May 3 2019
Edison Group, the leading investment and research advisory company, has published its sector report analyzing the growing retail and medicinal cannabis industry.
The cannabis sector is relatively broad, spanning FDA-approved drugs to consumer products. Both markets are still a fraction of their potential peak sizes due to laws that have historically forbidden the use of cannabis and regulatory hesitance to approve drugs with related active ingredients. Worldwide sales for all regulator-approved cannabinoid therapeutics were only $53m in 2018 according to EvaluatePharma, whereas the total legal cannabis market in the United States was around $8bn in 2017, compared to $234bn in sales for the alcoholic beverage industry. The landscape is changing, however, mainly due to cannabis legalization being popular with voters and the fact that politicians are starting to recognize the tax revenue that could be extracted through sales/VAT taxes, which could potentially fill significant budgetary holes.
North America: The tide has turned and now provides huge opportunity
Despite a relatively benign safety profile compared to alcohol, historically cannabis use has been broadly banned, even for medical use. This is all changing. Canada became the first major western country to legalize medical and recreational cannabis in 2018. The United States, which will likely be the most important market for cannabis for some time, is a hybrid state. In total, 10 states have legalized recreational cannabis and another 23, representing 43% of the US population, have legalized medical cannabis (although it remains illegal on a federal level). Additional states, such as New Jersey and New York, are expected to follow shortly.
More importantly, several prominent Democratic presidential candidates have endorsed removing cannabis from the Schedule of Controlled Substances. One major motivator for this trend towards legalization is the tax revenue involved as all the states that have legalized so far have effective taxes of between 20% and 47% on sales.
Epidiolex driving growth in the therapeutics market
There are surprisingly few therapeutics containing cannabis that have been approved by major regulatory authorities, with worldwide sales totaling only around $53m in 2018 according to EvaluatePharma. This is despite the fact that cannabis has been used for various medical purposes for thousands of years and has a safety profile that is superior to alcohol in many respects. While certain cannabinoids have been granted FDA approval since 1985, the first major cannabinoid with blockbuster potential, Epidiolex, was recently launched by GW Pharma to treat Dravet and Lennox-Gastaut syndromes, both pediatric epilepsies. The approval has effectively helped the therapeutics market turn a corner: the drug is expected to generate sales of $1.7bn in 2024 according to market consensus forecasts, making it the largest cannabis-related FDA-approved drug in history and the first plant-based cannabinoid to gain approval.
Fast-growing retail market is a small fraction of its full potential
The market for legal cannabis has been growing very quickly and has a meaningful size, but it is a small fraction of its full potential. In the United States, the legal cannabis market – both recreational and medicinal – is estimated to have been $8bn in 2017 by Ackrell Capital, an investment bank focused on cannabis companies. If the level of consumption per capita becomes similar in the states that recently legalized recreational cannabis to that seen in Colorado, the market could grow to $18.8bn in just a few years, as markets mature in these states alone. If there were a full legalization in the United States at Colorado per-capita usage levels, the country could potentially be an $88bn market.
Is biosynthesis the future of extraction?
Current methods of extracting or manufacturing cannabinoids have some significant drawbacks. Plant-based extraction of cannabinoids is time consuming (three to 10 months just to cultivate the plant), which also requires a high degree of purification to remove unwanted pesticides, molds, fungi or bacteria, residual solvents and non-target cannabinoids. Also, it is not cost effective to extract the 100+ minor cannabinoids from plants, as cannabinoids that make up <1% of the plant cost over $100,000 per kilogram to produce. More efficient extraction methods could help, such as biosynthesis, which produces a purer, more cost-efficient product created through cell-culture bio-reactions. There are two main approaches to biosynthesis, one using E. coli, the other using yeast.
InMed is the leading company using E. coli while several others such as Ginkgo Bioworks, Amyris, Intrexon, Librede and Tweewinot are focused on producing cannabinoids in yeast.
The promise of other forbidden fruits
Cannabis joining the medical, scientific and regulatory mainstream has helped open the door for other drugs with a history of recreational use, specifically within mental health. Ketamine has shown remarkably rapid efficacy in depressed patients and Johnson and Johnson recently gained approval for Spravato, composed of the s-isomer of ketamine, for treatment-resistant depression. Psilocybin is the active ingredient in magic mushrooms and is in a 216-patient Phase II trial in treatment-resistant depression patients with results expected in the first half of 2020. Importantly, the FDA granted the program breakthrough therapy designation, meaning it will be providing “intense guidance” on the design of the clinical trial program. Note that if approved, psilocybin would need to be rescheduled from DEA Schedule I to be made available to patients and a case can be made for a downgrade all the way to Schedule IV.
Meanwhile, 3,4-methylenedioxymethamphetamine (MDMA), the party drug also known as ecstasy, is in a Phase III clinical trial for the treatment of post-traumatic stress disorder (PTSD), which is being conducted by the Multidisciplinary Association for Psychedelic Studies, a non-profit research and educational organization. There have been several studies in PTSD that have shown MDMA can be helpful as it is thought to increase the emotional engagement necessary to process traumatic events.
Max Jacobs, Director of Healthcare Research at Edison Investment Research said:
While there is certainly hype surrounding the cannabis market, the undeniable reality is that it is a market with tremendous potential. It could easily be an almost $90bn market in the US and an over $40bn market in the EU-5 countries. It is not a question of if this will happen, just a question of when as governments are incentivized to move towards legalization, not just by broad popular support but the promise of meaningful taxes that can be raised by making this illegal market into a legal one. Though it is important to remember that while the internet helped revolutionize the world, that did not mean that all internet companies were successful. Just as it was important to differentiate between Amazon.com and Pets.com among internet companies, it is important to focus on the right brands and the right segments in the cannabis sector.”