What risks remain as the cannabis market grows?

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Copyright : Tyson Anderson // 123 RF

With the legalization of recreational cannabis in Canada and a patchwork of regulations governing its use in various states in the U.S., the sector’s influence is growing, according to new research by MSCI Inc.

In total, 50 countries now allow some form of medical cannabis use, while six countries have legalized it recreationally. In terms of public stocks, 148 issuers have some tie to the cannabis industry. These primarily include pharmaceutical companies (71 per cent) and some consumer staples (11 per cent), mostly beverage companies. So-called pure plays in the pharmaceutical sector include Canadian cannabis producer Canopy Growth Corp., as well as diversified drug companies for which cannabis products make up less than one per cent of sales, the research noted.

Canadian-listed companies take the lead at 68 per cent, followed by the U.S. (24 per cent), Australia (five per cent), Ireland (one per cent), the Netherlands (one per cent) and the U.K. (one per cent).

Last year saw major developments for cannabis, but the psychoactive plant containing large amounts of delta-9-tetrahydrocannabinol, or THC, isn’t the only crop making a splash in the markets. The 2018 U.S. Farm Bill removed hemp, which does contain trace amounts of THC, as well as the non-psychoactive cannabis compound, cannabidiol, or CBD, from the Controlled Substance Act. As such, farmers can now grow and sell the plant, which is used primarily for industrial purposes, across the U.S.

As far as future growth potential, the global legal market is expected to reach US$147 billion by 2025, according to the research.

However, as the market solidifies, its risks are becoming clearer, including regulatory scrutiny of cannabis marketing tactics. “For traditional pharmaceuticals, the most common types of marketing misconduct are off-label marketing (i.e., promoting a therapeutic use other than the one for which it was approved), minimization of a drug’s side-effect and price manipulation,” the research noted. “In the case of cannabis-related products, possible situations of misconduct include: making unfounded therapeutic claims (i.e., not backed by scientific studies over their effectiveness) and misleading labeling regarding the actual dosing of CBD or THC within the product.”

Within MSCI’s environmental, social and governance research, it found only two companies currently make some form of specific commitment where responsible marketing is concerned. “The absence of policies related to responsible marketing among cannabis companies is still a cause for potential concern, as it may exacerbate their vulnerability to future strengthening regulatory scrutiny and alleged controversial effects of certain uses of cannabis products,” the research said.

As well, manufacturing risks exist for pharmaceutical companies diversifying into cannabis rather than producing it. There’s more involved for these companies since they rarely manufacture their own ingredients and will likely be looking to third parties to source cannabis, according to MSCI.

On the other hand, pure plays have a more vertically integrated business model and would be less subject to regulatory issues where drug approvals are concerned. Further, recalls are a common problem in the pharmaceutical industry, but haven’t yet become an issue where pure-play cannabis producers are concerned. “It is unclear at this point whether this is due to effective risk management or the fact that the industry is in its infancy,” noted the research.

Investors should also be aware of the adverse health risks that exist around cannabis use, said the research, noting long-term business risks related to its impact on health could include marketing restrictions, safety liabilities and brand damage, which have been long-standing problems for alcohol and tobacco companies.

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