Reversal of Federal Marijuana Policy? Everyone, please, “Chill Out”!
Setback? (Maybe.) End of the World? (Not even close.) An analysis of the potential impact on the marijuana industry.
White House press secretary Sean Spicer’s remarks about “greater enforcement of Federal law”, indicating a reversal of marijuana policy, should not be taken lightly. It’s an abrupt change from the Obama administration’s view that marijuana policy should be determined by voters and governed by state-regulated industries. The former Administration had also tightened the purse-strings on the DOJ’s and DEA’s budgets in regards to pursuing state-licensed businesses: Federal dollars would not be allocated toward the prosecution of state-compliant businesses. These decisions helped the administration focus on the pursuit of criminal activity, such as: the diversion of marijuana from legal states into areas without state marijuana laws (policing interstate commerce): illegal banking/money laundering; any use of guns in the industry (directed at eliminating cartels, gangs, and criminal activity); growing of marijuana on public lands; marijuana usage on Federal property; sales to minors; and drugged driving (for highway and public safety).
But the new Administration’s suggestion of “greater enforcement of Federal law” does not necessarily mean the industry is in trouble, even though there will be both winners and losers if this happens.
Popular Support & Americans’ Changing Attitudes Toward Marijuana
The Federal Government will not restrict medical marijuana access: a reversal of Federal policy on medical marijuana would not only become a “state’s rights” issue. An overwhelming majority (83%) of Americans support access to marijuana for medical purposes. Over 60% of the American population lives in states that have voted in favor of state-regulated medical-marijuana programs.
There is also greater awareness of marijuana’s potential benefits. Anyone who has encountered the benefits of marijuana either personally, or with a friend/relative in pain, or during end-of-life care, or for easing the side effects of cancer treatments, quickly becomes a flag waver for marijuana’s cause. Parents fighting for access to “whole-plant” marijuana (not hemp-derived) CBD, to treat a child’s severe epilepsy or seizures, have been at the front lines of the battleground to change laws across the country for many years.
Existing state-medical programs will remain intact. The Feds will also not place restrictions on any states’ rights to vote on introducing medical marijuana programs, or even make recommendations on qualifying medical conditions. Last summer, the DEA refused to reschedule marijuana from its current Schedule I classification, based on insufficient medical evidence (due to a lack of scientific studies) within the US – so marijuana remains scheduled with LSD, Heroin, and Ecstasy (among others), as a “drug with a high potential for abuse and having no potential medical benefits”. At the same time, the DEA loosened rules to allow more research to be done. These studies may take years to complete, and gain FDA approval. Consequently, it’s unlikely the new Administration will instruct the DEA to create a framework for state-regulated medical marijuana programs, or limit qualifying conditions. It’s likely that more States will set up medical marijuana programs in the next few years. For many patients, these programs may not be as free-wheeling or as liberal as California’s list of qualifying conditions (giving wide access), but all 50 states, at some point, will create their own rules. The medical marijuana industry will continue to expand.
Recreational Laws are Different
Voters in 8 states plus DC have approved laws allowing “recreational” access to marijuana (to anyone over the age of 21). The Federal government, under the new administration, may in fact place restrictions on recreational laws. Press Secretary Sean Spicer’s remarks in fact made this distinction, noting that President Trump sees “a big difference” between the use of marijuana for medical purposes and for recreational purposes.
Recreational laws pose a real challenge to the Federal Government, as wider access and availability has allowed marijuana from legal states to cross state borders. Nebraska and Oklahoma took legal action against Colorado over this increased flow outside its borders, but the Supreme Court declined to accept the case last March.
The DEA and the DOJ, under guidance from the new administration, may place restrictions on recreational marijuana access. We hope they don’t, not because we’re in the marijuana industry, but because the effort is misguided. Any policy reversal will eventually fail. But here are a few predictions on winners and losers should this happen.
The real winner: the Black Market
Marijuana is not new. It’s the most commonly-used recreational drug in the US. In a recent analysis from ArcView Research’s State of Legal Marijuana Markets, it was estimated that $53.3 Billion was spent on marijuana sales last year. But 87% of this was obtained through illegal channels.
State-legal industries have witnessed astronomical growth in the past 4 years. None of this is based on new customers, increased demand, or an expanding market: this massive growth is based on the movement of illegal trade into state-regulated channels. The industry is not growing, but shedding its illicit roots. State-regulated markets bring better controls to the trade, increased oversight, and generate significant state taxes, which can be used to police/eliminate black market providers. In addition, nothing puts as big a “squeeze” on illegal trade as the convenience of marijuana available through Dispensaries/Retail stores, lower prices, and tested products.
But if there is a reversal of recreational laws, the black market will continue to thrive. Marijuana from CA’s Emerald Triangle will continue to fan out from Northern California across the US, into states where marijuana sales are not allowed. Even in legal (medical) states this remains an issue: New York City’s tiny, restrictive, and abysmally-regulated medical marijuana market will continue to service very few patients, while an estimated $2 Billion in annual sales will continue to be sold on the streets.
A more thoughtful approach to tackling this issue would leave states with recreational laws intact, and allow state governments to tax and regulate the industry.
Trends to watch:
1. Impact on marijuana stocks
We’re not in the business of stock-recommendations, and don’t invest in marijuana stocks. But the biggest losers of any Federal policy reversal will be small and micro-cap marijuana stocks currently trading on over-the-counter markets. Many of these stocks are thinly-traded, with suspect balance sheets, a real lack of visibility into financials. There have already been scandals and arrests based on shady deals and pump-and-dump investor fraud. Most of these were considered high-risk stocks even before last Thursday’s announcement.
One possible winner in this is so-called “Big Pharma”: GW Pharmaceuticals has been developing a pharmaceutically-derived drug that isolates marijuana’s compounds. We don’t like GW Pharmaceuticals, on principle: they donated over $500K to help defeat the recreational ballot initiative in Arizona during the last Federal election. They realize the threat that legal marijuana will have on a pharmaceutical alternative. They’re betting that Americans will choose pills over pot. Apart from our objections in principle, their drug is still in development, so remains a risky investment. They are also the makers of Fentanyl, a powerful opioid. Opioid-abuse is now a serious public health threat, that has increased to the point of an epidemic in this country. (‘Nuff said.)
2. Investment Dollars Might Flee to Canada
Investment dollars may start moving to the north. A key benefactor may be Canopy Growth Corp, which is the marijuana industry’s first $1 Billion “unicorn”. They control a 50% market share in Canada’s medical marijuana industry. They are the only marijuana-producing company listed on a “big board”, the primary exchange in a country (the Toronto Stock Exchange). In contrast to the suggestions of a reversal in Federal policy, the Canadian Government is leading the entire world with plans to launch (this year) a coast-to-coast, Federally-regulated, recreational marijuana industry. Investors like the stability of a Federally-legal, regulated market.
3. US Researchers will fail to keep up with expanding science
Israeli companies are now making serious inroads in medical research, drug development, and testing. Israel is leading the globe in the scientific understanding of marijuana, while other countries have restrictions on research. Any policy decisions impacting the marijuana industry will provide a larger window for Israeli companies to cement their pioneering role. They are in discussion with other countries to begin exporting medical marijuana overseas. Canadian producers are already doing this.
A Federal reversal on recreational marijuana will not destroy the marijuana industry. The industry is already growing at a rate of 23% per year, and generated revenues of $6.7 Billion in legal sales last year. California is due to finalize medical regulations in 2017, which will double the size of the US market in 2018 – even with a Federal reversal prohibiting the introduction of recreational laws. Florida will have medical regulations in place this year (estimate is $2 Billion in sales, in 2018). MD, PA, and other states have medical laws on the books and regulations in the works. Even if the Feds put the brakes on recreational marijuana, the medical marijuana industry may settle in at a sizeable $20-$30 Billion market within the next five years, co-existing with the illegal (black market) trade. So we really need to “chill out” all this talk about a doomsday scenario, or a day of reckoning ahead.
The economic impact of this expansion will also continue. License holders are buying and investing in operations. The “green rush” for suppliers looking to service state-legal industries will continue. Over the next few years, as new states bring in laws, the industry will continue to be a “suppliers’/sellers’ market”.
On that note…did we mention that we produce a Buyer’s Guide for suppliers to reach business owners in the industry? Contact us for details: email@example.com
(Part 2 of this article, covering banking, criminalization, and social impact will be covered next week. Stay tuned!)