You'd be hard-pressed to find an industry with faster growth potential than marijuana.
Since it was first approved in California 20 years ago, medical marijuana has become legalized throughout half the country. Most interestingly, the last two states to legalize medical marijuana -- Pennsylvania and Ohio -- have done so entirely through the legislative process (i.e., without bringing the matter to vote by residents of the state). We've also witnessed four states (Colorado, Washington, Oregon, and Alaska), as well as Washington, D.C., legalize recreational cannabis.
The growth figures are huge. ArcView Market Research, a leading cannabis research company, suggests that 30% compound annual growth is possible between 2015 and 2020. This would put the legal-marijuana industry on pace for nearly $22 billion in sales by 2020, based on ArcView's estimated $6.7 billion in legal sales for 2016.
The taxable revenue that could be generated from marijuana is equally impressive. A NerdWallet report from 2014 suggested at the time that a nationwide legalization of marijuana would net states approximately $3.1 billion in tax revenue on an annual basis. Keep in mind that states are often generating revenue from licensing fees for businesses, growers, and processors, too. The revenue currently being generated by legal marijuana sales won't close major budget deficits, but it is providing much-needed funds for education, law enforcement, and drug abuse programs in select states.
The federal government is the cannabis industry's biggest problem
The big problem for the cannabis industry has always been the schedule 1 status of the plant at the federal level. As a schedule 1 drug, cannabis is defined as not having any beneficial medical qualities and deemed to be illicit.
Having the schedule 1 status comes with two major disadvantages for cannabis businesses that we've examined before. First, there are adverse tax implications. Businesses that sell illicit substances aren't allowed to take normal tax deductions, leaving them to pay tax on gross profits instead of net profits. The other issue is that marijuana's schedule 1 status keeps financial institutions mostly on the sidelines. Only 3% of banks are willing to deal with cannabis-based businesses, which means business expansion will be difficult and security is at risk, since cannabis businesses are forced to deal in cash.
Yet times are changing, and select medical studies have suggested that marijuana could indeed have benefits. A liquid cannabidiol-based formulation currently in late-stage studies by GW Pharmaceuticals (NASDAQ:GWPH), known as Epidiolex, has helped to reduce seizure frequency in patients with Dravet syndrome, a type of childhood-onset epilepsy. Investors are hoping for similar results in two late-stage trials on patients with Lennox-Gastaut syndrome.
In addition to epilepsy, cannabinoids (or marijuana itself) have demonstrated positive effects on type 2 diabetes, ulcerative colitis, cancer, and more than a dozen other ailments. These promising studies have given hope that the Drug Enforcement Agency (DEA) may reclassify marijuana sometime soon.
That time could be coming sooner than you think.
This marijuana decision could be a game-changer
Sometime within the next couple of weeks, the U.S DEA is expected to rule on whether or not it will reschedule marijuana away from its current schedule 1 classification. If the regulatory agency were to reclassify marijuana as anything other than a schedule 1 substance, then medical marijuana would immediately become legal throughout the U.S., thus opening the door for medical marijuana businesses to prosper. It would also remove those aforementioned disadvantages holding the industry back.
The U.S. Food and Drug Administration has already submitted its recommendation on marijuana's scheduling to the DEA. However, DEA administrator Chuck Rosenberg has been tight-lipped as to what that recommendation was. The DEA is in the process of conducting its own eight-factor analysis, according to Inc.com, which will help the regulatory agency decipher what sort of abuse potential cannabis may possess.
There are, of course, a variety of options for the DEA to choose. It could completely deschedule marijuana, putting the plant on par with tobacco and alcohol. It could also choose to place a scheduling ranging from 2 through 5 on the substance. Drugs scheduled between 2 and 5 are deemed to have medical benefits, but as you get closer to schedule 2 (moving up the scale from schedule 5), the drug's perceived addictiveness increases. Finally, certain substances within cannabis could be legalized, while the plant itself could remain illegal. The DEA has plenty of options.
A rescheduling isn't necessarily good news
The option the DEA chooses could have wide-ranging implications. If marijuana is descheduled entirely, then the medical marijuana industry would be free to flourish in all 50 states, and investors would have a genuine reason to finally consider these companies as potentially suitable, though still risky, investments.
However, if marijuana is only rescheduled, then chaos could ensue.
Although a schedule 2 classification would legalize cannabis and affirm it has beneficial medical properties, it would also completely transform the marijuana industry. Schedule 2 drugs are considered prone to abuse, meaning the FDA would almost assuredly step in and tightly regulate the industry. This would mean closely regulating the growth and processing of marijuana. More importantly, it would also mean the FDA would get involved in the clinical aspects of its medicinal use. This could mean clinical studies would need to be conducted to prove to the FDA that medical benefits exist on an ailment-by-ailment basis. If cannabis producers continued to sell their product without adhering to FDA guidelines, they could face fines or criminal punishments. Packaging, labeling, and advertising would also need to be approved by the FDA.
All of this regulation means one thing to the marijuana industry: spending money! Transforming into a pharmaceutical-based industry could be very costly, and it could potentially put smaller players out of business. Only huge players with deep pockets would presumably be able to survive and thrive in a tightly regulated schedule 2 market, in my opinion.
Although no specific date has been given as to when the DEA will make its ruling, it's expected within weeks, and it will undoubtedly have major implications for the marijuana industry -- as well as investors.