California's Gigantic Medical-Marijuana Industry Could Be Devastated by an Unlikely Source

By Sean Williams Markets Fool.com


Image source: Getty Images.

Continue Reading Below

If you support the legalization of marijuana, 2016 didn't give you much to complain about. Last year, residents in four states approved recreational-marijuana ballot initiatives, doubling the total from the end of 2015, while five new states put medical-cannabis laws on their books. By year's end, 28 states and Washington, D.C., had legalized medical pot.

And there's more where that came from. We saw two battleground states -- Pennsylvania and Ohio -- introduce and pass medical-marijuana legislation without sending it to a public vote. We also saw a continued softening in the public's opinion toward marijuana, which remains an illegal drug at the federal level. Gallup's 2016 poll found that 60% of Americans now want to see the substance legalized nationwide, up from just 25% when California passed the first compassionate-use law in 1996. Legal weed sales have also soared. Cannabis research firm ArcView sees sales reaching nearly $22 billion by the end of the decade, while investment firm Cowen & Co. projects a better-than-23% annualized growth rate leading to $50 billion in legal sales by 2026.

California is a medical-marijuana juggernaut

Colorado, one of the first two states to legalize recreational marijuana in 2012, wound up generating $996.2 million in legal sales during 2015, leading to $135 million in tax and licensing revenue. Yet that's peanuts compared with legal pot sales in California, the eighth-largest economy in the world by GDP.

Image source: Getty Images.

Continue Reading Below

Since passing medical-cannabis legislation in 1996, California has amassed more than 720,000 current patients, at least according to a September 2016 estimate from the Marijuana Policy Project. That's about 1.8% of California's total population as of 2015, and it represents half of all legal medical-marijuana patients in the entire United States.

According to Troy Dayton, the CEO of ArcView, California generated $2.7 billion in medical-cannabis sales in 2015, which amounts to 62% of all medical-cannabis sales in the U.S. in 2015, as well as more than half of all cannabis sales, medical and recreational combined, in 2015. California's medical-marijuana industry is simply enormous.

But it may not stay that way for long.

The cannibalization of medical cannabis

In November, California's residents went to the polls and overwhelmingly voted in favor of Prop 64, which will legalize recreational, adult-use weed for the state's more than 39 million residents. In 2018 alone, California's legal pot sales are expected to climb to $6.6 billion, based on estimates by New Frontier and ArcView.

Image source: Cannabis Culture, Flickr.

However, legalizing recreational marijuana for adults aged 21 and up creates a potentially big problem for the United States' largest medical-marijuana industry: Once recreational-marijuana sales are allowed (they'll be rolled out over the next year), the incentive to head to the doctor to get a prescription for medical pot will no longer be there. Not to mention that getting a physician referral takes time and costs money. From physicians to medical dispensaries, there's the possibility that the medical-cannabis industry could be ravaged by the recreational-pot industry.

Medical dispensaries will still be needed for patients younger than age 21, so it's not as if they'd entirely disappear. But it's probable that the medical-marijuana industry in California today will look very different a year or two from now.

The Sacramento Bee points out that some medical-pot clinics are planning to rebrand to broader holistic services in order to keep their clientele. Those services may include acupuncture, chiropractic care, and hypnosis, for example. Medical-marijuana shops are also counting on new consumers who want the guidance of a physician before purchasing pot, even if they're just recreational consumers and not medical-marijuana patients. Marijuana consultations from an experienced pot clinic physician could still translate into profits.

But, admittedly, the future of medical marijuana in California is very uncertain.

Marijuana's clouded future

Beyond just California, the future of marijuana in the U.S. remains somewhat clouded, too.

For instance, the appointment of Sen. Jeff Sessions (R-Ala.) to be the next attorney general of the United States is a potentially damaging blow to the marijuana industry. Sessions is an ardent opponent of the legalization movement, and even though President-elect Trump has thrown his full support behind medical marijuana, and has suggested that states should retain their right to regulate their pot industry without federal interference, Sessions could roll back some of the leniency instilled during the Obama presidency. While this isn't to say 20 years of progress could be wiped out, it's unlikely that the sledding will get easier with Sessions as attorney general.


Image source: Getty Images.

We also can't forget that the U.S. Drug Enforcement Agency declined to reschedule marijuana when given the opportunity this past August. The DEA noted a lack of safety and clinical data, as well as a lack of understanding the chemical properties of marijuana, in its decision to leave the drug classified as Schedule 1. This means pot companies are still primarily forced to deal in cash, as most banks want nothing to do with them, and they continue to face higher corporate income tax rates since they are unable to take normal business deductions. These persistent disadvantages are what make investing in this space so incredibly dangerous.

Even if the incoming administration or the DEA does decide to reschedule marijuana, it doesn't mean things would necessarily get easier. Schedule 2 through Schedule 5 drugs fall under the tight regulation of the U.S. Food and Drug Administration. The FDA would likely implement strict marketing and packaging regulations, oversee all medical grow operations, and require that approved clinical trials be run to prove that medical cannabis treats certain ailments This all translates into big expenses for the medical-pot industry.

While marijuana's state-level expansion has been something to marvel, this remains an industry best watched from the sidelines.

10 stocks we like better thanWal-Mart
When investing geniuses David and TomGardner have a stock tip, it can pay to listen. After all, the newsletter theyhave run for over a decade, the Motley Fool Stock Advisor, has tripled the market.*

David and Tomjust revealed what they believe are theten best stocksfor investors to buy right now... and Wal-Mart wasn't one of them! That's right -- theythink these 10 stocks are even better buys.

Click hereto learn about these picks!

*StockAdvisor returns as of December 12, 2016
The author(s) may have a position in any stocks mentioned.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.