Can the cannabis industry overcome present challenges?

Medical cannabis has certainly been one of the most attractive areas for high growth-high risk investors. The industry is still at a young stage despite having emerged as a potentially profitable market in the late 90s. A few years ago, companies operating in the medical cannabis market enjoyed a short-lived rally that ended with a massive decline.

However, things appear to have started to peak again as more States and countries continue to welcome the prospect of federal legalization parts of the world. Regulation has been one of the biggest obstacles to the growth of the medical cannabis market. However, the problem could be rooted on the opportunity that exists.

In the world of business, some opportunities are easier to exploit while others can be hard to crack. Medical cannabis does certainly present a massive opportunity if scientists and researchers can eventually come up with products that other than being alternatives to many that are already in the market, can be unique in the value they add.

In medical research, companies play a high stakes game in which, if the outcome is successful, then the benefits can be enormous. However, if things fail to materialize according to expectations, the price to pay can often be too high. Big pharma companies like Pfizer (PFE), Merck (MRK), and AstraZeneca (AZN) have the financial power to accommodate product failures but smaller players tend to find it hard to cope.

The medical cannabis market is still at an early development stage, which means that most of the players are small and do not have the required financial muscle to have several products on their clinical pipelines. This slows the development of cannabinoid products thereby halting the growth of the industry.

In addition, unlike in the mainstream medical research space where venture capitalists and private equity investors are eager to fund startups, cannabinoid-based products still suffer from the stigma attached to marijuana and this deters some investors from showing their interest in companies operating in the industry. A federal legalization, however, could persuade more investors to put money in the industry.

Therefore, as governments continue to ponder about the impact on people if an extensive legalization of marijuana was to take place, one thing for sure is that the revenue arms of the various governments could revamp revenue collection in federal taxes. This is one of the arguments that the few States and countries that have legalized marijuana have cited in the defense of their decision.

From a stock investing perspective, some investors prefer to invest in the cannabinoid products market with the perspective of capitalizing on short-term gains. As such, the shares of medical marijuana companies like GW Pharmaceuticals (GWPH) have been very volatile over the last few years in reflection of this strategy. Investors came in and drove the stock prices high, but then realized that the challenges to the industry could be a lot more than regulation.

The medical cannabis industry faces a tough competition coming from the mainstream pharmaceutical companies. (Source)

In addition to regulation hurdles, and the limited financial resources available to medical marijuana companies, they also face a stiff challenge from the companies operating in the mainstream pharma market. As discussed earlier, some of the cannabinoid-based treatments already have their rivals in the mainstream medical products market. This can make it very difficult for the cannabinoid-based products to sell, given the stigma attached to marijuana.

A good example is GW Pharmaceutical’s Epidiolex, a cannabinoid product developed for the treatment of Dravet syndrome. It could very soon welcome a rival from the mainstream pharma market in the form of Zogenix’s (ZGNX) ZX008.

Reports indicate that following recent clinical trials, ZX008 showed a high degree of effectiveness in reducing seizures in a late-stage study of patients with Dravet syndrome. Following the announcement of these encouraging signs, GW Pharma investors feared that this could affect Epidiolex’s addressable market. Their sentiments were demonstrated by a sharp decline in the company’s stock price as compared to a massive rally in the shares of Zogenix.

Therefore, regulation aside, the medicinal marijuana market faces a major problem for those looking to exploit opportunities via the stock market. With limited finances, it is hard to take huge risks in research and development which limits the number of products the companies involved in the industry can have in their clinical pipelines at a given time.

In addition, the stigma attached to marijuana prevents some investors from devoting their resources to the industry given their diverse opinions on the potential impact to the population. However, as several theoretical research studies on medicinal cannabis continue to take place, more investors will begin to embrace the prospect of being involved in cannabinoid-based products. This will eventually provide the required financial resources to launch the industry to the next level.

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DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.