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Pharmaceutical stock returns could reduce due to cannabis legalisation

Home » Pharmaceutical stock returns could reduce due to cannabis legalisation

A new study has found that stock market investors predict cannabis legalisation will reduce conventional pharmaceutical sales by billions of dollars.

The findings show that stock market returns of publicly traded pharmaceutical firms were 1.5 to 2 per cent lower 10 days following a cannabis legalisation event. The implications of the annual sale from this reduction were in the billions, say the researchers. 

A number of other studies have determined that cannabis access reduces the consumption of specific types of medications, such as opioids, or in certain patient populations like Medicaid patients. This study is the first to analyse the overall effect of cannabis on pharmaceutical firms across all products and types of patients. 

Read more: Global cannabinoid pharmaceuticals market to reach £1.53bn by 2025

The study, ‘U.S. Cannabis Laws Projected to Cost Generic and Brand Pharmaceutical Firms Billions’, published in the journal PLOS One, was carried out by Ziemowit Bednarek from the Finance department at California Polytechnic State University, Sarah Stith from the University of New Mexico’s Economics department.

The impact of medical cannabis legalisation

Whilst many other drugs are designed to target, and are approved for, specific conditions, cannabis is used to treat a large range of conditions. These include physical symptoms such as headaches and muscle spasms as well as mental conditions such as depression and anxiety.

Currently in the US, the cost of pharmaceutical drugs remains a major barrier to healthcare and a significant financial burden to state and federal governments. The study concludes that cannabis acts as a new competitor in drug markets. 

Extrapolating the results to full federal legalisation, the authors estimate a reduction in conventional pharmaceutical sales of almost 11 per cent. The authors highlight that substitution away from conventional drugs towards cannabis appears to be occurring even without standardization, clear dosing instructions, or health insurance coverage.

Read more: Cannabis-based pharmaceuticals offer “major opportunities”, says new report

Stith commented: “Currently, cannabis patients and their providers have little information to guide them towards the most effective treatment for their condition. 

“The future of cannabis medicine lies in understanding the prevalence and effects of the plants’ components beyond THC and CBD and identifying ways to categorize cannabis by measurable characteristics that are known to yield specific effects. 

“Mimicking conventional pharmaceuticals through standardisation may not be the optimal endpoint for cannabis, as the variability inherent in the cannabis plant is likely driving its ability to treat so many conditions.”

The impact of recreational cannabis legalisation

In the study, the authors also found that recreational legalisation had more than twice the impact of medical legalisation.

According to the authors, this is presumably because of the much larger affected population, as medical cannabis access is typically restricted to those with severe, debilitating conditions. 

The findings revealed that branded drug manufacturers were more affected than generic manufacturers, which the authors say could be due to a greater competitive impact from cannabis entry on drugs without any existing competitors.

The study concludes that conventional pharmaceutical manufacturers may benefit from investing in cannabis markets rather than lobbying against them, and that regulatory policy should facilitate further research into the risks and benefits of using cannabis for both medical and recreational reasons. 

The magnitude of the negative effect of cannabis legalisation on the stock market returns from investing in conventional pharmaceutical firms suggests that cannabis is likely to be a permanent and growing player in pharmaceutical markets worldwide.

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