Will cannabis legalization hurt pharma?
Sober thinking > feelings
If you are a critical thinker, please keep reading. If you prefer wishful thinking or suffer from cognitive dissonance, there is no need to continue.
A recent study published in in the journal PLOS One (and picked up by media outlets) claims that drug company stock prices fell on average 1.5-2.0% within 10 days of a state voting to legalize medical or recreational cannabis. This represents a $3B loss across the industry for each legalization law passed. The study contends that patients experiencing sleep, pain, or anxiety problems will swap Big Pharma (BP) drugs for cannabis products when they become legally available.
Terrific news but are the findings true? This answer has significant implications for cannabis operators & investors in terms of strategy, valuation and capital needs.
I torture-tested the study’s conclusions. They don’t necessarily hold up when you consider the following:
1. Correlation is not causation - This is Statistics 101. Cannabis legalization may not be triggering decreases in BP share prices. Other non-cannabis factors such as pricing and local market conditions not to mention broader equity market and macro-economic dynamics could play a major role in the declines.
2. BP isn’t that worried about cannabis - The aggregate market cap of all publicly listed cannabis producers is puny compared to one drug company like Pfizer (US$248B) let alone the entire industry (around US$3.4T). Most opiate manufacturers have large enough balance sheets (post settlements) to easily acquire one or several producers. Ergo, BP could easily buy their way out of trouble.
3. Not all data is equal – This study is a single reference point among others. When it comes to cannabis substitution risk, what will really matter for BP will be things like the percentage of doctors prescribing cannabis, solid research supporting cannabis efficacy, product margins and insurance coverage. In legal cannabis states, all of these are still favorable for continued BP success. Though disruptive, medical cannabis still has a long way to go before it will meaningfully displace traditional medicines.
4. BP’s ostensible share loss did not translate into a valuation gain for cannabis pubcos. Ultimately, thats what matters.
I am not saying some pharma companies will not be hurt by cannabis products invading their turf - but most won’t. Rather, the deeper issue is the inclination of many cannabis operators and investors to not critically analyze independent [sic] research and assumptions, and secondly, to approach industry issues without bias and reductive thinking.
Many people love cannabis because they don’t believe in BP remedies and business practices. This predisposition can lead to strategic blind spots and a subconscious bias towards embracing any news where cannabis wins, and BP loses. Always think critically.
#cannabis #bigpharma #pharmaceuticals #cannabisindustry #legalization