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Pharmaceutical Companies Lose Billions When US States Legalize Cannabis, Study Finds

By Alexander Beadle

Published: Sep 06, 2022   
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Just one US state legalizing cannabis can cost the pharmaceutical sector nearly $10 billion, according to a new, first-of-its-kind study from researchers at California Polytechnic State University and the University of New Mexico.

Published in PLOS One, the study also suggests that annual drug maker sales may reduce by an average of $3 billion per legalization event.

Rather than lobbying against cannabis legalization policies, the authors suggest that pharmaceutical manufacturers may stand to benefit more from investing in cannabis markets. Additionally, they say that the magnitude of cannabis legalization’s negative effect on stock market returns suggests that cannabis is anticipated to become a permanent and important player in the pharmaceutical market.

Stock returns decrease by up to 2% following legalization

For this study, the researchers looked at stock return and prescription drug sales data for 556 pharmaceutical companies between 1996 and 2019. Data analysis compared the market trends before and after the enactment of various medical and recreational cannabis laws in relevant US states.

They found that, on average, stock market returns for pharmaceutical companies were 1.5 to 2% lower at 10 days after a state-level legalization event. Stock returns decreased in response to both medical and recreational legalization.

Looking at sales data, the researchers calculated that the average change in a firm’s market value to be $63 million per legalization event, with a total impact on market value across firms of $9.8 billion per event.

Using historical price-to-sales ratio data for drugmakers in the year associated with each legalization event, the researchers also estimated that there could be a $3 billion change in annual sales across all drugmakers per legalization event.

“The economic significance of an estimated $9.8 billion loss in market value across firms per cannabis legalization event is extremely large, however our results should be interpreted cautiously,” the researchers wrote.

“A key limitation is that we model investors as rational, which may overstate the economic significance of our results. Second, we are limited to publicly traded firms and past legalization events.”

Medical versus recreational legalization

While all cannabis legalization events caused some reduction in stock market returns, the researchers determined that medical use policies generated a more muted effect on cumulative returns, but were more “persistent”.

By comparing predicted and actual cumulative returns for drug makers and breaking out investor response between medical and recreational events, the researchers found that much of the difference in cumulative returns was driven by medical legalization events.

“We predict that if the remaining 16 states without medical cannabis legalization were to legalize cannabis, spending on conventional pharmaceutical drugs would decrease by almost 11%,” the study authors wrote.

In terms of sales data, the authors found that the implied sales decrease from recreational legalization was approximately 129% greater than that of medical legalization when the two were assessed separately. However, the authors do note that, as there are fewer recreational legalization events to draw from, it is possible that calculations for recreational events may be more susceptible to outliers.

Cannabis may increase competition in the drug market

The authors also looked at a subsample of 91 pharmaceutical firms, containing 16 brand drugmakers and 75 generic drugmakers.

They found that generic firms’ investor response tended to be affected more by legalization events in percentage terms, however the brand firms were affected more in terms of absolute magnitude as they carry a larger market value.

Cannabis reducing returns in this way is a novel finding, the study authors say. When a generic drug enters the market, for example, brand drug prices tend to increase in kind. Cannabis being different in this aspect could drive up competition in US drug markets, as cannabis’ broad therapeutic potential positions itself as an alternative to a range of established medications.

“Currently, cannabis patients and their providers have little information to guide them towards the most effective treatment for their condition,” study co-author Sarah Stith, said in a statement. “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 standardization 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.”

Are people really ditching pharmaceuticals for cannabis?

This observed impact on drug stocks and sales with each legalization event would appear to add weight behind the idea that cannabis is commonly used as an alternative to pharmaceutical drugs.

This idea is already suggested by numerous anecdotal reports, such as a 2018 survey of attendees at a public health event on cannabis reform. That survey found that 42% of self-identified medical cannabis users reported ceasing the use of a pharmaceutical drug after initiating cannabis use.

Following Italy’s legalization of “light cannabis” – a decision in 2016 to raise the domestic ceiling for THC in hemp from 0.2% to 0.6% – it was also reported that the accessibility of light cannabis led to a reduction in dispensed packets of opioids, anxiolytics, sedatives, anti-migraines, antiepileptics, antidepressants and antipsychotics.

Another recent survey, published in the Journal of Pain, found that around 80% of the adult cannabis consumers surveyed had used cannabis as a substitute for some kind of pharmaceutical drug, most commonly opioid painkillers. When asked for their reasons behind this substitution, the majority of respondents felt that cannabis had fewer adverse effects than the pharmaceutical equivalents, while still successfully managing symptoms.


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