Is the Medicinal Cannabis Sector only a Bubble?

Is the Medicinal Cannabis Sector only a Bubble?

The medicinal cannabis sector had a year to forget in 2019, and many experts have quickly linked the overall situation to the dot-com bubble witnessed in the late 1990s. A lot of market analysts believe that the bullish view the sector has seen over the last few years is going to be a thing of the past with the industry increasingly looking unattractive to investors.

The North American market, the biggest cannabis market in the world, has seen a significant decline in 2019 with major players such as Canada-based Canopy Growth Corp losing share price by as much as 32.8% last year.

However, while one can still believe that the cannabis market bubble has burst in Canada, it could be too early to consider that the bubble has burst at a global level.

2019 – A year full of challenges

With all the excitement around the cannabis industry in the last couple of years, it was widely expected that it has a bright future and that the stocks in the sector were here to stay. However, things didn’t turn out to be the way they were supposed to shape up.

In Canada, marijuana was made legal back in October 2018, becoming the second country to do so, after Uruguay. However, the framework essential for the sector to perform well has not been in place.

For example, it is believed that there is a shortage of licensed retail stores in the country, leading to a lack of access to the customers. Besides, analysts believe that the companies have not explored further and haven’t come up with different cannabis-based products. The challenges in Canada, coupled with the uncertainties surrounding the legal use of cannabis-based products in multiple geographies, including the US, led to the below-par performance in 2019. A supply which was way higher than the demand (affected due to legality of the products) hurt the cannabis sector.

Expectations from 2020 and Beyond

As the respective performance of cannabis stocks continues to underperform, there is a widespread belief that the industry has reached its nadir and is unlikely to recover. However, another set of experts think that the cannabis sector is still in its infant stage, and it has not yet been fully explored globally.

As more and more countries begin taking note of the benefits of medicinal cannabis, the sector seems to be heading in the right direction. Also, the increasing number of studies with compelling data on the efficacy and safety of cannabis for multiple indications is likely to have a favourable impact on the respective minds of policymakers. Further, while the viewpoint of many investors appears downbeat, the statistics show a different picture. 

According to market reports, the global cannabis market was worth ~USD15 billion in 2019, almost 1.5 times of 2018 figures. Besides, cannabis sector raised USD13.8 billion in 2018, indicating that the companies have made too big an investment to move out just because the sector had a bad year.

Companies adapting to the changing environment: Cannabis manufacturers and producers have been active in tackling with the fluctuation scenes in the cannabis industry. They are focussing on strategies including collaborations, revisiting their pricing, increasing awareness and knowledge around cannabis benefits, and bring out new products including concentrates and edibles.

Legalisation status in the US: Optimists believe that there could be a shift in momentum in 2020 with the upcoming presidential elections likely to bring the decriminalisation and legalisation of cannabis to the table as one of the major topics.

According to a recent study, it was found that a majority of US citizens are in favour of legalising cannabis-based for medicinal use. With only 12 states (including Illinois) allowing cannabis to be used for recreational purpose and a further 22 allowing only for therapeutic use, there is a massive opportunity for cannabis sector to unlock the potential of the world’s largest cannabis market. An investment bank suggested that the US cannabis market could be worth US$ 28 billion at present, had cannabis been legalised across all the states. Thus, if there is a favourable outcome with respect to the legalisation of cannabis, the stocks in the US will get a big boost.

Outlook for Australia: Australia has been one of the major countries in the cannabis space with the country legalising medicinal cannabis in 2016. The approval granted businesses the opportunity to apply for manufacturing and cultivating licences. However, full legalisation of cannabis is still ongoing and given the extensive use of illegal usage for recreational purpose the government is likely to prioritise the process.

Other than nabiximols, medicinal cannabis is not approved in the country. However, a significant increase in R&D activities has been seen since 2017, which could make it easier for drugs to be legalised for medical use. Initiatives such as the establishment of the Australian Centre for Cannabinoid Clinical and Research Excellence (ACRE) and continued research at the University of Sydney highlight the country’s intent to develop the cannabis sector. Also, the government has indicated that it aims to become one of the leading exporters of cannabis-based products. These initiatives could be a blessing for a sector that struggled in 2019.

Bottomline

Given the challenges the sector under discussion faced in 2019, including the two biggest markets, the US and Canada, it seems straightforward to understand why the market is ready to write-off the entire sector.

However, we have yet to see the full potential of the cannabis sector, as only about 10% of the worldwide population has access to cannabis-based products.  At present, around 41 countries have legalised medicinal cannabis, while only two countries (Uruguay and Canada) have legalised it for recreational purpose. Experts believe these numbers are likely to grow significantly in the next couple of years. The bigger the size of the market, the greater the opportunities for cannabis companies to grab.

The continued investments of companies, the ever-increasing focus on easing the legal processes and guidelines in order to decriminalise and legalise medicinal cannabis, and the ongoing studies aiming towards proving the benefits of cannabis in a range of indications point to just one thing – the cannabis sector may be down, but it is not out, at least not yet. The bubble might have burst in a region, but it is too early to call the sector as a bubble.


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