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Cannabis legalization has wiped out ~$10 billion of market value in the pharmaceutical sector

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A recently published study found that every cannabis legalization event that occurred between 1996 and 2018 in the United States caused generic companies and brands to lose about $10 billion in market value on average, implying a sales impact of $3 billion.

The scientists argue that their findings, which highlight the market’s recognition of cannabis as an alternative to traditional medicines, point to the need for further research into the therapeutic potential of cannabis.

In the United States, cannabis is classified as a Schedule I drug federally, with no currently accepted medical use for treatment and a significant risk of misuse. While 38 states have approved cannabis for medicinal purposes, 18 states and the District of Columbia have enacted measures to regulate its use for non-medical purposes by adults as of November.

The peer-reviewed study, published in PLOS ONE magazine Last week, researchers at California Polytechnic State University and the University of New Mexico conducted using daily stock return data for 556 pharma companies from January 1996 to December 2019. A subsample included 91 companies, of which 75 were generic pharmaceutical companies, and 16 were pharmaceutical manufacturers. Branded. In the initial sample, the companies had an average market capitalization of $8.9 billion and average annual sales of $945 million.

The researchers looked at how stock returns changed around the 45 state legalization events on cannabis that occurred between November 1996 and November 2018, with the exception of 2016, when the election of President Donald Trump sent drug stocks soaring.

The data indicated that each cannabis legalization event had an impact of approximately 63 million on the company’s market value, which means a total impact of $9.8 billion across all companies for each event. Based on historical price-to-sales ratios for drug companies for the year of legalization, the results indicate a $3 billion loss in annual sales for all drug companies for each event.

According to the researchers, the data suggests why market participants should monitor the evolving legal landscape of cannabis as they diversify their portfolios. “Given that we observe the market impact of each subsequent legitimization, we expect that future events are not fully reflected in current stock prices,” they added, noting the potential to reap returns from short positions.

The researchers also found that legalization of recreational use had an approximately 129% greater impact on drug sales than medical legislation, causing annual sales to decline by $2.4 billion. Furthermore, the impact on branded drug companies was approximately 224% higher than that of generic drug companies.

Using the average effect of sales per medical legalization, the researchers predict that if the other 16 states also legalize cannabis for medical use, spending on traditional retail pharmaceuticals in the United States would drop by $38.4 billion, or about 11%.

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

They wrote: “If cannabis use can treat several medical conditions simultaneously, the net impact on drug spending could be much greater than the introduction of typical generic drugs, which only compete with the brand’s original formulary and FDA-approved generic therapeutic equivalents. and American Medicine.

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

Regarding barriers to entry, they said, “Although cannabis production is smaller and tailored to each country, it is likely that more cannabis producers will enter simultaneously.” “In contrast, traditional manufacturers have centralized operations and large distribution networks across state and country borders, with their products individually approved by the Food and Drug Administration.”

The researchers, citing Pfizer, said (PFE) Recent acquisition of a cannabis-based drug Developer Arena Pharmaceuticals for $6.7 billion. Scientists also point to the pharmaceutical industry’s massive lobbying effort against cannabis legalization.

They added: “These are signs that the pharmaceutical industry from a marketing perspective, cannabis is currently still far from the FDA-approved therapeutic equivalent, and this may explain why pharmaceutical companies are putting less effort into detailing physician visits.”

However, the study was limited, including using publicly traded companies and past legalization events to draw conclusions and assume rational investors, which scientists say would overstate the economic significance of the numbers.

Multi-State Operators: MedMen Enterprises (OTCQB: MMNFF), Koralef Holdings (OTCPK: CURLF), Acreage Holdings (OTCQX: ACRHF), harvest health and recreation (OTCQX: HRVSF), Cresco Labs (OTCQX: CRLBF), Green Thumb Industries (OTCQX: GTBIF), Trulieve Cannabis (OTCQX: TCNNF), Ayer Wellness (OTCQX: AYRWF), Columbia Care (OTCQX: CCHWF), TerrAscend (OTCQX: TRSSF)

Licensed Canadian Producers: Canopy Growth (CGC), Tilray (Nasdaq:TLRY), Kronos (krone), aurora hemp (ACB), sundial planters (SNDL), OrganiGram Holdings (OGI), HEXO Corp (Hexa)

Cannabis-focused ETFs: AdvisorShares Pure Cannabis ETF (yulu), Global X Cannabis ETF (POTX), ETFMG Alternative Harvest ETF (MG). Amplified Seymour Cannabis ETF (CNBS)

Generic Pharmaceutical Manufacturers: Teva Pharmaceutical Industries (Teva Pharmaceutical Industries)teva), Viatris (VTRS), Amphastar (AMPH)


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