The medical cannabis investment case, revisited

Cannabis has seen phenomenal growth in the past few years, but 2020 was perhaps the most consequential year yet. We hit several important milestones, which we believe set cannabis stocks up for secular growth in the years ahead.

Before going into the details, it’s worth noting the sheer size and scale of the cannabis complex today. Based on estimates from New Frontier Data (NFD), global cannabis expenditure reached $408 billion in 2020. That's across a total of 276 million users worldwide. Asia remains the world’s largest cannabis market, followed by North America and then Europe.

In relation to medical cannabis, specifically, this is a market that is expected to grow at a compound annual growth rate or CAGR of 15.3% between 2021 and 2026.[1] We believe this number is conservative. Why? Because today, the cannabis plant has already found therapeutic application with relation to chronic pain, depression, arthritis, diabetes, glaucoma, migraines as well as epilepsy.[2] Cannabis-derived medicines are now available to treat a variety of symptoms and conditions in countries such as the UK, Germany, Italy, Spain, Mexico, Argentina and Brazil. All around the world, there are now more than 70 countries with legalised medical cannabis programmes.[3] In the US, we now have more states with legal medical cannabis programmes than states without.[4]

Cannabis reform is well underway, and in the last 2 years, the pace of reform has also picked up. As additional markets open up around the world, we expect the medical cannabis economy to deliver outsized returns for investors who get on the front foot today.

What are some of the near-term drivers?

We believe that cannabis complex is currently benefitting from 3 distinct but interrelated tailwinds. We can take a look at each one in turn.

Global acceptance

In 2020, the World Health Organisation (WHO) recommended that the United Nations (UN) remove cannabis from Schedule IV of the 1961 Single Convention. The removal would mean that cannabis would be rescheduled from its classification as ‘one of the world’s most dangerous drugs’ (and those which, it is deemed, have no therapeutic value) to a new classification under which cannabis would be deemed medically useful.[5]

In December 2020, the UN voted in favour of this recommendation. [6] We believe this vote represents the single most important policy shift in the global classification of cannabis in nearly 60 years.

Favourable legislation

The 2020 US election marked a further milestone for medical cannabis. Not just because US president Biden (and vice-president Harris) are the first president and vice-president to commit to Federal cannabis reform; but it was indeed one of their campaign promises prior to the election. To this day, medical cannabis (and adult-use cannabis) remains illegal at the Federal level in the US, which has created an irregular dynamic where states have individually legalised cannabis at the state-level. Some have gone for full legalisation (i.e. including the legalisation of adult-use cannabis), whereas others have opted for more conservative approaches (i.e. medical-only legalisation). Nonetheless, today, there are more than 35 states with legal medical cannabis programmes in the US (by contrast, adult-use cannabis is legal in less than 20 states).[7] Biden’s support for more widespread reform could see up to 10 additional states legalising cannabis by 2022, which would cover close to 80 million Americans according to New Frontier Data.[8]

We expect reform to include not just the decriminalisation of cannabis, but also the elimination of major barriers, including excessive taxation on cannabis companies, complexities around accessing financial services and banking, as well as institutional capital (indeed, to this day, the cannabis market still remains predominantly retail-led). Other barriers include the loosening of government restrictions around R&D spend focused on finding new medical use cases for cannabinoids. A lot of this spending was put on the backburner under the Trump administration. There are over 100 different cannabinoids in the cannabis plant, and we have only really scratched the surface of about 5, and that is before mentioning terpenes and flavonoids.[9]

Medical recognition

The number of medical use cases for cannabinoids are expected to be vast. In the future, cannabis-derived medicines are likely to be able to treat a myriad of symptoms and conditions, from those related to insomnia and anxiety to arthritis and multiple sclerosis.[10]

The Food and Drug Administration (FDA) is already on-board when it comes to cannabinoids, having green-lit several medicines, including GW Pharmaceuticals’ Epidiolex (cannabidiol), AbbVie’s Marinol (dronabinol), Benuvia Therapeutics’ Syndros (dronabinol) and Bausch Health’s Cesamet (nabilone). We expect more medicines (both plant-based and synthetic) to get the FDA nod in the coming months and years, as science unveils new indications that can be treated using compounds from the cannabis plant. According to New Frontier Data, the global medical cannabis market is expected to be valued at $148 billion by 2026.[11]

Cannabis as a disruptive force

Collective perception is now rapidly shifting away from cannabis as a discretionary vice to a plant hailed for its healing properties. We believe cannabis is now in a multi-year, efficacy-led bull market that is going to buoy the value of cannabis stocks across the entire value-chain.

The recent acquisition of GW Pharmaceuticals (GW) by Jazz Pharmaceuticals is a case in point.[12] Epidiolex, which is derived from plant-based cannabidiol (CBD) has been incredibly successful since it gained FDA approval in June 2018, propelling the company’s revenues to impressive highs.[13] Epidiolex has also helped push the boundaries of our understanding of neuroscience. Jazz’ focus on neuroscience explains their acquisition, and the value they see in GW’s pipeline, which includes key IP that can target other conditions affecting the nervous system. Several biotechnology/pharma companies have also followed in GW’s footsteps, dedicating R&D spend to look for therapeutic properties in other cannabinoids. Big Pharma is also involved in the industry, notably Novartis and AbbVie.

Over time, we expect to see the cannabis complex disrupting key categories, including, but not limited to, biotechnology/pharma, wellness, CPG and even industrials (the latter, especially in relation to hemp). We see a burgeoning industry that today presents a unique asymmetric risk-reward for investors who get in in these early stages of price discovery. Of course, as with any industry, we expect there will be a judgment phase, where good stewards of capital will be separated from those who are not. However, over time, we believe that efficient markets will start to rerate cannabis companies in the context of the multitude of tailwinds that lie on the horizon, and which will play out over the next 3 to 5 years.

References

1. Imarc Group, “Medical Cannabis Market: Global Industry Trends, Share, Size, Growth, Opportunity and Forecast 2021-2026”, 2021. Available at: https://www.imarcgroup.com/medical-cannabis-market
2. IBID
3. IBID
4. New Frontier Data, “Global Medical Cannabis Webinar”, January 2021. Available at: https://us02web.zoom.us/rec/share/i8DNwcLzmcqg3yPYM9jXP-fKugzirdcyRjX9zqCtkgpsMou-KA_n7JPRkHTcvyQg.SW6-5vtXkaW5oloD (Passcode: 01bfM*b6)
5. New York Times, “U.N. Reclassifies Cannabis as a Less Dangerous Drug”, December 2020. Available at: https://www.nytimes.com/2020/12/02/world/europe/cannabis-united-nations-drug-policy.html
6. IBID
7. Wikipedia, “Legality of cannabis by U.S. jurisdiction”, 2021. Available at: https://en.wikipedia.org/wiki/Legality_of_cannabis_by_U.S._jurisdiction
8. New Frontier Data, “Global Medical Cannabis Webinar”, January 2021. Available at: https://us02web.zoom.us/rec/share/i8DNwcLzmcqg3yPYM9jXP-fKugzirdcyRjX9zqCtkgpsMou-KA_n7JPRkHTcvyQg.SW6-5vtXkaW5oloD (Password: 01bfM*b6)
9. IBID
10. Imarc Group, “Medical Cannabis Market: Global Industry Trends, Share, Size, Growth, Opportunity and Forecast 2021-2026”, 2021. Available at: https://www.imarcgroup.com/medical-cannabis-market
11. Report and Data, “Medical Marijuana Market to Reach USD 148.35 Billion By 2026 | Reports and Data”, March 2019. Available at: https://www.globenewswire.com/news-release/2019/05/20/1829108/0/en/Medical-Marijuana-Market-To-Reach-USD-148-35-Billion-By-2026-Reports-And-Data.html  
12. GW Pharmaceuticals, “Press Release: Jazz Pharmaceuticals to Acquire GW Pharmaceuticals plc, Creating an Innovative, High-Growth, Global Biopharma Leader”, February 2021. Available at: https://ir.gwpharm.com/news-releases/news-release-details/jazz-pharmaceuticals-acquire-gw-pharmaceuticals-plc-creating
13. New Cannabis Ventures, “GW Pharma Pre-Announces Q4 Revenue of $148 Million Ahead of Expectations”, January 2021. Available at: https://www.newcannabisventures.com/gw-pharma-pre-announces-q4-revenue-of-148-million-ahead-of-expectations/