Medical Cannabis’s Long-Term Potential Overlooked By Investors

This article was first published by Benzinga Cannabis

By Hershel Gerson, CEO of ELLO Capital

Cannabis is really two markets: one focused on medical use and one focused on adult use. There’s plenty of overlap. In states where cannabis is legal for both uses, dispensaries make little distinction in their display counters. Investors, however, are showing a distinct preference for companies focused on the adult-use market over medical. From 2017 through mid-May this year, investors poured $1.8 billion into adult-use focused companies according to data in the MGO | ELLO Cannabis Private Investment Review, powered by PitchBook Data. By comparison, the medical segment trailed markedly, with $730 million total invested over the same period.

By some measures, this gap isn’t surprising. The market for adult-use cannabis is sizable and growing: Americans will spend about $12.5 billion on adult-use cannabis this year, an increase of one-third over 2018. And the potential for growth in the years to come is significant as more states legalize adult use. Cannabis is also becoming a fundamental ingredient in products such as beer and energy drinks, edibles, and balms, expanding the adult-use market even further. Increasing recognition of the potential within the adult-use market is accelerating investor activity in the sector. In the first four-plus months of 2019, private equity and venture capital investment in adult-use cannabis companies topped $862 million, according to data in the MGO | ELLO Cannabis Private Investment Review.

Medical market potential

At the same time, investors shouldn’t lose sight of the long-term potential of the medical cannabis segment. Medical-use cannabis is a large and growing market, which should see an almost 25% gain in revenue this year to about $4.7 billion, according to the 2019 Marijuana Business Factbook. Medical cannabis has the advantage of overwhelming public support – a recent Quinnipiac University poll showed a solid majority of Americans under 65 support medical marijuana generally, with 93% of all Americans expressing support for medical cannabis if prescribed by a physician. Such a consensus bodes well for the segment.

Expanding medical cannabis to new states is likely to be a smooth process, at least compared to adult-use legislation, since there are already ample models of successful regulatory structures across the 33 states where medical cannabis is legal today.

Biotech cannabis research in early stages

The growth potential for medical cannabis goes beyond expanding to new states. The pharmaceutical and biotech industries have barely scratched the surface of what cannabis could offer as a medicinal ingredient. The Marihuana Tax Act of 1937, which made cannabis illegal in the U.S., also stifled nearly all academic and pharmaceutical research. Despite the fact that cannabis is known to have been used for medical purposes for some 4,000 years, as a Class I controlled substance, the government’s official position on cannabis is that there is “no currently accepted medical use.” Medical professionals only began to crack open that closed door in the last decade, as a critical mass of patients with chronic pain have reported benefits from using cannabis.

The biggest progress came last year when GW Pharmaceuticals developed the first U.S. Food & Drug Administration approved plant-derived cannabinoid (CBD) medicine, Epidiolex, which treats seizures. The fact that there is now an FDA-approved CBD drug on the market should give investors hope that restrictions on medical research on cannabis are easing, if slowly. Despite the limitation in the U.S. on cannabis medical research, it’s a sign of the biotech potential for the plant.

Value creation and growth opportunities

This sets the scene for investors to view cannabis through the ‘slow and steady’ lens that applies to most pharmaceutical efforts. While that growth might be slower than traditional biotechs because of cannabis’ evolving legal status, the potential could earn companies the same kind of improved valuation as traditional biotech firms. And like pharma overall, the medical cannabis segment offers both long-term value creation opportunities and the potential of a blockbuster drug that generates $1 billion or more in annual revenue.

In the long term, the potential of both adult-use cannabis and medical cannabis is tremendous. As a very broad comparison, the global alcoholic beverage market is about $1.3 trillion while the global pharmaceutical market is about $1.1 trillion. Those two markets have very different growth rates, risk profiles and valuation benchmarks, offering investors multiple opportunities to capitalize on cannabis’ growth.