High Times Ahead For The Marijuana Industry

Editor's Note: Last night I was talking with my younger brother and a group of friends when the subject of marijuana came up. When asked his thoughts, my brother mentioned that despite never having used the drug and having no plans to, he didn't have a negative opinion of it and those who do. I agreed with him, and being in the same position, I decided to do a little research. This is what I found.

Over the last several years, the fight to legalize marijuana has broken out across much of the country. Those in favor of legalizing the drug have won major victories including approval for medical use in twenty-one states plus Washington D.C. Marijuana has also been approved for recreational use in Colorado and Washington for those 21 and older. In other places, such as Vermont, the personal use of marijuana has been decriminalized and is simply a ticketable offense. The majority of Americans now favor legalization and fourteen other states are likely to join Colorado and Washington in permitting recreational use. Uruguay recently became the first country to legalize marijuana possession, use, and sales and Canada has opened its medical cannabis business to the free market. In America, 2,000 people are arrested every day on minor marijuana-related charges. Although these developments at the state level are all at odds with federal law, the Justice Department has indicated that it has no plans to take any responsive actions.

Recent national poll numbers that indicate 58% of Americans support the legalization of cannabis for adult use. The same poll in 1969 showed just 12% supported legalization of the drug. While there certainly has been a large a shift in favorability, legalizing the drug still faces many challenges, particularly since those most likely to support legalizing marijuana fall in the younger demographic, which also happens to be the least likely to vote in elections.

Society has come a long way from the “This Is Your Brain On Drugs” PSAs of the 1990s that touted the dangers of recreational drugs including marijuana. Only 2.4% of high school seniors reported using marijuana daily in 1993, but nearly 6.5% of current high school seniors report using marijuana daily today. One reason for the shift is the change in the perception of the drug’s dangers. Sixty percent of U.S. high school seniors do not see regular marijuana use as harmful to their heath and thus nearly 40% reported smoking marijuana in the past six months. This trend extends beyond high school students as nearly 12% of eighth graders report having used marijuana. In contrast, the consumption of alcohol among students in both of these demographics has decreased since peaking in 1997. Students have traded drinking for smoking in part because they see the dangers of smoking as less than drinking, and they may have a point.

There are about 88,000 deaths attributable to excessive alcohol use each year in the United States, but there are no reported cases of someone dying from smoking or consuming too much marijuana. (The economic costs of excessive alcohol consumption in 2006 were estimated at $223.5B.) Of all the studies investigating the effects of marijuana, 94% focus on the drug’s potential harm, yet few have indicated the drug is dangerous.

In some studies, marijuana has been shown to lower testosterone levels, which can delay the onset of puberty, decrease testicle size, and cause some abnormalities in sperm. This is one of the reasons states have only legalized marijuana use for those 21 and older. One of the worst side effects linked to smoking marijuana is “Gynecomastia”, which means “woman like breasts” in layman terms. Gynecomastia is caused by a hormone imbalance between testosterone and estrogen with excess estrogen creating excessive breast tissue. That’s right guys, smoking marijuana can give you man boobs.

The negative effects of marijuana have only been subjected to initial research given its designation as a Schedule I drug by the DEA, making it as hard to obtain for research purposes as heroin. A Schedule I drug is defined as having no medically accepted use and high potential for abuse. The catch is that in order to change the classification of a drug from schedule I to schedule II or III, there must be FDA approved research to show it is safe and non-addictive, but its designation as a schedule I drug makes it nearly impossible to do research on it. To accomplish the necessary research to change the classification, a plethora of scientists would need to obtain a DEA license and have their study approved by the FDA. You can imagine how difficult it would be to get approval from two government agencies to conduct research on a drug that one believes is as bad as other Schedule I drugs such as methamphetamines, cocaine, heroin, and anabolic steroids.

To illustrate this challenge, I had a professor in college who was able to study the effects of benzodiazepines (Valium and Xanax) and barbiturates (used for physician-assisted suicide and lethal injection), which are both schedule IV drugs in her animal lab. Schedule IV drugs have a low potential for abuse and have an accepted medical use. However, she could not work with marijuana because of its classification as a schedule I drug (high potential for abuse, no medical purpose).

Although the FDA has sanctioned only a handful of studies, there are over 19,000 published studies on the medical benefits of cannabis. Most studies show that marijuana is less addictive and harmful than caffeine or nicotine.

Colorado has been a pioneer in the journey towards marijuana legalization and is poised to allocate $7M in state dollars to universities, research hospitals, and foundations to study marijuana’s effect on a variety of medical conditions including epilepsy, PTSD, and brain development in infants. The research grants are coming from the $13M the state has in the Medical Marijuana Program Cash Fund that was generated from people who paid for the medical-marijuana cards. This research would directly support the use of marijuana as a legal drug both recreationally and medically.

As research continues to progress and more states legalize cannabis use, marijuana could be the best-selling legal drug ever. The national market for legalized marijuana could hit $10.2 billion in as little as five years. Pfizer’s Lipitor, which is used to treat high cholesterol, currently holds the record for prescription rugs at $13 billion. This year, the market for legal marijuana was about $1.5 billion. Marijuana sales in states where cannabis is legal is expected to hit $3 billion in 2014. Part of the appeal of marijuana to drug makers is its resilience to being undercut by generic drugs. Prescription drugs have their profits slashed the moment generic versions hit the market and marijuana is unlikely to have that same competitive disadvantage.

The receptor that marijuana activates is called tetrahydrocannabinol or THC and used in a prescription drug called Marinol, which is sold by Abbott Labs. Marinol is used to stimulate appetite and control nausea and vomiting in patients undergoing chemotherapy, but it is little used because the absorption rate of THC varies widely, so the dosage is hard to pinpoint. Drug maker Sanofi tried to block the THC receptor to create a drug to treat obesity. The drug was called Acompila and had moderate success at helping people drop weight, but it had severe psychiatric side effects that featured depression, so the FDA never approved it.

Despite what the perception may be, drug companies and stoned hippies are not the only ones supporting the rapid expansion of the marijuana industry. The marijuana industry is filled with white-collar business executives who have built companies and prestigious resumes in other fields. Recently, the cannabis-focused private equity firm Privateer holdings Inc. hired former DEA agent Patrick Moen to be its managing director of compliance and senior counsel.

Privateer is an interesting firm that does not directly invest in growers, processors, or distributors in the U.S., where it could violate laws. Rather, most of its investments are in Canada, where there is a federal licensing system for medicinal suppliers. Privateer has already raised $7 million and is hoping to raise $25 million more next year to stimulate growth in the marijuana industry. Investors committed minimums of $250 thousand to the firm’s first fundraising effort, but the bar will be at $1 million for the coming round, indicating that even the nation’s wealthiest individuals believe the marijuana industry is about to take off.

Average interest rates on loans to medical marijuana businesses hover between 20% and 30% given that marijuana is still illegal at the federal level and the risks exceed normal business challenges. Executives could face criminal prosecution and investors can lose everything overnight if the government or local officials shut the industry down.

Despite the risks, several successful executives have jumped ship to try to seek new highs with marijuana. California-based GrowLife Inc. is a public company (ticker symbol: PHOT) that sells cultivation equipment and operates hydroponics stores across the country. GrowLife recently hired Marco Hegyi, a former executive with Yahoo and Microsoft to be its President. Shares were trading at $.14 at time of writing.

Similarly, Jamen Shively is another former Microsoft executive who has plans to develop a nationwide chain of dispensaries and retail stores. Also, former Massachusetts Congressman Bill Delahunt is among the 100 applicants vying for dispensary licenses in the state. He is listed as the head of Medical Marijuana of Massachusetts in the applications. These men will be competing with California-based Harborside Health Center, which is currently the most successful dispensary in the US with sales of more than $20 million annually, and the company is looking to enter new states as they legalize use.

The marijuana industry will inject more money into the economy beyond the simple purchase of the drug. One beneficiary will be the food and beverage industry as companies like Dixie Elixirs that makes marijuana-infused sodas, ice cream, and other products have started to spring up (not to mention fast food restaurants that would benefit from munchy mania). The multiplicative or collateral benefits of a booming marijuana industry include the dollars spent on professional services, ancillary products, agricultural products, farming equipment, and other offerings. Like other industries, the marijuana industry will need an army of lawyers in addition to accountants, human resource professionals, insurance specialists, and consultants.

From a financial standpoint, states are likely to want to legalize marijuana given the large potential for revenue from taxes. Taxation issues may arise as drugs that are used medicinally are not typically taxed, however recreational drugs like cigarettes and alcohol are taxed at a very high rate. For example, one marijuana dispensary in Oakland collected $1.2 million in sales tax last year for the city and Colorado pulls in $5 million from their pot sales tax annually. Some estimates indicate legalization of marijuana would save the federal government $13.7 billion in enforcement costs and $1 billion on individuals incarcerated for marijuana related charges.

The business case has certainly been built for the legalization of marijuana and preliminary research shows the drug has more heath benefits than risks, if it is used responsibly. State governments have tended to side with the majority of the population in their preference to legalize marijuana, but it’s less than clear what it is going to take to get the federal government to agree with the people and state governments. At the same time, so long as the federal government declines to take any responsive enforcement actions, it is likely that more and more states will take steps to decriminalize marijuana in ways that meet their own values and policies, which might be an even better outcome.

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