Cannabis

Black Legend Capital Explains the Investment Outlook in the Cannabis Industry

As governments open more avenues for investment, the cannabis industry's advance toward legalization presents a unique opportunity given the cannabis market's numerous growth drivers including a large base of potential cannabis consumers, movement toward the end of federal prohibition, advancements in alternative forms of ingestion, and new product platforms.


A History Of the Cannabis Industry

In November 2000, Colorado voters legalized medical marijuana with the approval of Amendment 20. This authorized the possession of limited amounts of medical marijuana for patients and their primary caregivers. After this victory, the Colorado court's ruling paved the way for small, low-volume dispensaries to spring up quickly to meet the demand. Nonetheless, the sector’s lack of formal legal status and financial recognitionforced it to remain informal, unintegrated, and unincorporated.

While the United States cannabis market's immense growth continues as a result of the legalization effort, trends are global. Cannabis possession is illegal in most countries under a 1925 treaty called the International Opium Convention.  However, many nations have since adjusted their laws to legalize medical or recreational use. Outside of the U.S., marijuana possession has become de jure or de facto legalized in Argentina, Bangladesh, Cambodia, Canada, Chile, Colombia, the Czech Republic, India, Jamaica, Jordan, Mexico, Portugal, Spain, Uruguay, Germany, the Netherlands, and Switzerland. Globally, marijuana production is a growing multibillion dollar industry with programs for medical use set up and running in countries including Germany, Canada, Australia, Israel and the Czech Republic. Uruguay, Peru, Colombia, the Netherlands, and Switzerland are the few countries that have legalized the consumption and possession of cannabis, and in Spain, adults are permitted, in certain jurisdictions, to join “associations” where groups of adults consume and grow cannabis. Currently, many countries are exploring cannabis business opportunities by legalizing and regulating Cannabis products for medicinal and recreational uses. Colorado remains the role model in creating a modern cannabis economy. In 2010, the Colorado legislature passed the Colorado Medical Marijuana Code regulating the commercialization of marijuana. The Code proved the industry’s legitimacy and prepared it for investor capital.Since January 2018, therecreational use of cannabis has been legalized in 8 states (AK, CA, CO, MA, NV, OR, VT and WA), Washington D.C., and 29 have legalized the use of Cannabis for medical purposes. Furthermore, 12 more states are poised to consider cannabis legalization later in 2018. On March 2018, President Trump assured Senator Gardner of Colorado that the current administration wouldn’t interfere in states where cannabis is legalized and promised to support a legislative solution to address marijuana legalization on a national scale.


Pharmaceuticals Entry into the Cannabis Space

With recreational marijuana being largely inaccessible in the U.S., medical marijuana has been the main driver of the industry for the past 10 years. Notably, University Hospitals Bristol conducted 79 randomized trials involving volunteers given either cannabis or a placebo. They noticed that improvements occured among the participants taking the cannabinoid products by relieving symptoms including seizures, nausea from chemotherapy, loss of appetite among HIV positive patients, multiple sclerosis spasms, depression, anxiety, sleep disorders, psychosis and Tourette syndrome. Additionally, cannabis has medical benefits for people suffering from Parkinson’s disease, arthritis, cancer, Crohn’s disease, glaucoma, and many other diseases, often by relieving chronic pain. This will allow cannabis-based drugs to become a viable treatment options in these large markets. The U.S. population demographic continues to drive demand for medical marijuana, since many of the diseases treatable by marijuana affect the elderly most.  To illustrate, IBISWorld, projects that the number of people who are 50 and older will grow at 1.6% to 120.1 million by 2020, increasing the demand for medical marijuana and encouraging the industry to increase in size and profitability. More than 40 medical conditions are listed as qualifying conditions in legalized states and as the efficacy of cannabis treatments becomes more understood, U.S. cannabis production is expected to surge to meet the growing demand.

 

Cannabis: Growing Rapidly

The U.S. legal cannabis sector is booming: Already worth over $7 billion, it is expected to grow to $50 billion by 2026. Within that market, CBD products are a significant subsector, expected to hit $1 billion in the next few years. Even more conservative U.S. states are overcoming their objections and opening up to CBD production and salesas legislators seek new ways of addressing growing healthcare pains. Moreover, the number of operators is expected to grow at a rate of 27% annually to 2021, while industry employment will increase to 1.1 million people. If legalized at a federal level, estimates for the entire U.S. cannabis industry’s profits are projected at $37 billion with 22 million consumers by 2020. Within California alone, cannabis sales reached $2.8 billion in 2017 and, supported by the activation of a regulated adult use market, annual sales are projected to grow at a compound annual rate (CAGR) of 23.1%, reaching an estimated $6.6 billion by 2025 to become the largest state cannabis market.

 

Although a federal prohibition is in place, there are an estimated 20 million people in the U.S. who consume cannabis every month, and $40 Billion was generated in 2010 in the illegal U.S. market for cannabis. To put things in perspective, the lucrative tobacco industry has an annual revenue of approximately $100 billion and 45 million retail consumers. Within ten years, the cannabis industry is expected to reach a combined total market of $100 billion annually and more than 50 million consumers if federal prohibition is discontinued.

The continued success observed in states that have legalized recreational cannabis provides incentive for other states to legalize for-profit marijuana. In 2016, taxes from the retail sale of marijuana totaled more than $500 million in Colorado, Washington and Oregon alone, according to BDS Analytics. Therefore, continued success in these states may provide an incentive for other states to legalize for-profit marijuana distribution. The legalization of for-profit recreational marijuana across numerous states has already had a positive effect on industry profit margins, which haveincreased to 21.5% of revenue in 2017.

Financial and Regulatory Involvement in Cannabis

 

After a pivotal moment in the legalization effort, the finance industry swiftly went out of its way to invest in retail marijuana. U.S. investments in foreign cannabis companies, as well as ancillary services from transportation, storage to mobile applications rating potency and quality in the industry, were immediate indicators. Investments are going into additional ancillary businesses, which do not need to be regulated, such as nutrients, lighting, climate control, and all kinds of equipment. However, the real prize remained for a long while unreachable: the idea of taking an industry with such high demand already in place and introducing it to the world of institutional capital, vertical integration, and incorporation. The root cause of the problem is in the legal challenges cannabis faces in most countries. Although the push for cannabis has been strong, the decriminalization of cannabis does not necessarily mean one can directly invest in it. In fact, investors hoping to place more capital in cannabis can only do so in countries where it is legalized or by indirect investment in businesses supporting the cannabis market.

Nonetheless, we will begin to see more nations legalizing the use of marijuana, which will allow international investors to have more possibilities for profitable investment in the industry. The recent Colorado Senate Bill addressing the regulation of out-of-state investors in cannabis, which finds that "medical marijuana businesses need to be able to access capital…" and that "Colorado medical marijuana businesses need to have ready access to capital from investors in states outside of Colorado," characterizes the first step in this process. So why is the industry getting so much attention from government, banks, and investors?

About 62% of Americans live in states where cannabis is legal in either medicinal or recreational use. Also, with a higher demand for medicinal uses of cannabis, big pharma looks to meet this demand by creating CBD and THC pills for ill patients. This will allow investors to be fully invested in the massive pharmaceutical industry. As cannabis legalization spreads, there are other benefits to investing in dispensaries beyond its increased use and profits. For example, the ability to be involved in a brand new industry adds excitement and as the market predictably grows, the barriers are fewer now than they will be in the future. The cannabis market is no different than other markets in that once it matures, competitiveness and an upsurge in capital will bring more obstacles for entry. This represents an opportunity to enter a market whose potential is largely untapped before legislation opens the floodgates for commercialization. The combination of strong demand and high potential inherent within the industry, coupled with the regulatory changes coming soon, have created the best time for strategic investment in the cannabis industry.

 

The bulk of the investments in the legal cannabis industry in the United States is concentrated among Biotech and Pharma companies, surpassing cannabis cultivation and retail cannabis sectors. The Biotech / Pharma industry involvement in the cannabis sector is rapidly expanding because of the legalization of the cannabis industry and the medical benefits now acknowledged internationally. Consumer product companies such as food & beverage and skin care lines are developing new products using cannabinoid oil (CBD), which continues attracting most of the investments in the industry.

We are in the early stages of a potentially powerful secular growth cycle for the cannabis and cannabis related industries. Ackrell Capital, a provider of objective research solutions, estimates that within 5 to 10 years there will be a substantial amount of mature companies who have the capacity to dominate the U.S based cannabis consumer market. Inevitably, well-resourced, well-managed, and well-positioned companies will have a myriad of opportunities for significant growth, and savvy investors quick to respond to this transitional period will be able to take advantage of it.

Sources:
Medical & Recreational Marijuana Report
Resource: Forbes, New Frontier Group, Marijuana Business Daily 
Resource: Price Economics, Headset Inc. Cannabis Intelligence, Forbes
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