Understanding Cannabis: Medical Vs. Recreational Markets
Entering the cannabis industry is not as simple as picking the right shares and waiting for the returns to roll in. To build a profitable portfolio, an investor needs to have an understanding of how the cannabis industry is categorised, the services and products available in these sectors, and how the situation may change due to new legislation.
Whenever “the cannabis industry” is discussed, two markets in particular underpin different companies, products, and services—medical, and recreational. These markets frequently overlap, and it is not uncommon to find companies operating across both. From an investment standpoint, the distinguishing factor between the two is legality, as the acceptance of recreational cannabis is still far from a global phenomenon.
Despite the two being intertwined, they do have different demographics, and as a result, a different focus when it comes to products and services. However, remember that the driving force behind both is the Cannabis sativa plant, and although the outcomes may vary, both markets need access to this raw commodity to be successful.
Medical marijuana is the use of cannabis (and/or its cannabinoids) to treat the symptoms of approved conditions or diseases. In areas where medical marijuana is legal, patients can be prescribed cannabis as a medicine, or in some cases, allowed to grow it at home. The conditions that cannabis can be used to treat vary significantly from country to country. If you are choosing to invest in pharmaceutical companies that specialise in treatments of a particular disease, it is worth researching where in the world that medication is approved.
It is not possible to self-prescribe medical marijuana, as only licensed physicians and doctors can approve its use. On a global scale, the medical market is significantly larger than its recreational counterpart. The medical market is also growing at a much faster rate than recreational sectors. This is partly because of ongoing research into cannabis-based treatments, but also because it acts as a middle-ground between prohibition and comprehensive legalization. Introducing a medical market allows governments and regulatory bodies to somewhat accept cannabis, while still instigating strict sanctions.
To give a rough indication of the size of the medical market, approximately 33 American states and over 20 countries accept the medical use of cannabis at present. In comparison, two nations and around 10 US states have fully legalized the consumption and sale of cannabis for recreational use.
Recreational markets allow the legal use of cannabis without any medical justification. The plant is free to be used (age restrictions and limitations pending) by any demographic without fear of legal repercussions. Exactly how this market is regulated, again, varies significantly from country to country. Typically, recreational markets have a much stronger focus on high THC percentages and product ranges that support this. While other cannabinoids like CBD still have a place in recreational markets, they are not as prominent as they are in medical sectors. You can read more about the differences between THC and CBD here.
Although the overall recreational market is significantly smaller, it has the greatest potential for high-value returns. Canada’s decision to legalize recreational cannabis is a perfect example of this, with shares skyrocketing in value as a result. Several publicly traded cannabis companies now have a market cap of over a billion dollars. Only time will tell how or whether they hold their value, but it indicates the investment potential for those who get there early. As there is no need to be approved to use cannabis, the recreational market has an exponentially larger pool of consumers and opportunities to synergise ranges with mainstream markets.
Across both markets, it is common to see a range of products (dried flower, edibles, concentrates, pre-rolled joints, oils, tinctures, etc.), and there are no definitive preferences between consumers in both. The majority of differences lie in the services, but again, this will depend on the overall size of the market, approved medications, and licensing laws.
The issues surrounding the growth of the recreational cannabis industry always come back to legality. Cannabis is still regarded as a Schedule I substance, a classification that has held it back from significant research and retail opportunities for decades.
Based on current trends, we can see that companies quick to capitalise on a country or state’s decision to legalize benefit substantially. The key as an investor is to stay up-to-date with global legislative changes to monitor how markets are developing. The one advantage of the current cannabis legalization process is that updates never occur out of the blue. Under government guidelines, the decision has to go through several stages of approval before being signed into law—thus providing plenty of time to understand investment opportunities.