington have been promising. So far, these states have enjoyed all the benefits of legalization with little-to-none of the feared side effects. Furthermore, as more studies are conducted on the medicinal efficacy of marijuana, more states will undoubtedly join the 23 that have already legalized cannabis for medical use. However, the marijuana industry is still extremely speculative in nature, and prices in states like Colorado and Washington have yet to reach a stable equilibrium. Moreover, cannabis retailers are faced with out-dated, sub-optimal tax policies that can cut into their income base.

Cannabis retailers, as well as other businesses dependent on cannabis, can have a hard time raising investment funding due to the credit and social risk associated with uncertainty on the drug's legal status. For now, investors should hold off on betting on the full federal legalization of marijuana.