folder Filed in Business
Mid Year Economic Update
Matt Karnes

Our midyear review of the Legalized marijuana market affirms our expectation that 2016 retail sales are on track to meet or exceed $6.5 billion. We reiterate our forecast for annual sales to reach $25 billion by 2020. These estimates are largely predicated upon the success this November of ballot initiatives to fully legalize marijuana in five states (including California). We also expect the passage of medicinal use statutes in three states (including Florida). In addition, we have extended our forecast to 2021 at which time we expect revenues to reach approximately $30 billion — this assumes that marijuana will be legal in all 50 states in some capacity (either medical only or fully legalized). Furthermore, this year’s election choices can potentially effectuate $4.2 billion in incremental retail revenues by 2018 and $5.8 billion by 2021.

More importantly, we note the beginning of what we characterize as a marijuana market metamorphosis as states with both legalized medical and recreational use evaluate the practicality of a merged regulatory regime. We see this effort presently in Washington, Oregon and Alaska and expect that Colorado will soon follow. This trend is consistent with our thesis (“The GreenWave Repot” October 2014) that initially bifurcated marijuana markets will merge under a shared regulatory system into substantially larger enterprises.

Should California vote to legalize recreational use this November, we expect implementation of a combined regulated market as soon as 2018. A combined California market is significant, not only because of its sheer size (~55% of the U.S. market), but also it would mark the first state to implement regulations for a fully legal market without initial oversight of medical use purchases. This could serve as a catalyst for similar action in Nevada, Arizona, Massachusetts and Maine. Accordingly, we have redefined the methodology for our model beginning in 2018.Our revenue segments are now characterized as “Fully Legal” and “Medical Only” (for those states that have not passed recreational use).

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We believe that until more extensive research is conducted and evaluated (facilitated by recent authorization by the DEA to extend cannabis research efforts beyond the University of Mississippi), it will be increasingly difficult for medical marijuana sales to thrive, particularly in a dual market environment. Therefore it seems logical to assume that regulatory oversight is more practical in a merged platform and a number of reasons support our conclusion

The recreational market disrupts medical use sales. This is underscored by a deceleration in patient growth. We have observed in our prior research that growth in patient counts is decelerating (new patient applications and cardholder renewals are declining) in Colorado, Oregon and DC. In Washington state, patient counts are not tracked and in Alaska, registered cardholders are limited to home grow with no commercial availability. Though Arizona permits only medicinal use, new cardholder applications were down sharply (73%) in May, perhaps in anticipation of a favorable election outcome for recreational use. In California new patient applications were at an all time low in FY 2016 (note that patient registry is voluntary and may not capture all of the data).

Since loosely defined “chronic pain” is the most common qualifying condition among medical marijuana users, it is likely that a number of recreational users are already purchasing marijuana without great difficulty in states where medicinal use is legal. Interestingly, we find the deceleration in patient counts comes mostly from patients with chronic pain cited as a qualifying condition.

The average amount spent per month on medical marijuana is highest in states where chronic pain is a qualifying condition. We believe that these spending patterns observed in a medical marijuana market could serve as a proxy in ascertaining consumer purchases in a recreational market. Additionally, our analysis in Colorado further demonstrates that monthly fluctuations in retail sales reported by both medical and recreational use dispensaries seemingly appear to move in tandem which further substantiates similar spending pattern:

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It is likely more cost effective to regulate one combined market. Redundancy in oversight and enforcement mechanisms will be recognized as costly and confusing.

The medical community’s participation is insignificant and likely to remain so as long as cannabis remains classified as a schedule 1 drug by the DEA. Our research suggests that on average, only 2.4% of licensed physicians in existing medical marijuana states (where MD participation is disclosed) are registered to recommend marijuana to qualified patients thus inhibiting the full potential of a medical market.

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Introduction of the “Regulate Marijuana Like Alcohol Act” (HR 1013) which would essentially end prohibition: While we believe this bill will stand still for quite some time, it’s consideration could possibly facilitate a dialogue among state officials that calls to attention a window of opportunity for added tax revenues before a federal change occurs (once federally legal, interstate commerce can occur).

While we do not intend to undermine the importance or necessity of medical marijuana as an alternative treatment for many debilitating health conditions, there presently appears to be little distinction (other than potency) between the various designated medicinal use products and those offered in a recreational market. We do, however, believe that the medicinal use market will recalibrate when the pipeline of new, more targeted medications become available and as the medical profession gains more comfort in “pushing” a marijuana treatment rather than a patient having to “pull” a recommendation from a doctor. These may include products available only by prescription as well as over the counter nutraceuticals. In the meantime, as these two markets merge, we will likely see “medically endorsed” recreational dispensaries.