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Since everyone is talking about Cannabis…..I thought I’d try to get some of the facts on the table.

First of all, why do we care? Over 7 billion Canadian dollars have been raised in the last 3 years in the cannabis sector[1], approximately 30 companies of note, and the majority of listed companies are based in Canada. The North American Marijuana index, which has 35 of the largest companies in it, has a market capitalisation of $31B[2].  Analysts predict compound average growth rate of 40-60% over the next 5 years[3]. Marijuana will be fully legal for both recreationally and medical use in Canada on October 17th and has been medically legal for years. Analysts predict that Canada, population 35m, has a recreational market worth anywhere between 5-10 billion in annual revenues[4]. In the USA 39 states have legalised marijuana for medical use and 9 for recreational use. Australia, Europe and Latin America as well as the US federal government are all seriously considering the issue of legalisation in various capacities.  At present, medical cannabis is legal for medical use in 12 European countries, although due to lack of studies and drug licencing, very little is prescribed.

Let’s take a step back. What is Cannabis? It’s a plant, the flowers of which contain chemicals called Phyto cannabinoids. It has been used for over 5000 years in traditional medicine, in China for rheumatism, in Egypt for glaucoma, in India for anxiety, and in ancient Persia as an anti-convulsant.  In the 19th and 20th centuries, it was used widely as an analgesic for neuropathic and musculoskeletal pain, for migraine, glaucoma and an aid to childbirth. But in 1925 it was included as a narcotic in the Geneva international convention on narcotics control, which was adopted into the UN single convention on narcotic drugs in 1961. Why? Because a single doctor from Egypt in 1925 stood up at the convention and said that cannabis was becoming an epidemic in Egypt much like the rampant abuse of opium in China.  As it happens, Cannabis is not a narcotic. Tetrahydrocannabinol (THC) is one of the cannabinoids that does have psychoactive properties, but it is not chemically addictive unlike cocaine, opium or alcohol. In contrast to alcohol, cocaine and opioids, cannabis does not have chemical withdrawal symptoms. It is similar to other drugs in respect of being psychologically addictive, it gets rid of pain and anxiety, it makes you feel good and the human animal becomes addicted to those feelings. The long term use of cannabis creates a dependency in approximately 9% of users, compare that to 15% for alcohol, 32% for tobacco, and over 50% for opioids.  There has also been a huge amount of fear that cannabis induces psychosis, but it is much more likely that cannabis exacerbates symptoms in people already suffering psychosis. To put it in context, 10,000 light male users, and 29,0000 light female users would need to cut their use of cannabis to prevent one case of schizophrenia (Hickman et al 2009).

Cannabinoids

So why does cannabis work? We humans, like all mammals, produce cannabinoids ourselves. The endocannabinoid system (ECS) is a biological system composed of endocannabinoids, which are endogenous lipid-based retrograde neurotransmitters that bind to cannabinoid receptors, and cannabinoid receptor proteins that are expressed throughout the mammalian central nervous system (including the brain) and peripheral nervous system. The endocannabinoid system is directly involved in a number of neural functions, memory, motor control, pain modulation, neurogenesis, neuroplasticity, thermoregulation, sleep, appetite, social behavior, and anxiety.  It is also involved in metabolic functions, energy balance, female reproduction function, stress response, autonomic functions, the bladder function, GI function, and cancer control. The cannabis plant Phyto cannabinoids are simply replication, replacing, adjusting, supplementing and boosting the natural endocannabinoid system.

The cannabis plant has two main active components, THC and Cannabidiol (CBD) and about 100 cannabinoid active chemicals within the plant. THC is psychoactive, CBD is not.  CBD is generally legal in most countries including Europe, as long as the product (Hemp) contains no THC or very little. The issue is that the majority of the useful cannabinoids are found in the marijuana plant and contain THC.  That is not to say Hemp cannabinoids aren’t useful, concentrated hemp products with CBD are used for epilepsy, anxiety in pets, anxiety in humans, and several other ailments.

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The number of ailments that Cannabis is useful for is overwhelming, with modern techniques we could refine cannabinoids to treat a huge number of diseases. The problem is that there are very few studies on the benefits of cannabis because it has been illegal for so long in most of the world. There is very good evidence that cannabis can help with chronic pain, neuropathic, post surgical, spasticity, cancer, arthritis, and headaches. It has almost none of the side effects of opioids (the most commonly prescribed treatment for these conditions) and is not chemically addictive. There is also very good evidence that CBD can be used to treat anxiety, PTSD, and epilepsy.  There is moderate evidence that CBD can help with appetite stimulation, sleep disorders, and fibromyalgia. It is believed that it can also help with agitation in dementia, bladder dysfunction, Tourette’s, glaucoma, and some aspects of Parkinson’s disease.

Fears of the plant’s psychosis inducing effects have petrified most of the nations of the world for a long time. But the question of cost benefit analysis remains unanswered. We have already talked about some of the medical benefits of cannabis but there’s more than just medical benefits. A recent study in the US estimated that $500 m a year[5] would be saved on drugs due to the introduction of marijuana use. That’s in the US alone.   Also in 2017, in Colorado a state with a population of 5.5m had $1.5b in medical and recreational marijuana sales which led to $250m in tax revenue. Annually, Opioid overdosage leads to approximately 7 deaths per 100,000 users, 1000 deaths in the UK alone, that cannabis, could potentially prevent.

There is a great wave of cannabis legalization that is sweeping North America and Europe. Medical cannabis is now available in more than 9 European countries. In 2018, the pan European wellness market for CBD derived from hemp oil will amount to approximately 200m euros in retail sales. Current sales growth is estimated at 40% per annum, and annual sales will likely reach 650m euros by 2022[6].  Prescription medication is approximately 100m euros but given the wave of research and popularity it could have exponential growth. Especially, if doctors are given sufficient information and are approved to be able to prescribe it within national health regimes. If medical cannabis consumption in Europe matched the Netherlands today, it would be worth 450m euros.

The true cherry on top of this cake, for Europe and the US, is that if the trend continues and eventually the US and Europe allow for full legalization of the recreational market, the returns could be astronomical. With branding and specialization, cannabis is poised to be a huge disruptor to the alcohol and tobacco market. The largest company in the North American Marijuana Index, Canopy Growth, listed on the NYSE has a market cap of $11.9b, and recently Constellation Brands took a 5b dollar stake in it. In 2017, Canopy Growth only had revenues of 40m Canadian dollars.  In Europe, the world’s richest continent, this could easily give rise in the long term to an industry generating more than 25bn euros annually should it ever be recreationally legalized, and that is an opportunity investors cannot afford to ignore. It should be noted that the market capitalizations of the majority of companies assume an astronomical growth rate, and the sector is already significantly over hyped, so it is difficult to see where the real value lies. From bio tech research companies, marijuana growing companies, naturopathic wellness products, pharmaceutical products, recreational brands, pet products, facilities management companies, the list is long and complicated so investing in the sector is still a challenge for many.  None the less, cannabis is here to stay and it is a sector that can no longer be ignored.

[1] Toronto Stock Exchange data

[2] Bloomberg

[3] CANACCORD Genuity Limited (UK). Industry Update. ‘Cannabis in Europe.’ 31 August 2018. Page 1.

[4] CANACCORD Genuity Limited (UK). Industry Update. ‘US Cannabis industry primed for growth.’ 4 September 2018. Page 1.

[5] Medical Cannabis. Presentation by Prof Mike Barnes, MD FRCP. Prof of Neurological Rehabilitation, Newcastle Upon Tyne, UK. Chief Medical Officer, Aphria International.

[6] CANACCORD Genuity Limited (UK). Industry Update. ‘Cannabis in Europe.’ 31 August 2018. Page 1.

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