Ndarc Fb
Source: National Drug Abuse Research Centre.

Forgive the pun, but marijuana has been growing like a weed within the United States.

In what seemed like a long shot to flourish even a decade ago, the federally illegal drug has been expanding at a lightning-quick pace across the country. As it currently stands, nearly two dozen states have legalized marijuana to be sold for medical purposes (as well as Washington D.C.), while four states -- Oregon, Washington, Colorado, and Alaska -- along with Washington D.C. have legalized the drug for recreational adult use.

The benefits of marijuana and its prospects for legalization also appear to be gaining ground. Washington state's marijuana tax revenue topped estimates over its first trailing year, and the money Colorado collected via taxes may wind up yielding $40 million for the state's education department if Colorado voters determine that's where the money should go.

Additionally, marijuana studies have yielded a number of surprising benefits that strengthen the case that the drug should be legalized (at least medically) or decriminalized in the not-so-distant future. We've seen instances where marijuana and its cannabinoids have been used to treat rare forms of epilepsy, aggressive brain cancer known as glioma, and even to regulate chronic conditions such as type 2 diabetes.

But, what if the grass wasn't as green as you thought on the other side of the fence?

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Source: Centers for Disease Control and Prevention.

This may force the CDC to toughen its stance
According to the Centers for Disease Control and Prevention's Morbidity and Mortality Weekly Report from last week, the agency is suggesting the need for some tougher regulations on the marijuana industry following the related death of a 19-year-old man in Colorado last year.

Images

Source: Flickr user Mark.

Although Colorado is a recreation-legal state, buyers have to be at least 21 years of age to purchase marijuana. In this instance, the decedent's friend, aged 23 years, purchased marijuana cookies and gave one to the decedent. The recommended serving size (which is 10 mg of THC, the psychoactive component of marijuana) is a sixth of the cookie. But edible marijuana products take longer to absorb into the system than smoking it, and it stays in the bloodstream for a longer period of time, thus legal marijuana shop owners often suggest waiting 30 minutes for the product to take effect. The decedent, not noticing an effect after a sixth of the cookie, ate the entire cookie (65 mg of THC in total) and wound up leaping from a fourth-floor balcony about two-and-a-half hours later. The decedent later died from trauma with "marijuana intoxication" listed as the chief contributing factor on the autopsy report.

While marijuana overdoses have been shown to be practically impossible, the psychoactive effects of THC on the user above and beyond the recommended limits could force the CDCs hand into action in terms of toughening the label requirements on marijuana edibles.

We've already witnessed one state clamp down on labeling requirements. In Colorado, regulators now require edible packages to be clearly labeled, and there need to be defined divisions or partitions within edible packaging to signal what a recommended dose is for the user (i.e., a 10 mg THC dose). In Colorado, per the CDC, 45% of all marijuana sales are edibles, so this is a rapidly growing market in legal states that may wind up leading to tighter standards.

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Source: GW Pharmaceuticals.

Marijuana does get one big break...
On the bright side, the medical marijuana industry was actually granted a pretty sizable concession from the Department for Health and Human Services in recent weeks when it announced it would stop requiring marijuana-based products to undergo a separate review with the Public Health Service. These PHS reviews often mirrored the review process of the Food and Drug Administration, thus the HHS determined that it would be best if the FDA solely granted investigational new drug applications for clinical trials going forward.

This may not seem like a major step in the development of marijuana-based therapeutics, but the PHS review often held up drug development for many months at a time, costing the drug developer quite a bit of time and money. GW Pharmaceuticals (NASDAQ:GWPH), which is currently in the process of developing six cannabinoid-based compounds across 10 different indications, is possibly the most prominent beneficiary of this regulatory switch. This new policy could allow GW Pharmaceuticals to bring experimental drugs from preclinical trials to human studies that much quicker, while also cutting its expenses, which is important since it's expected to lose money throughout the remainder of the decade.

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Source: Pictures of Money via Flickr.

...but most breaks haven't favored the marijuana industry
However, tougher labeling requirements could affect smaller marijuana companies currently trading on the over-the-counter exchanges, as well as medical and recreational marijuana shops in legal states. The reasoning behind more defined labeling and packaging is simply to improve safety so future marijuana intoxication-related deaths don't occur. But, it's another added cost that growers, distributors, and retailers hadn't counted on.

Thus far, the marijuana industry has been on the wrong end of a handful of surprises. In Washington, the retail price per ounce of marijuana is off nearly 70% as grower volume outpaced what consumers actually purchased by 3.5 tons over the first trailing year. As Econ 101 dictates, an oversupply of a product often leads to a downtrend in prices, which is exactly what we've seen with marijuana prices in Washington. Lower prices have the potential to crush margins from the growers all the way to retailers.

Taxes Stockmonkeys

Source: Flickr user StockMonkeys.com.

We've also witnessed tax laws absolutely ravage the marijuana industry. In Washington, there's a 37% tax on marijuana (yes, I did just say 37%), and in San Francisco, the Ninth Circuit Court of Appeals earlier this month upheld U.S. tax code section 280E (in Olive v. Commissioner), which states that expenditures tied to the illegal sale of drugs will negate a business' ability to qualify for deduction or benefits on their taxes. In other words, marijuana businesses are being taxed on their gross profits rather than their net profits.

Add all of this together -- the high taxes, the inability to make deductions, product oversupply in select states, and now the possibility that it may need to beef up its labeling standards -- and you have a lot of reasons the industry may struggle to thrive.

If the latest MMWR from the CDC proves anything, it's that the marijuana industry is still very much in flux. It also serves as a reminder that there's a steep learning curve for these companies (and for regulators), which places their long-term survival in doubt. Thus, my suggestion continues to remain that investors keep their nose clean of the marijuana industry until there's better clarity.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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