Cannabis was added to the United Nations' Single Convention on Narcotic Drugs in 1961. Since then it has been illegal in most of the world. US president Richard Nixon declared a "war on drugs" a decade later, reinforcing the notion that cannabis was a dangerous illicit substance; virtually every American president has followed suit. But now the prohibitionists are in retreat. The last few years have seen liberalisation spread throughout the West and beyond, spearheaded by a growing acceptance in the medical community that cannabis can be used to treat an increasing number of ailments.
In 1978, New Mexico became the first US state to recognise the medical value of cannabis, passing a law that began allowing the limited use of the drug for medical purposes. In 1990 Marinol a form of synthetic THC (the psychoactive ingredient in cannabis) administered orally was approved in limited form by the federal government for the treatment of nausea in cancer patients.
A slow start
However, it wasn't until 1996 that California became the first US state to fully legalise "medical marijuana". Since then, the use of cannabis for medical purposes has been brought within the law in 33 US states, plus the District of Columbia. Outside America, medicinal cannabis has been legalised in at least 30 countries. Europe leads the way, through Germany, Italy, Denmark, the Netherlands, Poland, Switzerland and several others. Australia legalised medicinal use in 2016. Since November 2018, medical use has technically been legal in the UK, too. However, the change in legislation was triggered by some very specific high-profile cases, including those of Billy Caldwell and Alfie Dingley. The rules do not go as far as medical-use laws in other countries. Cannabis-based drugs are available as unlicensed medicines prescribed by certain approved medical professionals in very specific cases where the clinical need cannot be met by existing licensed medicines.The only exception is Sativex, a common cannabis-derived drug produced by the UK's GW Pharmaceuticals to alleviate many of the symptoms of multiple sclerosis. But as medical use becomes established in other countries, and public opinion shifts in line with the global trend, it's reasonable to expect medical cannabis will become more widely available here, too.
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From medical to recreational use
Many governments also seem to be coming round to the idea that cannabis can be safely used for recreational purposes. Several countries, notably Portugal, have decriminalised possession of small amounts or turned an official blind eye, as in the Netherlands. Uruguay became the first state to legalise recreational cannabis use at a national level in 2005 although it is only possible to buy it from state-licensed pharmacies, of which there are few. The pace of change has slowed, however, as the country's current president, Tabar Vzquez, is reportedly no big fan of recreational use. A further problem in Uruguay is that banks are reluctant to provide financial services to cannabis businesses as a result of laws in the US which prevent American banks dealing with businesses that facilitate drug trafficking.
Mexico is reported to be considering legalising pot for recreational use. In 2020, New Zealand will hold a referendum on the move; a poll in the New Zealand Herald suggests that 60% of the population are in favour. And in Europe, Luxembourg could become the first country in Europe to fully legalise recreational use for its 400,000 adult residents after the government said it would introduce legislation within the next five years.
Sell it and tax it
The argument for legalising recreational use has gained momentum with the realisation that depleted public coffers could receive a welcome fillip from taxing the sale and production of the drug. Of the ten US states that have passed laws allowing recreational use, only seven currently tax and regulate shops selling cannabis. But in 2018, those seven states took a total of more than $1bn in tax revenue, estimates Leafly, an online cannabis information resource. Washington state led the way with $319m in taxes and licence fee income; Colorado took $266.5m; and California, which legalised recreational use in 2018, is estimated to have taken around $300m.That's a significant amount, says the Institute on Taxation and Economic Policy, but it still only represents less than 1% of total state and local taxes collected in the states that tax cannabis. Still, it gives a clear indication of the nationwide scope for a fiscal boost. It's also interesting to note that the amount raised from cannabis taxes in Colorado and Nevada has already eclipsed that from alcohol, and is predicted to do the same in California by 2020. There's the employment picture to consider too. According to Leafly, almost 65,000 new jobs were created in America's legal cannabis industry in 2018, bringing the total directly employed to 211,000 full-time positions, increasing to 296,000 when "indirect" employment is added.
Opposition in Washington DC
There is, however, still a serious impediment to the development of the US pot industry: cannabis is not legal at the federal level in the US. Indeed, it is still classed as a "schedule 1" drug on a par with heroin. This is causing all areas of the industry, from producers to sellers, transporters and anyone who does business with them, big problems. Big banks and institutional investors are wary of dealing with them, as cannabis-related transactions fall foul of federal money-laundering rules, says The Wall Street Journal. Indeed, the big banks are so terrified of problems with the law that they're not even backing a banking reform bill currently making its way through Congress. It's tempting to say that good sense will eventually prevail and the federal laws will change. But it could take some time. And it's always possible that a hardline president could get elected who makes it his or her mission to crack down on the industry. It happened with alcohol, after all, before prohibition eventually gave way to common sense.
The opportunities in hemp and CBD
Nevertheless, the US recently passed legislation removing hemp a strain of cannabis traditionally bred for its fibres, with no psychoactive properties from its list of controlled substances. That has allowed American farmers to grow it as an agricultural crop. Most is grown not for fibres for rope or textiles, but to press the seeds to get oil, which contains cannabidiol, or CBD.
This is one of the two main active ingredients in cannabis, (there are more than 100 in total) but it has no psychoactive properties. In other words, it doesn't get you high (the ingredient that does is THC, or delta-9-tetrahydrocannabinol, to give it its full name). But CBD has quickly carved out a market as a herbal medicine. Indeed, despite being in a fairly murky legal area (CBD is sold as a "food supplement", not as a medicine), the CBD market is thriving in the UK. You may have noticed that hemp oil, CBD tinctures and other concotions are increasingly available on the high street, offering relief from ailments ranging from anxiety to chronic pain.It's also being added to all sorts of other products, including drinks, unguents and even pet food. The EU is considering including CBD under its "novel foodstuff" regulations, which is likely to temper the market's growth, at least temporarily. In its pharmaceutical form, CBD is the basis of GW Pharmaceuticals' epilepsy drug, Epidiolex, which was recently approved in the US and is currently going through the licensing system in the UK.
Big business cashes in on cannabis
Given the sector's impressive potential, big consumer products groups have decided they want a slice of the action. Brewing giant AB InBev has set up a $100m joint venture with Canadian pot producer Tilray to research CBD-infused non-alcoholic drinks, reports Reuters. Constellation Brands, maker of Corona beer, has poured $4bn into Canada's Canopy Growth, which targets the medicinal and recreational market, to fund its expansion. Molson Coors has entered into a joint venture with another Canadian producer, Hexo Corp, to make cannabis-infused drinks. And cigarette-maker Altria has taken a $1.8bn stake in Canadian cannabis producer Cronos. It now owns 45% of the company, with the option to increase its holding to 55%. Coca-Cola and Pepsi have both expressed an interest in cannabis, too.
Europe opens its market
Being fully legal at the federal level has given Canada's producers a huge boost compared with their US counterparts. Now, Canadian producers, flush with money, are looking to expand in Europe. Prohibition Partners, a consultancy, estimates that the European legal market could be worth up to €123bn by 2028 €58bn in the medicinal market and €65bn in the recreational. It would be the "largest medical cannabis market in the world". The EU is working on legislation that will bring cannabis medicines under its existing regulatory regime. This will inevitably raise the barrier to entry into the market, favouring companies already up and running. With the exception of Britain's GW Pharmaceuticals, the Canadian companies find themselves in pole position.
Germany looks especially promising
Canada's established producers are already moving into the German market, potnetwork.com reports. Germany has legalised medicinal cannabis and is likely to be the first major European country to permit recreational use. Prohibition Partners reckons the market could be worth up to €16.2bn a year. Aphria, one of Canada's largest producers, recently acquired CC Pharma, a medical cannabis distribution company from Germany, and aims to build production facilities there. Canopy Growth has established a subsidiary in Frankfurt. Germany recently issued its first four-year licences to cultivate medicinal cannabis. Two have gone to established Canadian companies, Aurora and Aphria. The third went to German wholesaler and distributor Demecan.
Other big European markets that could soon open up, says Prohibition Partners, include Italy, worth up to €15.7bn, France at €18.6bn and Spain at €8.3bn. The UK market could be worth up to €18.4bn should the government soften its stance; however, Britain remains one of the world's biggest exporters thanks to GW Pharmaceuticals. But, as Matthew Lynn recently pointed out in his City View column, unless the government moves to put itself at the forefront of this emerging market, Britain looks set to lose out.
Is a bubble emerging?
Since the legal cannabis industry exploded onto the scene, investors have been piling in, backing the early-stage pioneers in the hope of making a killing. The trouble is that the trend is now looking uncomfortably like a bubble. The Financial Times has already wondered whether cannabis is the new bitcoin. Clearly, as a physical product with multiple well-documented uses, it's nothing like bitcoin, but the meteoric rise in valuations and volatility does call to mind recent developments in the cryptocurrency market. Since listing in April 2014, Canopy Growth Corp, one of Canada's big five producers, hit a peak of 2,500% times its initial public offering (IPO) price last September, only to lose almost half its value soon after. It has since pulled back to slightly more than 2,000% its IPO price. So how worried should you be, and should you put any money in at all?
Valuations are still high. The last time we covered this subject, in September 2017, you could have bought Canopy Growth for just $9; now it costs $58. The Horizons Marijuana Life Sciences Index exchange-traded fund has more than doubled. Short-term price movements and volatility aside, however, what seems clear now that legalisation is sweeping the world is that we are in a structural growth market. Long-term investors should therefore consider cashing in on cannabis by starting to dabble in the market now.
The cannabis stocks and funds to consider now
The best-known medical cannabis stock is Britain's GW Pharmaceuticals (Nasdaq: GWPH), which is now listed in New York. Its Epidiolex epilepsy drug, recently approved in the US, has enjoyed unexpectedly strong sales, and is set to be approved in Europe in the near future.
The "big five" pot producers are all Canadian. The biggest by market value is Canopy Growth Corporation (Toronto: WEED), worth around C$22bn. Despite being the biggest operator and increasing revenue to C$97.7m in the third quarter, compared with just C$21.7m in the same period the previous year, it's still not profitable and pays no dividends. Indeed, it is losing more money than ever. It's a similar story elsewhere. At Aurora Cannabis (Nasdaq: ACB; Toronto: ACB) both sales and losses have risen. Aphria (NYSE: APH; Toronto: APH) is the second-biggest of the five but has yet to make any profits. Cronos Group (Nasdaq: CRON) and Tilray (Nasdaq: TLRY) are currently unprofitable. As with many tech stocks, companies are concentrating on expanding, establishing their name in a fast-growing new area.
That means an exchange-traded fund covering several of the bigger names may be a safer bet for now. Among exchange-traded funds, the ETFMG Alternative Harvest ETF (NYSE Arca: MJ) has performed well this year. Top investments include GW Pharmaceuticals, Aurora Cannabis, Canopy Growth, Cronos and Tilray. Its expense ratio is 0.75%.The Horizons Marijuana Life Sciences Index ETF (Toronto: HMMJ) was the world's first cannabis-focused ETF when it launched in Canada. It is now also available in New York. Its holdings are similar to the Alternative Harvest ETF's and it is a tad pricier; the expense ratio is 0.87%. A new ETF trading in New York is the AdvisorShares Pure Cannabis ETF (NYSE: YOLO), a more actively managed fund that doesn't track the underlying index in the way the ETFMG Alternative Harvest ETF does. Its expense ratio is 0.74%.
Just as during mining booms, investors may do better with companies providing picks and shovels for diggers rather than the actual metal being mined, a bet on suppliers to the pot industry could pay off. In this context, consider Innovative Industrial Properties (NYSE: IIPR). It is a real estate investment trust (Reit) that concentrates on properties for medical cannabis businesses. It has been consistently profitable for a couple of quarters now, says Motley Fool. And Trulieve Cannabis Corp. (Toronto: TRUL), which operates cannabis dispensaries in Florida, and is the state's biggest operator, with more than 60% of the market, also appears worthy of further research.
Investors who prefer their stocks to be listed in the UK have virtually no options. Sativa Investments (NEX: SATI) is UK's first medicinal cannabis investment vehicle listen on the NEX exchange. NEX is an independent stockmarket that specialises in small growth businesses; it has been described as the junior stockmarket Aim's smaller sibling.
Ben studied modern languages at London University's Queen Mary College. After dabbling unhappily in local government finance for a while, he went to work for The Scotsman newspaper in Edinburgh. The launch of the paper's website, scotsman.com, in the early years of the dotcom craze, saw Ben move online to manage the Business and Motors channels before becoming deputy editor with responsibility for all aspects of online production for The Scotsman, Scotland on Sunday and the Edinburgh Evening News websites, along with the papers' Edinburgh Festivals website.
Ben joined MoneyWeek as website editor in 2008, just as the Great Financial Crisis was brewing. He has written extensively for the website and magazine, with a particular emphasis on alternative finance and fintech, including blockchain and bitcoin. As an early adopter of bitcoin, Ben bought when the price was under $200, but went on to spend it all on foolish fripperies.
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