Though it probably took a lot longer than many expected, marijuana is growing into the big business that's always been envisioned by investors.
To our north, Canada stands on the verge of becoming the first industrialized nation in the world to legalize recreational cannabis. Following the passage of the Cannabis Act on June 19, Prime Minister Justin Trudeau set an official sales-launch date in licensed dispensaries of Oct. 17. When fully ramped up, the industry could pull in upwards of $5 billion a year, atop what it's already generating from domestic medical marijuana sales and via exports to foreign countries where medical weed is legal.
As for North America as a whole, cannabis research firm Arcview found that aggregate legal sales soared 33% in 2017 to $9.7 billion. Arcview further anticipates annualized growth of 28% through 2021, potentially pushing to nearly $25 billion in legal annual North American sales by 2021.
Interestingly enough, even though Canada is leading the charge in legal cannabis, it almost assuredly wouldn't be if the U.S. federal government were to take a different tone on marijuana. In spite of being a Schedule I drug at the federal level in the U.S. -- i.e., entirely illegal, prone to abuse, and having no recognized medical benefits -- we've witnessed 30 states legalize medical weed in some capacity, including the Republican-leaning state of Oklahoma just a few months earlier.
Further, more Americans want to see marijuana legalized than ever before. Gallup's national survey conducted in October found that 64% of respondents favored giving the green light to legal weed. It would appear that, if pot were legal, the U.S. market would be the most lucrative in the world.
However, it's not just perception that backs up this thesis -- it's actual usage statistics.
More Americans than you probably realize are going "green"
Earlier this week, the Annals of Internal Medicine published the results of a 16,280-person survey of adults from across the United States. Among the questions these folks were asked was whether or not they'd used marijuana at some point over the past year or 30 days, as well as what form of cannabis they'd used (smoking, vaping, edibles, and so on), if they said yes.
The results found that 14.6% of respondents had used marijuana within the past year, along with 8.7% admitting to cannabis use in the past 30 days. If this survey were accurate over a broader swath of the population, then, using population estimates from the U.S. Census in July 2017, 14.6% of the adult population works out to 36.8 million people aged 18 and over. Or, put another way, almost 37 million Americans used marijuana last year.
As you might expect, usage rates over the past year were notably higher in legalized recreational marijuana states (20%) than states where adult-use weed hasn't been legalized (12%). In medical marijuana states, usage rates stood at 14%.
The survey also notes that smoking marijuana was substantially more popular than any other form of consumption in the United States. Some 12.9% of respondents smoked cannabis, with 6% admitting to consuming edibles, 4.7% reported vaping, 1.9% used concentrates, and 0.8% used topical products that absorb through the skin. This is particularly interesting since dried cannabis has shown to be easily commoditized in what few states have legalized pot for adult use. With Canadian pot growers pushing toward alternative cannabis products, it'll be interesting to see if a similar shift occurs in legal U.S. markets.
Why legalization remains a long shot in the U.S.
If nearly 37 million Americans are using marijuana each year, it might be a bit (or more) of a head-scratcher as to why the federal government has been so unforgiving in its stance of cannabis. There are, however, some clear-cut reasons.
The biggest (let's not beat around the bush) is money. Forget the talk of pharmaceutical lobbying to keep cannabis illegal. The biggest issue is that legalizing marijuana could actually cost the federal government money.
Currently, cannabis, as a Schedule I drug, falls under Section 280E of the U.S. tax code. This section disallows businesses that sell Schedule I and II substances from taking normal corporate income tax deductions, save for cost of goods. For profitable businesses, this could mean an effective tax rate of up to 90%. Even if pot were legalized and taxed at normal rates, the simple fact that marijuana businesses would be able to take deductions like normal businesses would reduce the amount of revenue the federal government could bring in versus taxation under 280E.
Politics is also to blame. Traditionally, self-identified Republicans have a far less favorable view of marijuana than do Democrats or Independents. However, the GOP is in control of the legislative branch of the federal government for the time being. With little room on the legislative docket for cannabis, reform efforts continue to stall out.
If there is a shot in the dark of hope for the U.S. pot industry, it's the recent approval of GW Pharmaceuticals' (GWPH) lead drug Epidiolex, a treatment for two rare types of childhood-onset epilepsy. While investors are probably swooning over GW Pharmaceuticals' prospects of being profitable on a recurring basis very soon, it's the fact that this was the first cannabis-derived drug to be approved by the U.S. Food and Drug Administration that's a far bigger deal. GW Pharmaceuticals may play a role in disproving the Schedule I definition that these are drugs that have no recognized medical benefits (since Epidiolex does have a recognized benefit). It has the potential to be a starting point for debate and possible reform of cannabidiol (the main cannabinoid of Epidiolex), if not marijuana as a whole, at the federal level.
For the time being, though, it looks as if growing cannabis acceptance among the U.S. public isn't going to be enough to sway Congress, meaning ongoing challenges for the U.S.-based businesses trying to operate in this space.