This is the first in our new series of RI Emerging Issues highlighting, “emerging issues” which may be of interest to clients, but where we have yet to develop a comprehensive House view. There has been considerable market interest in the potential for cannabis as an investment, as some territories relax their regulatory and criminal approaches to its consumption. We view cannabis as presenting significant ethical challenges, and we explore this in more depth below.
WHAT IS CANNABIS?
Cannabis is a generic term for a flowering plant that has several sub-species, the most common genus being Cannabis sativa. The plant is also known as Hemp, and has been long cultivated for hemp fibre, hemp seeds and oils. It is also grown for recreational and therapeutic use given the cannabis plant produces a group of chemicals known as cannabinoids which produce mental and physical effects when consumed. It is the most widely used recreational drug in the UK.
WHAT ARE THE THERAPEUTIC USES FOR CANNABIS?
Medical cannabis is a broad term for any cannabis-based therapy used to relieve symptoms, and is administered in the main as an oral spray or as an oil-based product. Typically, medical cannabis does not generate a ‘high’ as it lacks the vital chemical that produces this effect – tetrahydrocannabinol or THC. Medically prescribed cannabis is in its infancy in the UK and is only available for very severe epileptic conditions or for adults to relieve the side-effects of chemotherapy.
The NHS suggests there is some evidence of its efficacy as a pain reliever, although it maintains ‘the evidence is not yet strong enough to recommend it for pain relief’. Controlled studies point to potential efficacy in the treatment of asthma, glaucoma, as an anti-depressant, appetite stimulant and as an anti-spasmodic. However, the NHS also points to material side-effects arising from its consumption, whilst the WHO stresses the need for more studies.
WHAT ARE THE RECREATIONAL USES OF CANNABIS?
Hash, pot, weed, spice, marijuana is the most prevalent and widely used illicit drug in the world. The cannabis plant is usually smoked in its dried form or can be added to food (e.g. brownies or cake). The major psychoactive chemical in Cannabis is tetrahydrocannabinol or THC. According to the WHO, the geographic use of recreational cannabis is global, covering practically every country of the world, with an estimated 147m people or 2.5% of world population consuming it regularly. In the UK, despite being categorised a Class B drug (alongside ketamine, amphetamines and barbiturates), it was reportedly used by 7.2% of 16-59 year olds in 2017. Cannabis is linked most closely to youth culture, with a lower overall age of first use than for harder Class A drugs. The EMCDD (European Monitoring Centre for Drugs and Drug Misuse) estimates that 87.7m European adults (15-64) or 26.3% of this age group have experimented with Cannabis - with 10m of these aged 15-24. France has the highest observed prevalence rate in the EU, and Romania the lowest. Based on national surveys, it is estimated that around 1% of European adults are daily users, around 30% are older adults and 75% are male. The health implications or regular cannabis use are discussed below, but trend data suggest more people are now entering treatment for addiction than ever before; up from 43,000 in 2006, to 76,000 in 2015.
In the US, the National Institute of Drug Abuse (NIDA) places lifetime prevalence of cannabis use at 47.5% for those aged 26 and over and 15.3% for those aged 12-17. The highest observed prevalence is among the 18-25 age group where 52.7% of adults were regular users.
WHAT ARE THE HEALTH RISKS FROM CANNABIS?
The effects of cannabis vary by user. Upon smoking, THC passes from the lungs into the bloodstream, carrying the psychoactive chemical to the brain and organs. THC ‘over activates’ natural brain receptors, producing a chemical effect or ‘high’. These effects may include altered senses, changes in mood, impaired movement, impaired memory, delusions and hallucinations, and in extreme cases of prolonged use, psychosis and paranoia. The long-term effects for early users may impair brain development, learning and thinking. There have been some studies linking long-term use from teenage years with lower IQ, but these have not proved conclusive.
IDA states additional health risks to include breathing, increased risk of coronary attack, problems in pregnancy and cycles of severe nausea and vomiting. In acute cases, the prolonged use of cannabis can be marked by the onset of schizophrenia and depression.
IS CANNABIS A GATEWAY DRUG?
Cannabis use, like tobacco and alcohol, tends to come before the use of harder narcotics, and to that extent it has been called a ‘gateway’ drug. However, this is not to say the path to harder addiction is always inevitable from the use of cannabis. It is fairer to say that soft drugs may have a causal risk for some users in gravitating to cocaine or heroin, but this is far from proven. The gateway theory is predicated on two things: experimentation (increasing the taste for further experiences) and peer pressure (social groups heightening experimentation across drug types).
WHAT IS THE REGULATORY POSITION?
The regulatory and criminal environments for the control and use of recreational and medicinal cannabis have begun to fragment. Overwhelmingly, international approaches to cannabis use remains prohibitive and criminal, but there is growing interest in advancing the use of medicinal cannabis, coupled with an appetite in some geographies for recreational regulation over prohibition.
The WHO, in the first scientific assessment of cannabis since 1935, found that cannabis is not likely to produce the ill-effects of more 'dangerous substances'. This could lead the way for a modification of the way cannabis is viewed in international law, where drug control treaties require parties to establish a criminal offence for the possession, purchase or production of cannabis. WHO has recommended cannabis be removed from Schedule IV of the 1961 Single Convention or Narcotic Drugs to which there are 186 parties and 40 ratifications. Schedule IV is the most restrictive category under the Convention; however, WHO has now recommended cannabis be placed in Schedule 1 - a less restrictive category for narcotic. moreover, drugs containing THC are recommended to be removed to Schedule III - the lowest category of risk.
Medical and therapeutic cannabis is unlikely, in our view, to be sufficiently revenue-attractive as a sole strategy, suggesting companies may seek to develop dual strategies to diversify revenue to assure growth. Investment on these terms would be problematic where recreational cannabis derived revenues could outstrip medical.
The European Parliament has separately passed a non-binding resolution encouraging the advancement of medical cannabis, prioritising medical research and further study. The jury is, however, still out; the INCB (International Narcotics Control Board) remains resolutely opposed to decriminalisation and even questions certain medical uses of cannabis.
Criminalising use appears to be breaking down; Canada become the second full country to legalise cannabis in 2018 following Uruguay in 2013. The Mexico Supreme Court ruling that laws prohibiting its use are unconstitutional has paved the way for Mexico becoming the third sovereign state to legalise the recreation use of cannabis.
In the US, recreational cannabis remain illegal at federal level, however 10 States including Alaska, California, Maine, Colorado and Washington have legalised recreational use.
In Europe, a policy of limited enforcement has been widely adopted, for instance in Spain, Portugal and the Netherlands where it is tolerated in licensed premises. there is little harmonisation within the EU as this remains the responsibility of member states. In the UK, for instance, recreational use remains illegal, but possession is seldom enforced.
WHAT IS THE INVESTMENT ANGLE?
Softening of attitudes towards the use of cannabis presents an investment opportunity with the legal cannabis market forecast to be worth $57bn by 2027. Spending alone has been forecast to grow by 230% in just five years! The combined Canada and USA markets are already worth an estimated $17.7bn. We view cannabis to be an 'emerging issue' because there remains great uncertainty over the extent of legislation, and how this will operate; even in Canada there is great variation with Ontario only allowing the sale of cannabis in 40 licensed shops, whilst Newfoundland will allow its sale in supermarkets.
Investment interest has seen the creation of Marijuana Index (and discrete US and Canadian sub-indices). The main index, which launched in 2015, comprises 46 constituent stocks – 25 US and 21 Canadian, with stocks required to have a business strategy ‘focused on the legal marijuana industry’. Major stock constituents include Canopy Growth Corp., Aurora Cannabis Inc., Cronos Group Inc., and Aphria Inc. Canopy Growth Corporation, perhaps the best known, was the first publically traded cannabis stock in the world, and specialises in the production and sale of medical marijuana.
WHAT IS EDENTREE'S POSITION?
Our Health & Wellbeing theme represents a commitment to invest in companies promoting mental and physical health & wellbeing. Cannabis is viewed as an emerging issue as it is unclear as yet how commercially viable the recreational and leisure market will be, as distinct from the purely therapeutic. We are alive to the potential health benefits derived from cannabis based products, where these are tightly regulated and professionally prescribed. We would be unlikely to allocate client capital to companies heavily exposed to recreational cannabis where this could potentially lead to addiction or psychotic conditions on ethical grounds. Medical and therapeutic cannabis is unlikely, in our view, to be sufficiently revenue-attractive as a sole strategy, suggesting companies may seek to develop dual strategies to diversify revenue to assure growth. Investment on these terms would be problematic where recreational cannabis derived revenues could outstrip medical. Our approach to this emerging issue is therefore cautious, with a predilection not to invest.
The cannabis industry is still in its infancy and subject to the whims of regulators opening up a once-taboo substance to ‘everyday use’. The regulatory frameworks are not conducive to stable growth and are likely to be subject to intense political intervention. The industry is currently fragmented, with the 10 largest companies accounting for no more than 50% of total revenues. Equally, the major players tend more to production than retail; these are specialist plant producers rather than pharmaceutical plays. Some clearly have their sights on the recreational market, which we expect to be the more lucrative in the long-term, progressing strategic tie-ups with industries such as alcohol and tobacco producers, long excluded by our Funds. The only pure medical cannabis players are Almirall SA of Spain and GW Pharmaceuticals, formerly of the UK but now listed in New York. Associated British Foods, under an agreement with GW Pharmaceuticals, began growing a non-psychoactive form of cannabis in 2017 specifically for medical purposes. The annual crop produces enough to treat 40,000 children suffering from debilitating epilepsy. Cannabis will present significant ethical barriers for EdenTree, and whilst we look forward to following industry trends, we do not expect to find opportunities to invest in the near future.