The Opportunity and Threat of Marijuana Legalization
 
Marijuana stocks are the hottest thing since “Bitcoin, circa 2017.”  Marijuana has been a huge hit in the illicit market for at least 60 years.  And, as most advocates will tell you, government has concluded that, as with the prohibition of alcohol, the treatment is worse than the disease.  As a result, jurisdiction-after-jurisdiction is slowly removing penalties and moving to transform the formerly illicit industry into one that is both encouraged and heavily taxed.  As the theory goes, people will responsibly consume Cannabis as they do alcohol, cutting criminal organizations out of the supply chain.  Tax revenues will soar while the costs of law enforcements and running prisons for users and dealers fall.  Best of all, marijuana will become just another consumer product like alcohol and tobacco, with huge profit margins projected for the dominant brands.

Under this scenario investors, consumers, and governments all win.  Right?  Well, that depends on the validity of the underlying assumptions.

Let’s consider the facts as we know them in 2019.

We’ll start with the size of the worldwide market for medical and recreational marijuana. Today, the worldwide illegal marijuana market, currently totals around $200 billion a year.  Therefore, a figure of $150 billion for the global market size for legal marijuana makes sense, if you assume recreational marijuana will be fully legalized throughout the world in the near future.  For now, though, Canada and Uruguay are the only countries that have legalized the use of marijuana for recreational purposes.

Beyond merely replacing illicit marijuana, some promoters insist that marijuana will potentially disrupt the alcohol, cigarettes, and pharmaceuticals industries via substitution.  That’s a much bigger deal.

The global alcoholic beverages market is estimated to be between $1.3 trillion and $1.5 trillion.  And there appears to be a good chance that cannabis-infused beverages could capture part of that market.  Major alcoholic beverage maker Constellation Brands was bullish enough about the potential for cannabis that it recently invested $4 billion in Canopy Growth.

Similarly, cannabis products could disrupt the cigarette market by being used for smoking cessation.  The worldwide tobacco and cigarette market (outside of China) is estimated to be at least $680 billion. The smoking-cessation product market is much smaller, of course. But its growing - and could reach $22 billion by 2024.

Several countries as well as 30 U.S. states have legalized medical marijuana, and more are expected to do so over the next few years.  But the reality is that the market size for the medical use of marijuana wont come close to $100 billion.  Arcview Market Research and BDS Analytics methodically researched all the available data to develop an estimate for the global market size.  And they pegged the 2017 legal marijuana market at roughly $9.5 billion, total.

In 2018 and 2019, Canadian recreational marijuana sales have helped push the global market size higher.  So, has the growth in international medical marijuana markets such as Germany and the United Kingdom.   Arcview and BDS Analytics project that the global marijuana market will reach $32 billion by 2022.  And, nearly three-quarters of that  - or $23.4 billion - will come from the U.S.

But, can the marijuana market increase significantly more than that over the long run? Absolutely.  In fact, its possible that more countries will legalize recreational marijuana. More U.S. states could do so as well.  And, Federal marijuana laws in the U.S. could change in a way that really opens-up the market.  But for the next few years, a market size closer to $32 billion seems much more realistic than the $150 billion or even $500 billion annual figures being thrown around by those promoting “cannabis stocks.”.

As with alcohol prohibition, cannabis legalization is a large-scale experiment.  The difference is that alcohol was legally produced, sold, and consumed with few controls throughout history until the “prohibition era.” Therefore, the costs and benefits of widespread alcohol consumption could be easily weighed against the costs and benefits of prohibition.  What people didn’t know was what would happen if alcohol was banned.  On the other hand, even though marijuana was legally produced, sold, and consumed with few controls until the early 20th century, it was a tiny niche market until 60 years ago.  So, we know a lot about what happens when marijuana is banned, but we didn’t know until very recently what would happen when marijuana became widely-available at a low-cost to consumers, without the deterrent effect of criminal penalties.

The recent cases of state-wide decriminalization of recreational marijuana use is, for the first time, providing a large-scale test of our assumptions about its social and economic costs.  As with many public policies where the costs are diffuse and the benefits are concentrated, the people to whom the benefits accrue have a large incentive to present their story and suppress the counter-arguments.  So, with the stocks of cannabis companies soaring and politicians promoting legalization as a low-risk way to raise tax revenue and reduce crime, it’s not surprising that most of us have not heard about the related implications for mental illness, productivity impairment and violence.

Yet, over the last 30 years, psychiatrists and epidemiologists have turned speculation about marijuana’s dangers into science.  And over that same period, a shrewd and expensive lobbying campaign has pushed public attitudes about marijuana the other way.  Therefore, it’s safe to say that, almost everything those advocates and the media have told you about marijuana, for a generation, is wrong.

Consider the facts.

First, marijuana industry advocates have told you marijuana has many different medical uses.  In reality, marijuana and THC, its active ingredient, have been shown to help only a few narrow conditions.  They are most commonly prescribed for pain relief.  But they are rarely tested against other pain relief drugs like ibuprofen or naproxen.  For instance, in July 2018, a large four-year study of patients with chronic pain in Australia showed that cannabis use was associated with greater pain over time.

Second, they’ve told you that cannabis can stem opioid use.  For instance, according to Wonkblog, a Washington Post website, in April 2018 “Two new studies showed how marijuana can help fight the opioid epidemic,” and that marijuana’s effects as a painkiller make it a potential substitute for opiates.   In reality, like alcohol, marijuana is too weak as a painkiller to work for most people who truly need opiates, such as terminal cancer patients.  Even cannabis advocates, like Rob Kampia, the co-founder of the Marijuana Policy Project, acknowledge that they have always viewed medical marijuana laws primarily as a way to protect recreational users.  As for “the marijuana-reduces-opiate-use theory,” it is based largely on a single paper comparing overdose deaths by state before 2010.  Since 2010, as both the opioid epidemic and medical marijuana laws have spread nationally, the finding has been refuted.  And the United States, the Western country with the most cannabis use, also has by far the worst problem with opioids.  Furthermore, a January 2018 paper in the American Journal of Psychiatry showed that people who used cannabis in 2001 were almost three times as likely to use opiates three years later, even after adjusting for other potential risk factors.

Third, advocates have told you that marijuana is not just safe for people with psychiatric problems like depression, but that it is a potential treatment for those patients.

- On its website, the cannabis delivery service Eaze offers the “Best Marijuana Strains and Products for Treating Anxiety.”  And,

- An article on Leafly, the largest cannabis website, is titled, “How Does Cannabis Help Depression?”

However, a mountain of peer-reviewed research in top medical journals shows that rather than treating mental illness, marijuana can cause or worsen severe mental illness, especially psychosis, the medical term for a break from reality.  Significantly, teenagers who smoke marijuana regularly are about three times as likely to develop schizophrenia, the most devastating psychotic disorder.  After an exhaustive review, the National Academy of Medicine found in 2017 that “cannabis use is likely to increase the risk of developing schizophrenia and other psychoses; the higher the use, the greater the risk.”  And, that “regular cannabis use is likely to increase the risk for developing social anxiety disorder.”

Given the clearer picture that science provides us of the product’s health implications, we need to reexamine our assumptions about patterns of marijuana as well as the changes that have occurred to the characteristics of the drug itself as legalization has rolled-out.

As widely publicized, legalization has not led to a huge increase in the number of people using the drug casually.  About 15 percent of Americans used cannabis at least once in 2017, up from ten percent in 2006, according to a large federal study called the National Survey on Drug Use and Health.  By contrast, about 65 percent of Americans had a drink in the 2017.

However, the number of Americans who use cannabis heavily is soaring.  In 2006, about three million Americans reported using cannabis at least 300 times a year, the standard for daily use.  By 2017, that number had nearly tripled, to eight million.  And it is expected to soon reach the twelve million which is equal to the number, who drink alcohol every day.  Put another way, one in 15 drinkers consume alcohol daily, while about one in five marijuana users use cannabis that often.

Cannabis users today are also consuming a drug that is far more potent than ever before, as measured by the amount of delta-9-tetrahydrocannabinol, or THC, the chemical in cannabis responsible for its psychoactive effects.  In the 1970s, the last time many Baby Boomers used cannabis, most marijuana contained less than two percent THC.  Today, marijuana routinely contains 20-to-25 percent THC, thanks to sophisticated farming and cloning techniques - as well as to a demand by users for cannabis that produces a stronger high, more quickly.  In states where cannabis is legal, many users prefer extracts that are nearly pure THC.  To use an alcohol analogy, think of the difference between so-called near-beer and a 100-proof vodka, or even pure grain-alcohol.

These new patterns of use have caused problems with the drug to soar.  In 2014, people who had diagnosable “cannabis use disorder,” the medical term for “marijuana addiction,” made up about 1.5 percent of Americans.  And they accounted for 90,000 psychosis cases in emergency rooms a year or 250 a day.  That’s triple the number in 2006.  And, in states like Colorado, emergency room physicians have been forced to become experts on dealing with cannabis-induced psychosis.

Cannabis advocates often argue that the drug can’t be as neurotoxic as studies suggest, because otherwise Western countries would have seen population-wide increases in psychosis alongside rising use.  In reality, accurately tracking psychosis cases is impossible in the United States.  The government carefully tracks diseases like cancer with central registries, but no such registry exists for schizophrenia or other severe mental illnesses.

On the other hand, research from Finland and Denmark, two countries that track mental illness more comprehensively, shows a significant increase in psychosis since 2000, coinciding with an increase in cannabis use.  And, in September of 2017, a large federal survey found a rise in serious mental illness in the United States as well, especially among young adults, the heaviest users of cannabis.  While these studies don’t prove that rising cannabis use has caused population-wide increases in psychosis or other mental illness, they offer intriguing evidence of a possible link.

This brings us to the established marijuana-psychosis-violence link, which almost nobody talks about.  It’s been shown that people with schizophrenia are only moderately more likely to become violent than healthy people when they are taking antipsychotic medicine and avoiding recreational drugs.  But when they use drugs, their risk of violence skyrockets!

Along with alcohol, the drug that psychotic patients use more than any other is cannabis: a 2010 review of earlier studies in Schizophrenia Bulletin found that 27 percent of people with schizophrenia had been diagnosed with cannabis use disorder in their lives.  And unfortunately - despite its reputation for making users relaxed and calm - cannabis appears to provoke many of these people to violence.

A Swiss study of 265 psychotic patients published in Frontiers of Forensic Psychiatry in June 2018 found that over a three-year period, young men with psychosis who used cannabis had a 50 percent chance of becoming violent.  Even after adjusting for factors such as alcohol use that risk was four times higher than for those with psychosis who didn’t use cannabis.  Other researchers have produced similar findings.  A 2013 paper in an Italian psychiatric journal examined almost 1,600 psychiatric patients in southern Italy and found that cannabis use was associated with a ten-fold increase in violence.

The most obvious way that cannabis fuels violence in psychotic people is through its tendency to cause paranoia - something even cannabis advocates acknowledge use of the drug can cause.  The risk is so obvious that users joke about it and that dispensaries advertise certain strains as “less likely to induce paranoia.”  Notably, for people with psychotic disorders, paranoia can fuel extreme violence.  A 2007 paper in the Medical Journal of Australia analyzed 88 defendants who had committed homicide during psychotic episodes; it found that most of them believed they were in danger from the victim, and almost two-thirds reported misusing cannabis, which is more than the number who abused alcohol and amphetamines combined.

Importantly, the link between marijuana and violence doesn’t appear to be limited to people with preexisting psychosis.  Researchers have studied alcohol and violence for generations, proving that alcohol is a risk factor for domestic abuse, assault, and even murder.  Far less work has been done on marijuana, in part because advocates have stigmatized anyone who raises the issue.  But studies showing that marijuana use is a significant risk factor for violence have quietly piled up.  Many of the studies weren’t even designed to catch the link, but they did.  Notably, dozens of such studies already exist, covering everything from bullying by high school students to fighting among vacationers in Spain.

In most cases, studies find that the risk of violence is at least as significant with cannabis as with alcohol.  A 2012 paper in the Journal of Interpersonal Violence examined a federal survey of more than 9,000 adolescents and found that marijuana use was associated with a doubling of domestic violence; a 2017 paper in Social Psychiatry and Psychiatric Epidemiology examined drivers of violence among 6,000 British and Chinese men and found that drug use - the drug nearly always being cannabis - translated into a five-fold increase in violence.

Today, that risk is translating into real-world impacts.  Before states legalized recreational cannabis, advocates said that legalization would let police focus on hardened criminals rather than marijuana smokers and thus reduce violent crime. Some advocates go so far as to claim that legalization has reduced violent crime. In fact, in a 2017 speech calling for federal legalization, U.S. Senator Cory Booker said that “states [that have legalized marijuana] are seeing decreases in violent crime.”  Unfortunately, Booker was wrong.

The first four states to legalize marijuana for recreational use were Colorado and Washington in 2014 and Alaska and Oregon in 2015.  Combined, those four states had about 450 murders and 30,300 aggravated assaults in 2013.  Last year, they had almost 620 murders and 38,000 aggravated assaults - an increase of 37 percent for murders and 25 percent for aggravated assaults; that’s far greater than the national increase, even after accounting for differences in population growth.

These emerging trendlines reveal a growing dilemma for policy-makers. “Do the short-term profits, political advantages and increased freedom of choice for consumers justify the increasing probability of serious social and health consequences?”

Given this trend, we offer the following forecasts for your consideration.

First, rather than linear progress toward worldwide legalization of recreational marijuana, the possibility of a halt, or even a roll-back will increase, unless the trend in the data changes.
Since 2014, when recreational use of marijuana became legal crime has been rising in Colorado, outstripping the national trend.  Whether the two are connected is still hotly debated - and if they are, then what?  In a 2018 CNN interview, then-governor John Hickenlooper told CNN he didnt rule out recriminalizing recreational marijuana.  As he observed, “if the data was coming back and we saw spikes in violent crime and spikes in overall crime, there would be a lot of people looking for the bottle and figuring out how we get the genie back in."

Second, as with alcohol and tobacco, the health care costs associated with marijuana use will be borne by families and society, not just by the manufacturers and the individual users.

Consider the new research showing that marijuana use is associated with a three-fold increase in the risk of death from hypertension.  Meanwhile, another study shows that marijuana use early in life may result in abnormal brain function and lower IQ.  That means any cost-benefit analysis must weigh the benefits over the entire life-cycle of the business.  It’s quite possible that long-term health care costs and reduced productivity will more than offset the tax revenues and profits of the industry.

Third, contrary to what cannabis advocates have told us, increased marijuana legalization will lead to increased misuse of opioids and other prescription drugs.

A new study in the Journal of Addiction Medicine, finds that people who use medical marijuana have higher rates of medical and non-medical prescription drug use - including pain relievers.  Rather than being at lower risk, people who use medical marijuana may be at higher risk for non-medical prescription drug use.  The researchers analyzed more than 57,000 responses to the 2015 National Survey on Drug Use and Health.  People who used medical marijuana were 60 percent more likely than those who did not use medical marijuana to report prescription drug misuse.

Fourth, in the medium-term, the biggest problem with legalization will be impaired driving.

Since nearly as many people now use marijuana, on a daily basis, as do alcohol, the risk could be almost as big.  Recent research indicates that psychomotor impairment in heavy users can be observed three weeks after the last dose.  Therefore, people taking medicinal cannabinoids need to know that their driving is going to be impacted.  Today, roadside testing for marijuana use is not yet reliable.  But fortunately, recent research has identified new blood and urine markers, and tests using breath and saliva markers are being developed.  These new markers and tests could also be used to assist in treating drug dependence, in determining appropriate therapeutic levels of medical marijuana, and for monitoring women who want to stop using cannabinoids during pregnancy.  Fortunately, ride-sharing services provide an affordable alternative to impaired driving.  So, there is no excuse for breaking the law.  And,

Fifth, there will be a few winners and many losers among “pot stocks” and their owners.

Like speculators in Chinese tech stocks and crypto-currencies, those who trade in today’s “pot stocks” are largely naive amateurs enticed by dreams of the “next big thing.”   As with the beer industry at the end of prohibition, there will be a sudden proliferation of producers and distributors.  The result will be a highly fragmented industry with low barriers to entry and limited product differentiation.  Any company that plans to do anything more than break-even and generate tax revenue for the government will have to discover a “sustainable competitive advantage.” -  Every corporate strategist knows that there are three possible ways to achieve this:

- low-costs mixed with high product consistency,

- product and service differentiation, and

- so-called customer intimacy.

There are few economies of scale or other obvious low-cost drivers in growing and selling marijuana.   Similarly, product differentiation seems to be limited to blending marijuana into other consumer products that have a strong brand identity.   And finally, customer intimacy for consumable products is usually generated in the consumption experience; bars are highly fragmented businesses with low margins that typically thrive only within restaurants.  Creating the “Starbucks of cannabis” with “high-margin munchies” is likely to be a one-off achievement.  More likely, it’s illicit history will cause “pot consumption modality” to resemble that of cigarettes. ? Bottom line: As with crypto-currencies, some speculators will make big money in cannabis in the next five years, but the Trends editors believe there are many better ways for investors to make money than “going to pot.”

References

1. Imprimis.  January 2019. (Volume 48, Number 1)   Alex Berenson.  Marijuana, Mental Illness, and Violence.

https://imprimis.hillsdale.edu/marijuana-mental-illness-violence/

2. European Journal of Preventive Cardiology.  2017.  Barbara A Yankey, Richard Rothenberg, Sheryl Strasser, Kim Ramsey-White, Ike S Okosun. Effect of marijuana use on cardiovascular and cerebrovascular mortality: A study using the National Health and Nutrition Examination Survey linked mortality file. 

https://journals.sagepub.com/doi/abs/10.1177/2047487317723212?journalCode=cprc

3. Trends in Molecular Medicine.  2018. Huestis and Smith.  Cannabinoid Markers in Biological Fluids and Tissues: Revealing Intake.

https://www.ncbi.nlm.nih.gov/pubmed/29398403

4. Acta Psychiatrica Scandinavica.  2016.  E. A. Osuch, K. Manning, R. A. Hegele, J. Theberge, R. Neufeld, D. Mitchell, P. Williamson, R. C. Gardner. Depression, marijuana use and early-onset marijuana use conferred unique effects on neural connectivity and cognition.

https://onlinelibrary.wiley.com/doi/abs/10.1111/acps.12629

5. Journal of Addiction Medicine.  2018.  Theodore L. Caputi, Keith Humphreys. Medical Marijuana Users are More Likely to Use Prescription Drugs Medically and Nonmedically.

https://insights.ovid.com/crossref?an=01271255-201808000-00008

6. The Journal of Primary Prevention.   2017.  Bridget Freisthler, Andrew Gaidus, Christina Tam, William R. Ponicki, Paul J. Gruenewald.  From Medical to Recreational Marijuana Sales: Marijuana Outlets and Crime in an Era of Changing Marijuana Legislation.

https://link.springer.com/article/10.1007%2Fs10935-017-0472-9

7. Drug and Alcohol Dependence.  2019.  Erin E. Bonar, James A. Cranford, Brooke J. Arterberry, Maureen A. Walton, Kipling M. Bohnert, Mark A. Ilgen.  Driving under the influence of cannabis among medical cannabis patients with chronic pain.

https://www.sciencedirect.com/science/article/pii/S0376871618308263?via%3Dihub

8. CNN.com.  April 20, 2018.  Scott McLean and Sara Weisfeldt.   Colorado governor wont rule out banning marijuana again. Heres why.

https://www.cnn.com/2018/04/20/us/colorado-marijuana-and-crime/index.html