4/18/2011 3:31 PM ET|
Can you profit from pot -- legally?
Medical marijuana is big business. Some governments are taking a sympathetic approach to it, and some investors smell an opportunity. But there's a problem hanging in the air: Pot is still illegal.
Hard times, meet high times.
Freewheeling California and Colorado typically come to mind whenever anyone mentions easy access to marijuana, even for medical purposes. But with state-budget crunches forcing lawmakers nationwide to expand their minds to new revenue sources, opposition to pot is going up in smoke.
In a trend that experts say is likely to continue, even a number of states you don't normally associate with flower power or the '60s are approving medical-marijuana sales.
Two recent examples:
- In New Jersey, Republican Gov. Chris Christie -- a presidential favorite among many conservatives (though he's not a candidate) -- last month issued licenses to several pot dispensaries that hope to be up and running by the end of the summer. Lawmakers approved the sale of medical marijuana last year, something Christie had opposed.
- In Arizona, which has voted for the Republican presidential candidate in nine of the past 10 presidential elections, the state's Department of Health Services is currently handing out medical marijuana cards. Legalized medical marijuana was approved in a referendum last November by voters, many of whom presumably had tax dollars on their minds.
Meanwhile, in California, local governments are skimming ever more off the medical-marijuana business. In the past year, Berkeley and Los Angeles have imposed new taxes on legalized pot sales.
His company is one of a number of emerging businesses that help get medical marijuana to users. The sector is seeing rapid growth and by some estimates could double over the next few years.
As with any moneymaking trend, there are investing plays in this medical-marijuana boom that present "unique opportunities to entrepreneurs and investors," says Kris Lotlikar of See Change Strategy, a firm that specializes in analyzing new industries.
But this industry faces some unusual dilemmas, including this huge one: A lot of it is still illegal. So while there are some very mainstream ways to invest in this trend, others definitely walk a thin line.
Is prohibition passé?
So should pot be illegal? Opinions differ, but polls show broad public support for legalized medical marijuana. And given budget needs, lots more states will likely be joining the 15 that have already approved the sale of marijuana for medicinal purposes. Justin Hartfield, the CEO of WeedMaps.com, an online guide to medical-marijuana dispensaries that sell the plants, thinks most states will approve medical marijuana over the next 10 to 15 years.
It's already a big business. Hartfield puts the number of pot dispensaries nationwide at about 2,000, mostly in California and Colorado. They sell about $1.7 billion worth of marijuana a year, which will double over the next five years, according to a See Change Strategy report called "The State of the Medical Marijuana Markets 2011." Pakulis, of General Cannabis, thinks that estimate is way too low. He puts annual sales at $4 billion to $5 billion.
Whatever the numbers -- and it's notoriously difficult to cut through the haze in this shadowy commodity sector -- sales are likely to grow rapidly over the next five years, especially if President Barack Obama stays in office.
Despite approvals in some states, marijuana possession of any sort is still illegal under federal law. But in 2009, the Obama administration instructed Drug Enforcement Administration (DEA) offices across the country to mellow out and de-emphasize busts of marijuana dispensaries and their customers, in a dramatic policy shift from that of the previous administration.
If this policy continues, expect to see many more dispensaries pop up across the nation.
Entrepreneurs looking to start dispensaries or get into crop production need capital from investors. It means growth of ancillary businesses for such wide-ranging products and services as bongs, security, insurance, hydroponic equipment used to grow pot indoors, and fertilizer.
But the legal dispute also means that the medical marijuana industry could disappear if the mood in Washington changes.
Investing in pot
There are other reasons for investors looking to make money on this trend to be careful. Most of the pure-play marijuana stocks are the market equivalent of a bunch of stoners stumbling out of a Grateful Dead concert -- penny stocks with little in the way of earnings or revenue growth. I looked at just about all of the ones trading for under 50 cents a share, and they all look to me like bad seeds to be avoided.
But there are a few ways to invest in medical marijuana that look reasonably solid.
The most obvious pure play is General Cannabis, which trades at around $4.50 a share as a pink-sheet stock. It has two main lines of business in medical marijuana that produced $1.2 million in profit on $7.7 million in revenue last year.
Its General Health Solutions division helps manage medical-cannabis clinics. It assists doctors with things like billing, collections, hiring, site location and marketing. Its call center, part of its marketing effort, was recently getting about 800 calls per day and making hundreds of doctor's appointments each day for marijuana smokers. A doctor can write a "letter of recommendation" -- because you can't write a prescription for an illegal drug -- that lets users buy from pot dispensaries. This division manages 14 medical offices in California and hopes to move into new states and increase clinics under management to 20 this year.
The other main division, WeedMaps Media, operates the WeedMaps.com website. The site helps people find medicinal-cannabis dispensaries, which pay a fee to be listed. WeedMaps already covers 1,800 of the country's roughly 2,000 dispensaries. So growth here will depend in part on more states approving medical marijuana.
Another way to get pure-play exposure to medical marijuana is through ArcView Angel Network. It's a startup that helps people with at least $50,000 find and invest in medical-marijuana-related business in areas like insurance, packaging, consumption devices and growing supplies. It doesn't raise money for dispensaries or growers.
ArcView Group CEO Troy Dayton says a few hundred investors and entrepreneurs have already contacted him. Dayton's partner, Steve DeAngelo, runs a large dispensary called Harborside Health Center in Oakland, Calif., so they have some direct experience with the business.
A real drug company
GW Pharmaceuticals (GWPRF, news) of Britain is one of the safer pot-related investment plays, at least in terms of legal risk. It develops and sells legal extracts from pot plants, as opposed to the plants and buds you'd find at medical marijuana dispensaries. Pot-based drugs are already mainstream, but this is the only pharmaceutical company that's a pure play.
The potential here could be big, because there are more than 70 separate cannabinoids, identifiable substances, in the marijuana plant. Any of them might have medical applications. "In a sense, the cannabis plant is a little pharmaceuticals factory," says GW's Mark Rogerson.
His company has already brought two such substances to market in a drug called Sativex, used to treat spasticity, a symptom of multiple sclerosis. The active ingredients alter electrical signals in the central nervous system, Rogerson says.
The key thing, he says, is that when using Sativex, "people don't just get high and not care about the symptoms anymore. They are taking a much lower dose of the active ingredient than recreational users."
Sativex, taken as a spray inside the mouth, is approved for use in Britain, Spain, Canada and New Zealand. Sales jumped 64% last year to $1.7 million, helping to drive overall GW revenue up 27%, to $18.8 million.
GW has partnerships with Novartis (NVS, news), Bayer (BAYRY, news) and Japan's Otsuka Pharmaceutical to either sell Sativex or develop pot-based drugs. The company is also researching the use of such substances to treat pain, epilepsy, diabetes, obesity and some mental disorders. GW is conducting trials in the U.S. on using pot extracts to treat cancer-related pain.
The other suppliers
To get exposure to the marijuana business with no legal risk, I'd suggest home gardening and farming supply retailers like Home Depot (HD, news) and Tractor Supply (TSCO, news), as well as fertilizer suppliers such as Mosaic (MOS, news), Potash of Saskatchewan (POT, news), Intrepid Potash (IPI, news) and CF Industries (CF, news).
These companies are doing a lot of business with pot growers, even if they don't know it. After all, marijuana is the biggest agricultural crop in California, worth about $14 billion a year, according to Drugscience.org. There are no official statistics, but that would mean that growers spend a huge amount of money on supplies.
How much? Industry insiders familiar with the economics of growing pot tell me the cost can range anywhere from about $50 a pound, for large-scale outdoor operations, to $1,000 a pound for indoor farms. As a rough average, I'll take the $400-a-pound cost cited by a grower in a 2008 CNBC special on the business of marijuana. I'll assume that about three-fourths of those costs are for labor, which leaves $100 a pound for supplies like equipment and fertilizers.
Roughly 5 million pounds of pot, or $20 billion worth, is purchased a year in the U.S., according to Jeffrey Miron, who teaches economics at Harvard University. This suggests around a half a billion dollars a year goes to buy the supplies used to grow pot.
But what's the future?
These sorts of suppliers are safe, mainstream stocks, and companies working on marijuana pills and medical sprays seem relatively safe as well. But there's clearly a big risk in putting your money into General Cannabis or other companies linked to selling the plant form of marijuana -- the shaky legal ground.
As popular as medical-pot dispensaries are in some circles, a lot of doctors and drug researchers haven't bought into the idea. "It does not make sense," says Ryan Vandrey, an assistant professor in the Behavioral Pharmacology Research Unit at Johns Hopkins University School of Medicine.
Doctors like Vandrey oppose smokable pot being dispensed as medicine because it can cause lung damage; it's difficult to prescribe dosage amounts since usage and potency vary; and there are no manufacturing controls to check for risky impurities.
Also, while the feds may choose not to enforce the law right now, the law has not changed. The marijuana plant -- as opposed to synthetic derivatives or plant extracts -- remains a "schedule 1" drug, the toughest classification from a law-enforcement perspective.
Pot is unlikely to get knocked down to the more lenient "schedule 2" category, which embraces potentially harmful drugs that have legitimate medical purposes -- including synthetic pot like Marinol. The reason: There have been no large, statistically valid medical studies performed in the U.S. on the use of the plant for medical purposes, says Vandrey.
And these studies are unlikely to ever happen for a simple reason, he says. Pharmaceutical companies can't effectively patent the use of the plant for medical use, unlike its spray or pill forms. So they are unlikely to spend the millions of dollars it would take to conduct such research.
Legalization would clean all this up, of course. But Miron, of Harvard, doubts the mood of the country is shifting that far. He cites the failure of a 2010 California referendum on legalization.
But others still hope. Allen St. Pierre of the National Organization for the Reform of Marijuana Laws (NORML) believes the ascent of more baby boomers into key leadership roles in government and the media will help pave the way for legalization. These people have more lenient attitudes towards pot, he says, which may actually translate into legalized pot for everyone -- not just those who want the drug for medicinal purposes. "Prohibition," he says, "is wearing a little thin."
At the time of publication, Michael Brush did not own any stocks mentioned in this column.
Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.
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It's time that MJ was legal; At least for medical purposes.
My wife has a fairly significant connective tissue disease. They give her some really mind numbing drugs to combat the pain. They dull the pain but she really doesn't like taking the drugs because they are so addictive and they just take her out.
She smoked a joint and no pain.... I got my wife back for a couple of hours. Had that joint for 5 years. Now I need to find a drug dealer and get more. Sure don't like that idea, but my wife comes first.
Recreational use will have a much tougher time, given the alcohol lobby.
Marijuana is far less dangerous than alcohol or tobacco. Around 50,000 people die each year from alcohol poisoning. Similarly, more than 400,000 deaths each year are attributed to tobacco smoking. By comparison, marijuana is nontoxic and cannot cause death by overdose. According to the prestigious European medical journal, The Lancet, "The smoking of cannabis, even long-term, is not harmful to health. ... It would be reasonable to judge cannabis as less of a threat ... than alcohol or tobacco."
Look guys, I have personally smoked marijuana since I was 14 and I have never wanted to try any other drug. Marijuana helps ease tension, and relieve stress. Those who believe it is a gateway drug are those who have not tried it. Politicians and Pharmacists may be intelligent, but they don't know a damn thing when it comes to POT. I believe it should be legalized and stop the prohibition. We Americans waste billions of dollars in court systems for marijuana posession, distribution, or consumption. If they legalize we will save billions in courts and we can use those billions for research (so politicians and pharmacists can sleep better at night).
Potency and dose doesn't matter, regardless you're going to end up high. So LEGALIZE IT!!!!!
I think it is easy for people to sit back and repeat everything we have been told all our lives on the evils of this plant, but the day someone you know and love benefits from it, your entire view changes. CANA and GWPRF will deffinately find their way into my portfolio, and hopefully I can weed out (pun intended) a couple other winners for this emerging industry.
The W.H.O. (World Health Org.) did a 25 year study on Cannabis use among Rastafarians. (Jamaicans who smoke pot daily in their religion) And they determined that their extended, and chronic use of marijuana, did not cause any significant negative health effects. No long term cellular damage, no brain damage, NOTHING.
Not even lung cancer rates went up among them, in fact it was lower than average!
These people have smoked pot for generations, and its not caused any health problems. MJ has been used by numerous cultures for millennia. Its harmless, otherwise we would see evidence of the damage? Wheres the damage, if its so bad? There is none, thats why.
To all those opposed to legalization of MJ. If you don't agree with it then don't use it!
But, You need to wake up. It doesnt' matter if it's legal or not. If someone wants to smoke it they ARE going to smoke it. Including kids and people you know and trust. You just don't know they are doing it. It's extremely easy to get. Millions and Millions of people have smoked it, do smoke it, or WILL smoke it. Some even eat it! Prohibition does NOT work. We have seen that already with booze and booze is also a drug! Alcohol, cigarettes and prescription drugs are legal, why can't MJ be? It doesn't make sense and if you are intelligent you'd realize that whether you choose to partake or not. (btw, I am not a smoker, just someone with a brain)
Melissa, your quote "I think adding the number of new stoners that legalizing marijuana would create would make the chances of being involved in an accident of that type way too big of a risk."
Melissa, please back up your assertion. "Create" stoners, lol. Are you kidding me? Everyone who wants to smoke pot ALREADY IS!! My God, people, you don't think that just because it's legal droves of people are going to smoke pot? That is total lunacy. My Mom who would have been 84 this year smoked pot a few times and hated it. Many people don't like it in the least. To say that we will "create stoners" is ridiculous, and has no basis in fact. I don't know one single person that would start smoking pot if it became legal, because everyone that enjoys it ALREADY IS!!
Melissa, logic and facts don't match your posts. Your just spouting the old line "gateway" junk. Do you blame murder on alcohol too? How about bank robberies?
The reason the california legalization bill was shot down was because it would have mandated a 7 year prison sentence for anyone with kids in the home who smoke, whether it was medicinal or not.
saying that the defeat of that bill shows a lack of support for legalization is misleading. a reasonable bill would garner much more support.
The laws against Marijuana are un- constitutional. I don't need the Government protecting me.
If I stick a screwdriver in my own eye, screwdrivers are not outlawed. Now if I stick a screwdriver in someones else eye, well then you have a crime. The Constitution states fairly clearly that we shall not make laws to protect a person from themselves. We are supposed to be free to do stupid things as long as we don't hurt someone else with our behavior.
This is a free country, isn't it?
All the fear over Marijuana is ridiculous and without merit.
Alcohol is our biggest problem, not Marijuana. Tobacco and Marijuanna should swap, tobacco illegal and Mariju****gal. We could literally wipe out Lung cancer.
Marijuana does not have the chemical soup in it that Big tobacco adds to it's product to keep it's customers addicted. Plus for the Christians out there, God created Marijuanna and God doesn't make mistakes, does he??
Big tobacco companies can grow pot instead. They would have a lot more customers than tobacco users and their product won't kill off the customers.
Get rid of the DEA and lets use that money for education instead. The DEA spends $1500. a second. That kind of money could go along way in educating children.
By the by, did you know that the DEA is now going after Dr's that they think are prescribing too much pain medication? Not pill mills but regular Family practitioners. 200 Drs are in prison in this country right now because of the DEA. Not for killing a patient, but for what they prescribed to patients. The DEA goes around to Pharmacies telling them what to look for and how to report suspicious prescriptions. Are you OK with a minimum wage worker interpreting the care that your DR has decided is best for you?
They are cops not DR's they don't have any business deciding what a Dr prescribes a patient, they are cops not Dr's. The DEA is a joke and a total waste of money.
AS long as they are politicians that were born before 1940 it will never be legal. So it will be another 20 years or so. Too bad, the whole country could use a nice mellow buzz about now to put things in perspective.
The purpose of legalizing it, is to legalize it. The medical issue is separate, and its people like you Melissa who have held up the medical use for patients who need it. Because you're so worried someone might be getting high
Full legalization is coming. The war on drugs is a bust.
But I do have to say there's been more families destroyed by booze than anything else. I know cause I was married to a alcoholic for 12 years till she died last year from chronic drinking last year. Theres alot worse out there thats legal in our society than pot.
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