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Cannabis legalization wiped out around $10 billion in market capitalization from the pharma sector (NASDAQ:TLRY)

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A recently published study found that each cannabis legalization event that occurred between 1996 and 2018 in the United States caused generic and branded pharmaceutical companies to lose approximately $10 billion in market capitalization on average, implying an impact on sales of $3 billion.

The scientists say their findings, which highlight the market’s recognition of cannabis as an alternative to conventional medication, underscore the need for further research into the therapeutic potential of cannabis.

In the United States, cannabis is classified as a Schedule I drug at the federal level, with no currently accepted medical use for treatments and with a high risk of abuse. While 38 states have approved cannabis for medical purposes, 18 states and the District of Columbia have taken steps to regulate its non-medical use by adults starting in November.

The peer-reviewed study, published in the journal PLOS ONE last week, was conducted by researchers at California Polytechnic State University and the University of New Mexico using daily performance data from shares of 556 pharmaceutical companies from January 1996 to December 2019. A subsample included 91 companies, of which 75 were generic drug makers and 16 were brand name drug makers. In the main sample, businesses had an average market value of $8.9 billion and average annual sales of $945 million.

Researchers looked at how stock market returns changed around 45 state cannabis legalization events that occurred between November 1996 and November 2018, excluding 2016, when President Donald Trump’s election rallied support. pharmaceutical stocks.

The data indicated that each cannabis legalization event had an impact of approximately $63 million on the market value of a business, implying a total impact of $9.8 billion across all businesses per event. Based on historical drugmaker price-to-sales ratios for the year of legalization, the results suggest a loss of $3 billion in annual sales for all drugmakers per event.

According to the researchers, the data indicates why market participants should monitor the evolving cannabis legal landscape as they diversify their portfolios. “Given that we observe a market effect for each subsequent legalization, we expect that future events will not be fully reflected in current stock prices,” they added, noting the potential for return with positions. short.

Researchers also found that recreational legalization had an approximately 129% greater impact on pharmaceutical sales compared to medical legalization, resulting in a $2.4 billion drop in annual sales. Additionally, the effect on brand name drug makers was approximately 224% greater than that on generic drug makers.

Using the average impact of sales per medical legalization, the researchers predict that if the other 16 states also legalized cannabis for medical purposes, retail conventional pharmaceutical spending in the United States would drop by $38.4 billion. or ~11%.

As reasons for the impact, researchers point to cannabis’ ability to treat multiple medical conditions simultaneously, unlike conventional drugs, which are limited to FDA-approved indications.

“If cannabis use can treat multiple medical conditions at once, the net effect on drug spending may be much greater than the typical generic drug entry, which only competes with the original branded form and equivalents. FDA-approved generic therapeutics,” they wrote.

Additionally, the researchers highlight the marijuana industry’s lower barriers to entry and the potential for recreational legalization to lower barriers to access.

Regarding barriers to entry, they argued that “although cannabis production is smaller scale and state-specific, more cannabis producers are likely to enter simultaneously.” “In contrast, conventional generic manufacturers have extensive centralized operations and distribution networks across state and country borders, with their products each individually approved by the FDA.”

The pharmaceutical industry would respond to this with investment and marketing, the researchers said citing Pfizer’s (PFE) recent acquisition of cannabinoid drug developer Arena Pharmaceuticals for $6.7 billion. The scientists also point to the massive lobbying efforts of the pharmaceutical industry against the legalization of cannabis.

“These are signs that the pharmaceutical industry from a marketing perspective, cannabis currently remains far from an FDA-approved therapeutic equivalent, and this could explain why pharmaceutical companies have devoted less effort to detailing doctor visits,” they added.

However, the study had limitations, including the use of publicly traded companies and past legalization events to reach conclusions and the assumption that investors are rational, which the scientists believe would overstate the situation. economic importance of figures.

US Multistate Carriers: MedMen Enterprises (OTCQB: MMNFF), Curaleaf Holdings (OTCPK: CURLF), Acreage Holdings (OTCQX: ACRHF), Harvest Health & Recreation (OTCQX: HRVSF), Cresco Labs (OTCQX: CRLBF), Green Thumb Industries (OTCQX: GTBIF), Trulieve Cannabis (OTCQX: TCNNF), Ayr Wellness (OTCQX: AYRWF), Columbia Care (OTCQX: CCHWF), TerrAscend (OTCQX: TRSSF)

Canadian Licensed Producers: Canopy Growth (CGC), Tilray (NASDAQ:TLRY), Cronos (CRON), Aurora Cannabis (ACB), Sundial Growers (SNDL), OrganiGram Holdings (OGI), HEXO Corp (HEXO)

Cannabis ETFs: AdvisorShares Pure Cannabis ETF (YOLO), Global X Cannabis ETF (POTX), ETFMG Alternative Harvest ETF (MJ). Amplify Seymour Cannabis ETF (CNBS)

Generic drug manufacturers: Teva Pharmaceutical Industries (TEVA), Viatris (VTRS), Amphastar (AMPH)

Read: A recent Gallup poll indicated that regular cannabis consumption exceeded cigarette consumption for the first time in July.