Rahul Bhushan is co-founder of Rize ETF and sees real opportunities for growth from ETFs investing in this dynamic sector. Here he explains the reasons why.
Cannabis has seen phenomenal growth over the past few years, but 2020 was perhaps the most consequential year for the industry to date. And it has setup several important tailwinds for cannabis stocks which makes them uniquely positioned to appreciate in the months ahead.
Before delving into details, it is important to understand the sheer size and scale of the existing cannabis complex. Based on estimates from New Frontier Data, global cannabis expenditure currently sits at around $408 billion globally. That is across 276 million users. Not many people know this, but Asia is 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). The reason? Because today, cannabis has found application in the treatment of a number of symptoms and diseases including chronic pain, depression, arthritis, diabetes, glaucoma, migraines and even epilepsy (2). Owing to these therapeutic benefits, cannabis has been approved for medical use in a host of countries, including Argentina, Brazil, Germany, Italy, Mexico, Spain and the UK.3 In total, there are now over 70 countries around the world that have some form of legalised medical cannabis programme (4).
Some of these markets are more nascent than others, of course, and some are more restrictive than others; but this has not slowed the pace and proliferation of cannabis reform. As additional markets open in the years ahead, the medical cannabis economy is set to experience tremendous growth as opportunities abound.
What lies ahead?
The global medical cannabis complex is currently buoyed by the tailwinds of global acceptance, favourable legislation, and medical recognition. We believe these tailwinds will collectively propel the industry forward in 2021 and beyond. Let us look at each one in turn.
Global Acceptance
In 2020, the World Health Organisation recommended that the UN reschedule cannabis from its classification under ‘the world’s most dangerous drugs’ (those that, it is deemed, have no therapeutic value) to a classification under which cannabis would have demonstrable value (5).
In December 2020, the UN undertook this vote and decided to remove cannabis from Schedule IV of the 1961 Single Convention (6). This is a transformational vote and represents perhaps the most significant policy shift in the global classification of cannabis in nearly 60 years.
Favourable Legislation
The 2020 US election marks a further step in the medical cannabis story.
President Joe Biden is the first president to enter office that has committed to federal cannabis reform. To date, cannabis remains illegal at a federal level, which has created an irregular dynamic whereby individual states have legalised cannabis independently, some for medical use only, and others for both medical and recreational use. Today, medical cannabis specifically is legalised in 35 out of the 50 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).
This is likely to include not only the decriminalisation of cannabis but also the elimination of major barriers the industry has had to face, including excessive taxation, difficulty accessing banking as well as institutional capital, and government restrictions around looking into the therapeutic applications of cannabinoids.
New Frontier Data estimate that legal cannabis sales could double by 2025 in the US alone, from around $20 billion today to just over $40 billion (9).
Medical Recognition
Medical use cases for cannabis are vast and they are used to treat myriad conditions from anxiety and insomnia to arthritis and epilepsy (10).
The FDA has already approved one cannabis-derived medicine, GW Pharmaceuticals’ Epidiolex (cannabidiol), as well as three synthetic cannabis-derived medicines: AbbVie’s Marinol (dronabinol), Benuvia Therapeutics’ Syndros (dronabinol), and Bausch Health’s Cesamet (nabilone). More cannabinoid-derived medicines are likely to get the seal of approval both by the FDA (and the EMA) in the coming months and years, as new indications can be addressed. We are in the early innings of what is estimated to become a global medical cannabis market worth $148 billion by 2026 (11).
Macro catalysts in 2021
In our view, cannabis is in the early stages of a multi-year, efficacy-led bull market that is going to buoy companies across the cannabis spectrum. The collective perception is already shifting away from cannabis as a discretionary vice to a plant with healing properties and industrial applications.
The recent acquisition of GW Pharmaceuticals (GW) by Jazz Pharmaceuticals is a case in point (12). GW Pharmaceuticals’ plant-based CBD-derived medicine, Epidiolex, has been tremendous success since its approval by the FDA in June 2018. The distribution of Epidiolex across the US as well as
Europe has propelled the company’s revenues to meaningful heights (13). Epidiolex has also helped pushed the boundary of our understanding in neuroscience. As well as oncology, neuroscience is one of the key focus areas for Jazz Pharmaceuticals which explains their decision to acquire GW (which includes GW’s pipeline). Several companies are now following in GW’s footsteps, looking to find new indications that cannabinoids have the potential to address.
We see the cannabis complex disrupting categories such as biotechnology/pharma (through cannabinoid-derived medicine), wellness (through the application of CBD and its derivatives) as well as industrials (through use of hemp and hemp-derived products given their more eco-conscious properties).
The election of President Biden marks an inflection point for the industry. It is possible that we are seeing a unique asymmetric risk-reward in these initial stages of price discovery (given how badly cannabis stocks have been beaten down in the past few years). That said, over time, as with any industry, we are surely going to see a judgment phase that will separate out the good stewards of capital from those who are not. We believe markets are ultimately going to be the efficient animals that will assist in this fierce rerating of companies and deliver a form of “comeuppance” to companies that don’t deliver against expectations.
Rahul Bhushan is co-founder of Rize ETF
References
- 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
- IBID
- IBID
- 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)
- 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
- IBID
- Wikipedia, “Legality of cannabis by U.S. jurisdiction”, 2021. Available at: https://en.wikipedia.org/wiki/Legality_of_cannabis_by_U.S._jurisdiction
- 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)
- IBID
- 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
- 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
- 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
- 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/
