Is pharma poised to make some big cannabis bets? Part 3

I recently penned a piece on why Alcohol & Tobacco (A&T) will enter the cannabis industry in a big way.  I shouldn’t leave out the pharmaceutical industry and their short term need to get deeper into medical cannabis.

Fact is, pharma is already involved in the cannabis space.  They own a substantial number of cannabis-related patents and are seeking more.  They also compete in the cannabis industry, directly and at a distance (e.g, Pfizer/Arena, GW Pharmaceutical, AbbVie, Teva, Johnson & Johnson/Avicanna).  To date, these moves have been focused and modest.   The question is: when will pharma fully lean in and where?

First, let’s be real.  Most pharma is not worried about weed cannibalizing their business.  Pharma understands the plant science as much as any MSO or LP, if not more.  And no, they don’t see a few, small studies and limited number of cannabis-prescribing doctors significantly challenging their market share not to mention disrupting the entire healthcare system in the short term.

What pharma cares about right now is profitable, IP-based revenue growth. They’ll need it soon to deal with a rapidly approaching patent cliff. 

According to the Economist, the 10 biggest drug makers in the world stand to lose about 46% of their revenues, when patents for more than 190 drugs expire by the end of the decade.  Luckily, they have an aggregate cash pile of US$1.4 trillion to bridge this patent cliff and buy into new growth markets. The large and complementary cannabis industry (medical or adult use) will be on their radar screen.

When it comes to entering new markets and therapeutic areas, pharma is often a buyer not a builder.  A flurry of deals suggests that they are seeking to buy their way out of trouble.  A recent Barron's article reported that “In the first quarter of this year (2023), total healthcare and life sciences M&A in the U.S. was about $71 billion, more than double the $28 billion seen in the same quarter last year” Some cannabis firms will be in their M&A crosshairs.

Competing in cannabis fits well with the Big Pharma operating model, balance sheet and core capabilities. They can level up MSO/LP operating performance in terms of R&D spend and commercialization, regulatory & government affairs and sales & marketing (including driving partnerships with insurers and wholesalers).

Not surprisingly, pharma will find the same cannabis charms (e.g., low valuations, high market growth) as A&T does. And they won’t be naïve to the cannabis sector’s challenges such as regulatory uncertainty and the financial shakiness of many firms.

This pov is neither an endorsement or condemnation of pharma involvement in cannabis but rather a recognition of an inevitable evolution.

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