Medical Cannabis vs. Recreational Cannabis Stocks: An Overview
The marijuana industry is broadly divided into two markets—medical and recreational marijuana. As their names suggest, both have applications in different industries and cater to different markets. Medical marijuana stocks represent companies that are involved in research and development (R&D) for the treatment of certain health conditions, while recreational cannabis companies cater to products that don't serve a medical purpose. Instead, their users seek the high that comes with smoking, consuming, or drinking cannabis.
Depending on an investor’s risk profile and time horizon, stocks in both markets are attractive because they represent a growth opportunity. Keep reading to find out how these two markets differ from one another and how you can jump in as an investor.
- Although it is used to treat medical conditions and symptoms, medical marijuana is still considered a controlled substance at the federal level in the U.S.
- Recreational marijuana caters to a larger market and has multiple applications from marijuana-infused beer to coffee and cigarettes.
- According to research, more spending is expected to take place in the recreational cannabis market, but it is heavily taxed.
Medical Cannabis Stocks
Medical cannabis is a type of therapy prescribed by doctors for health conditions and symptoms. This means patients can only access cannabis treatments with a prescription from their doctors. To date, the drug has been used to treat Alzheimer's, different forms of cancer, various mental health conditions, multiple sclerosis, nausea, and pain.
The industry has been moving forward since California became the first state to legalize medical pot in 1996. Research conducted in 2018 stated that Sanofi Aventis (SNY) and Merck (MRK) are among the top cannabis-related patent holders. Companies involved in the use of marijuana for medical uses are GW Pharmaceuticals (GWPH), Tilray (TLRY), Corbus Pharmaceuticals (CRBP), Cara Therapeutics (CARA), and Zynerba Pharmaceuticals (ZYNE).
The basic framework for evaluating medical marijuana stocks remains similar to that for the pharmaceutical industry, which means investors should focus on the company’s drug and research pipeline. Because research in cannabis is relatively new, it is safe to assume that the payback for investors in the industry will be longer as compared to recreational marijuana. Consider the fact that GW Pharmaceuticals spent 19 years researching cannabis chemicals before getting its first drug approval. Epidiolex was approved by the Food and Drug Administration (FDA) in 2018 to treat patients with severe epilepsy. The agency, however, has yet to approve medical marijuana as a whole. That's because the U.S. Drug Enforcement Administration (DEA) still lists marijuana as a controlled substance.
Getting into the market is as easy as any other industry. Investors may consider purchasing stock in companies researching or those that currently have medical marijuana on the market as mentioned above. Many are listed on stock exchanges like the Toronto Stock Exchange (TSX), while others are traded over-the-counter (OTC). Exchange-traded funds (ETFs) also offer exposure to the market such as the Alternative Harvest ETF, which includes companies such as GW Pharmaceuticals and Tilray.
Uruguay and Canada are the only two countries that have fully legalized both medical and recreational cannabis for their citizens.
Recreational Marijuana Stocks
Recreational marijuana caters to a larger audience. This translates into a potentially bigger market for this type of marijuana and is reflected in the exponential growth statistics for companies involved in this sector.
The recreational marijuana industry primarily uses tetrahydrocannabinol (THC), a psychoactive agent that is responsible for the high that comes from smoking marijuana, for its products. It has multiple applications across products, from marijuana-infused beer and coffee to cigarettes. Instead of a medical purpose, the recreational cannabis industry markets the high that marijuana is known for and that many users seek.
Just like medical marijuana, there are stocks and other investments available in the recreational cannabis sector. The most prominent company involved in recreational marijuana is Canada's Canopy Growth (CGC). The stock price closed at $28.82 on Dec. 8, 2020, and had a market cap of $10.729 billion. Canopy Growth reported total annual revenue of $398.77 million for 2020, compared to $226.34 million from the previous year.
Medicines that incorporate marijuana may find significant applications in government health care. A 2016 research paper by Ashley Bradford and W. David Bradford from the University of Georgia found that prescription drug sales for painkillers “fell significantly” in states which legalized medical marijuana. The study showed that Part D, Medicare's prescription drug, saved roughly $165.2 million in 2013 in states that legalized medical marijuana.
The variety of products available for recreational marijuana comes with a catch—hefty taxes. For example, Colorado charges a 15% excise tax for sales from cultivators to retailers and another 15% sales tax. This makes the final marijuana product fairly expensive. Companies involved in recreational marijuana products will have to account for significant regulatory charges from governments on their balance sheets.
Investors and companies alike have been excited about the cannabis market. Once on the fringes of the financial world, cannabis companies are gaining more traction, with mainstream companies jumping on the marijuana bandwagon.
Uruguay fully legalized pot in 2013, followed by Canada, which did so in 2018. But many other countries have been slow to follow suit—partly because of the stigma associated with marijuana. The drug still remains illegal at the federal level in the United States, but attitudes are shifting at the state-level. Colorado became the first U.S. state to fully legalize marijuana. As of November 2020, 35 states and Washington, D.C. legalized marijuana to some degree.
This has major implications for the industry. According to ArcView Market Research and BDS Analytics, spending on legal cannabis is poised to grow on a global scale. The report showed that spending will increase from $16.9 billion in 2019 to $31.3 billion in 2022—a jump of 38%. This represents a compound annual growth rate of 26.7% between 2017 and 2022.
But even as the sector racks up significant gains in the stock market, investor assessment of marijuana stocks is still colored by past stereotypes. Some investors still find it hard to jump in on the action, even with promises of big gains.