Election 2016: Marijuana mandates & mixed messages

One thing is clear about the Presidential Election, Americans voted for change. With Donald Trump we chose a candidate that is so far outside of the political establishment that it left many in shock. After the results were in on the evening of Nov. 8, the E-mini Dow futures were down 800 points, but an hour into the next day’s regular trading session the Dow was up 250. Arguably, the second biggest story of the election was the continuation of another historic and ongoing change: marijuana. Rarely, if ever, have we seen nine ballot initiatives on one issue in a single election night. Marijuana went eight and one in post-season play and came away a champion (see “Keeping score,” below). Add the 107-year broken curse by the Chicago Cubs and it was a hell of a week.

The good

Prior to the election there were 25 states where marijuana was legal for medical use, and four (Colorado, Washington, Oregon and Alaska, plus Washington D.C.) where it was legal for adult use. As of today, we have 28 states that allow legal medical use and eight, plus D.C., that allow adult use. We added Maine, Massachusetts and Nevada on Nov. 8, but the game-changer hands down is California. It is the largest single regulated cannabis economy in the world with a population of 38 million. Investment dollars were already flowing into the state in anticipation of the passing of Proposition 64 — the adult use of Marijuana Act (AUMA) — and interest in the days after the elections saw a spike in investor inquiries. 

However, the laws in California are extremely complex and with the passage of adult use it remains to be seen how they integrate them. It is not uncommon for states to have conflicting laws regarding marijuana use following successful ballot initiatives and the resultant fights can bring the system to a standstill. After many years of having a completely unregulated system, California made big strides last year with the California Medical Marijuana Regulation and Safety Act (MMRSA), which will aim to regulate the medical trade more tightly. Lawmakers anticipated AUMA, so it should be integrated fairly quickly. Still, it will take a good 18 months to two years to start seeing the first legal adult use markets in the state.

In the public markets, all three  marijuana  indexes produced by MJIC shot up in the months leading up to the election. The North American Index ran from $116 on Oct. 4 to $163 on Nov. 7, then the index dropped 24% on the two trading days following the election. The Canadian index, however, was up 2% post election. 

By way of market comparison, Canada expects to approve legal adult use in 2017, and a recent Deloitte study predicted the value of the Canadian industry at $23 billion. “In Canada we see this as a huge opportunity for licensing, expansion and a historic event that will attract investment to the entire industry,” says Dooma Wendschuh, CEO of Province Brands, which blends alcohol and cannabis concepts into a unique psychoactive beverage.  Province is his second venture in the industry, the first in Canada. 

Chris Bunka, CEO of Lexaria (LXRP), which does not qualify for listing on the Marijuana Index as of now, had a similar ride up. This penny stock tripled from Oct. 10 to Nov. 7, but then dropped 30% in the following days. “I don’t know how much of the run up was due to news about our first patent being issued and how much was election related, but we see it as a good thing. Despite the correction, our phones have been ringing off the hook since Nov. 7,” Bunka says. 

The bad

While President-elect Trump has advocated for medical use, and even mentioned dropping the drug from Schedule 1 to 2 or 3, he also has advocated for states to choose and govern the adult use; but we all know it’s not that easy. Republicans have historically apposed legalization in any form. Vice President-elect Mike Pence is not a friend of marijuana. Neither are Rudy Giuliani and Chris Christi, both influential in the Trump campaign. Not to mention that  the GOP controls both Houses of Congress. 

Also, if marijuana were to move to a Schedule 2 or 3, the result could be devastating from an investor standpoint because that puts the medical use squarely in the hands of the Federal Drug Administration (FDA) and there is not a single company in the industry today that is well-funded enough to conduct proper clinical trials and make an application to the FDA for approval. That could mean well-capitalized companies in big pharma could come charging in to take over the industry very quickly. One notable exception is GW Pharmaceuticals (GWPH) is a big winner in both cases as it is a publically traded U.K.- based pharmaceutical company that would probably get bought up quickly for a nice profit.

The question becomes: What would happen to the fragmented industry of smaller venture capital funded medical cannabis companies? Will they get bought up purely for the talent and knowledge even if their process is deemed undesirable by big pharma?

Winners & losers 

The winners in this equation are the aforementioned GWPH, the adult use markets and the ancillary products. Unlike the medical markets, adult and ancillary are not subject to the same level of regulatory oversight as medicinal use companies. That makes it easier for them to attract capital and scale before the agriculture; and alcohol and tobacco industries can step in and compete. Those industries would still need to wait for Federal legalization to enter the markets, which is not likely to happen in this Presidential term. There are some well-funded retail and cultivation operations that could easily scale out, and when the big three do enter, the strategic multiples will be much more significant than in the case of medical roll-ups.
Any companies that are in the business of developing cannabis as a medical drug and have not already developed an ancillary or adult use revenue stream are going to have a hard time with long-term viability. There is an entire community of local growers that will most likely be run out of the business as a result of this. This is not unlike any other industry facing growth, but it’s never a good thing for the people in those industries either. 

The cannabis industry as an investment got both more attractive and more complex in this election. It remains the single biggest investment opportunity in the United States, but requires specialists who are spending their full time and attention in the industry to weed through the opportunities and cherry pick the best ones.

About the Author

David Friedman is the CEO of Panther Capital and the Panther Opportunity Funds, which provide platform services and investment in emerging markets and have focused on the Cannabis space for the past three years.