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Legit at Last: How is Marijuana Getting Ready for Legalization?

Private Equity Analyst, RocSearch
Aug 20, 2018 7:58 AM 5 min read

We have all heard of aerospace, railroad, medical electronics, or tech stocks on NASDAQ, but now the world’s second largest stock exchange boasts marijuana stocks as well!


Yes…you read it right…marijuana.


Also known as cannabis, marijuana has always been shrouded in controversy. While the plant is often ostracized due to its “addictive properties”, of late studies have shown its consumption can in fact be beneficial.


Anti-drug organizations such as the American Anti-Drug Council and ‘Marijuana Anonymous’ argue for the former, asserting that regular consumption of marijuana with a high content of Tetrahydrocannabinol or “THC” (the compound responsible for intoxication or giving the ‘high’) may give rise to addiction. They also include brain damage, depression, sleep disorders, memory loss, schizophrenia, lung cancer, vascular problems et al to the list of side-effects.


On the contrary, a WHO report claims that the ‘medicinal’ variant of marijuana (which has a greater content of Cannabidiol or “CBD”) can be used for brain development and neurogenesis (i.e. the growth and development of the nervous tissue). It can apparently serve against depression, nausea, some cases of sleeping disorders, pain sensations, seizure activities, impaired motor functionality and deteriorating cognitive functions.

Legit at Last: How is Marijuana Getting Ready for Legalization?

This contradiction implies marijuana never fails to catch attention, especially that of lawmakers. Debates around regulation and legalization have been ongoing in and around North America for quite some time. In the conflict between the proponents of legalization and anti-drug bodies, the former recently came out victorious in Canada – from where almost $1.2bn worth of cannabis were exported illegally in 2017.


The Canadian Market


Canada on 19th June 2018 completely legalized marijuana for recreational purposes, becomes the second country after Uruguay to do so. Marijuana is set to become legal throughout the country starting 17th October this year.


The country has been dovish on the product for some time, enabling over 90 marijuana companies to be listed on its stock exchanges and representing a combined market capitalization of c. $31 billion. And the demand is unmissable! According to Federal data in 2017, with almost 49 million consumers, Canada spent c. $5.7 billion on the compound – of which 90% was for recreational purposes. The annual recreational market is valued between c. $5 billion and $9 billion.


One of the most significant recent developments, which perhaps represents a loosening stance across the border, is the initial public offer (IPO) of Tilray – a cannabis cultivator, processor and distributor – on NASDAQ.  Tilray has been able to raise $153million on NASDAQ as it looks to expand business across Canada. It is the first marijuana company to be listed on a major American exchange through the IPO route. Other Canadian marijuana companies, such as the Cronos Group and Canopy Growth got listed through the much quicker (i.e. subject to less onerous exchange requirements) ‘Direct Listing’ route.

Legit at last: How is Marijuana Getting Ready for Legalization?
Source: Daily Hive

Tilray was founded in 2013. A subsidiary of Privateer Holdings (an investment firm that focuses exclusively on the legal marijuana industry), it sells marijuana to patients across 10 countries spanning 5 continents through its subsidiaries in Canada, Australia and Germany. The company produced 6,779 kilograms of the product in 2017, amounting to c. 8.4% of the entire marijuana produced in Canada during that year.  Tilray has now expanded its horizons to nine US states and Washington D.C. for recreational purposes.


Across the Border


While US Federal law largely considers marijuana as an illegal drug, many states allow its consumption, possession and cultivation, making the country possibly its largest untapped market. US has the second highest consumer penetration of cannabis, equaling 16.3% of its population (vs. Iceland with 18.3% penetration) as per a 2017 UNODC report. America’s current legal marijuana market is valued at $10 billion, of which California alone, where recreational use is legalized, is estimated be worth $5.1 billion.


According to the Marijuana Business Factbook, legalisation of marijuana in US could increase sales to up to $80 billion by 2022. Tax revenue from legal cannabis usage, $745 million in 2017, could go up to $2.3 billion by 2020.


Widespread acceptance of medicinal marijuana is pushing lawmakers to seriously consider this proposition. The expanding illegal market also acts as a force to reconsider. Instead of letting the “drug” create a shadow economy of its own, it may make sense to regulate it and make the proceeds taxable. In the process, crime surrounding marijuana like possession and selling would also subside.


The Road Ahead


Competition is picking up. Licensed marijuana producers in Canada have gone up from 37 to 112, between December 2016 and June 2018. As more and more licenses are being granted to producers, confidence amongst consumers and lawmakers is picking up. All hurdles haven’t been surpassed. Lack of Federal support in the US renders it difficult for businesses to access banking and financial services to operate and grow. The biggest threat faced by the US is that people are unlawfully exporting marijuana from states and counties where it is legal to areas to where it is illegal and selling it in the black market.


Another obstacle is the ethical argument. Notwithstanding its medicinal properties, marijuana is predominantly perceived as a “drug” and any increased tax revenues comes as little comfort for politically conservative constituents.


Canada is only one of the few first countries to legalize marijuana. More are likely to follow. With American companies such as MedMen already listed on the Canadian Securities Exchange, more companies now look forward to access capital by listing on Canadian exchanges post 17th October. What remains to be seen is the effect this move will have on the industry?


It is likely that with the legalization of marijuana, the demand for recreational marijuana will shoot up.  With a greater demand for the recreational variant, companies which deal in both medicinal and recreational marijuana may dedicate more resources to the latter.


Increased recreational consumption might also have adverse effects in terms of increased number of crimes or health issues. For example, after legalization in California, Officials in Sonoma County reported an increase in home evasions, violent crimes and robberies. US Attorney General Jeff Sessions also has raised concerns around increase in crimes in areas surrounding Colorado, where marijuana was legalized in 2014. However, such studies being ad hoc and localized in nature, are unable to conclusively show a correlation.

Legit at last: How is Marijuana Getting Ready for Legalization?

The Indian Story


India categorizes marijuana as illegal and criminalized under the Narcotic Drugs and Psychotropic Substances Act, 1985. Interestingly, there are a couple of start ups which have been working around marijuana legally, through hemp (It is the non-drug variety of the cannabis sativa plant with no THC concentration). Companies like Namrata Hemp Co, The Bombay Hemp Co and Nirog currently utilize hemp for developing textiles, furniture and wax. They have been pushing for the cultivation of medical marijuana.


FMCG giant, Patanjali has also deployed 200 scientists to study the medicinal and industrial properties of medicinal marijuana.


The decision by the Canadian government has opened up new possibilities and avenues for users, businesses, regulators and governments all around the world. India definitely won’t be left behind.


What next for marijuana? Time will tell.


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