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 saw several important milestones, which we believe have 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 opportunity today. Based on estimates from New Frontier Data (NFD), global cannabis expenditure reached $408 billion in 2020. That number was measured 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 value in relation to chronic pain, depression, arthritis, diabetes, glaucoma, migraines as well as epilepsy.[2] Cannabis-derived medicines are now available to treat various symptoms and conditions in countries from the UK, Germany, Italy and Spain, to Mexico, Argentina and Brazil. All around the world, there are now more than 70 countries with legalised medical cannabis programmes.[3] In total, there are now over 70 countries around the world that have some form of legalised medical cannabis programme.[4] In the US, there are now more states with legalised medical cannabis programmes than there are states without.

We see global cannabis reform well underway, and in the last 2 years, the pace of reform has also picked up. As additional markets open up, we expect the medical cannabis economy to deliver outsized returns to investors who are able to get on the front foot today.

What are some of the near-term drivers?

We believe that cannabis complex is currently benefitting from several distinct but interrelated tailwinds. Here we examine each in turn.

Global Acceptance

In 2020, the World Health Organisation (WHO) recommended to the United Nations (UN) to remove cannabis from Schedule IV of the 1961 Single Convention. The removal would mean 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 assigned medicinal property.[5]

In December 2020, the UN voted in favour and passed the WHO recommendation.[6] We believe this vote should not be taken lightly, and represents perhaps the most significant policy shift in the global classification of cannabis in nearly 60 years.

Favourable Legislation

The 2020 US election marked a further milestone for the medical cannabis complex.

Not just because US President Biden (and VP Kamala Harris) are the first president and VP to commit to Federal cannabis reform post-election, but also because it was indeed one of their pre-election campaign promises. To this day, medical cannabis (and adult-use cannabis) remains illegal at the Federal level, which has created an irregular dynamic of states individually legalising cannabis at the state-level. Some have gone the whole way with adult-use legalisation (which by default also means medical legalisation) while others have remained more conservative with only medical legalisation. Nonetheless, today there are more than 35 states with legal medical cannabis programmes out of a total of 50 (by contrast, adult-use is legal in less than 20 states).[7] Biden’s support for more widespread reform could see up to 10 further states legalise cannabis by 2022, covering 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 industry barriers, including excessive taxation, complexities around access financial services and banking, as well as introductions to institutional capital (the market still remains predominantly retail-driven, even today, contrary to popular belief). The other aspect is of course government restrictions around R&D spend targeted at uncovering new medical applications of cannabinoids, which was put on the backburner under Trump. There are over 100 different identified cannabinoids in the cannabis plant, for example, and we have only really scratched the surface of 5.[9]

Medical Recognition

As a result the number of medical use cases for cannabis are expected to be vast. In the future, cannabis-derived medicine is likely to be able to treat a myriad of symptoms and conditions from 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 already, 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 make their way into the market over time, as science unveils new indications for which cannabinoids can be efficacious. According to New Frontier Data, the global medical cannabis market is expected to be valued at $148 billion by 2026.[11]

Macro catalysts in 2021

Collective perception is now rapidly shifting away from cannabis as a discretionary vice to a natural plant with a multitude of healing properties. For this reason, 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] GW Pharmaceuticals’ Epidiolex drug, which is derived from plant-based cannabidiol (CBD) has been incredibly successful since its FDA approval in June 2018, propelling the company’s revenues to impressive new highs, quarter after quarter.[13] Importantly, Epidiolex has also helped push the boundaries of our understanding in neuroscience. Jazz’ focus on neuroscience explains their acquisition of GW, as well as the value they see in GW’s current pipeline, which includes a number of new medicines that seek to target other conditions that affect the nervous system. Several pharma/biotech companies are now following in GW’s footsteps, dedicating R&D to look for therapeutic value in other cannabinoids, terpenes and flavonoids. Big Pharma is also engaged in the industry, with Novartis and AbbVie both exploring opportunities.

Over time we see the cannabis complex disrupting key categories that include not only pharma/biotech, but also wellness, CPG and industrials (the latter, especially in relation to hemp). We see a burgeoning industry that presents a unique and asymmetric risk-reward for investors today, especially in these early stages of price discovery, and especially in light of the fact that cannabis stocks were badly beaten down prior to the election of Joe Biden.

As with any industry we expect a judgment phase for the industry too where good stewards of capital will be separated out from those who are not, and over time we’ll see markets rerate cannabis companies in the context of the multitude of tailwinds on the horizon that are likely to play out over the next 3 to 5 years.

Related ETF

FLWR: Rize Medical Cannabis and Life Sciences UCITS ETF

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: http://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/