Study Summary: U.S. Cannabis Laws Cost Pharmaceutical Firms Billions

Updated: Oct 8

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An August 2022 peer-reviewed research study entitled "U.S. Cannabis Laws Projected to Cost Generic and Brand Pharmaceutical Firms Billions" that was published in the journal PLoS ONE investigated the nuanced relationship between state-level cannabis legalization and pharmaceutical industry financial performance, including stock value and revenue volume.

The study hypothesized that cannabis legalization in U.S. states "is likely increasing the use of cannabis as an alternative to conventional pharmaceutical drugs." The researchers examined how cannabis legalization "between 1996 and 2019 affected stock market returns for listed generic and brand pharmaceutical companies," finding that pharmaceutical industry revenues "were 1.5-2 percent lower at 10 days after legalization."


The researchers referenced the stock market valuations of publicly traded pharmaceutical firms to gain insight into how cannabis legalization in states affects profitability for publicly listed pharmaceutical companies "over nearly 25 years of state cannabis legalization."

The researchers referenced the stock market valuations of publicly traded pharmaceutical firms and other marketplace metrics to gain insight into how cannabis legalization in states affects profitability for both publicly listed and private pharmaceutical companies "over nearly 25 years of state cannabis legalization."


The Study

The study revealed that observed revenue decreases for pharmaceutical firms occurred among generic and brand drugmakers and were triggered by both "medical and recreational legalization." "Despite federal classification as a Schedule I drug, by 2020 33 states had legalized medical access to cannabis for severe, debilitating conditions," reported the study's authors.


The research explained that the cannabis plant species is "largely unpatentable" and may, following state-level legalization, play a role in the marketplace similar to that of a new generic pharmaceutical drug. "However, unlike a conventional new generic drug, cannabis use is not restricted to a single or limited set of conditions," noted the authors.


Results

The study revealed that the average change in a pharmaceutical company's market value for each time a state legalized either medical or adult-use cannabis to be $63 million and that the cumulative impact on the pharmaceutical industry "across firms" was $9.8 billion.


"The average change in a pharmaceutical company's market value for each state medical or adult-use cannabis legalization event was $63 million, with a cumulative impact on the industry of $9.8 billion."

"This implies a change in annual sales across all drugmakers of $3 billion per [state-level legalization] event," reported the study's authors. They noted that the level of sales decrease "is about 129 percent greater" for adult-use legalization events compared to medical programs.


Brand Drugmakers Suffer Most

When comparing the effects of cannabis legalization on generic versus brand pharmaceutical drugs, "we find the effect on brand drugmakers is 224 percent larger than the effect on generic drugmaker sales."


The study's authors interpreted their results to indicate that cannabis legalization "is associated with a decrease in the stock market returns for pharmaceutical firms" and that a medical legalization event "generates a more muted effect on cumulative returns" compared to an adult-use law.


Interestingly, the investigation found that these estimated decreases in pharmaceutical stock values and sales revenues "consistently occur within 20 days prior to enactment" of legalization.

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Conclusions

The study summarized that the data it collected "suggest important implications for stakeholders, including drugmakers, patients and their providers, investors, regulators, and the academic community" and that these implications result "from both past and future legalization events."


As a whole, "pharmaceutical firms have devoted substantial lobbying efforts and dollars into fighting cannabis legalization."

The researchers predicted that both publicly traded and privately held pharmaceutical companies will respond to revenue decreases associated with the launch of state-level cannabis legalization laws with "investment and marketing." They noted that pharmaceutical giant Pfizer paid $6.7 billion "to acquire a biotech company that focuses on cannabinoid-type therapies."


Pharmaceuticals Lobby Against Cannabis

However, the study also noted that, as a whole, "pharmaceutical firms have devoted substantial lobbying efforts and dollars into fighting cannabis legalization." It described the estimated effect on not only pharmaceutical companies, but all stakeholders, including patients and investors.


"For investors, the negative impact of cannabis legalization on the market price indicates the adjustment of expectations about future cash flows of pharmaceutical firms" that is necessary, reported the research. It recommended that "participants in capital markets should monitor the evolving legal cannabis landscape as they diversify their portfolios."


The study concluded that the marketplace has recognized cannabis "as an alternative to conventional medications" and this underscores the need for additional research.

The study concluded that the marketplace has recognized cannabis "as an alternative to conventional medications" and that this fact underscores the need for additional research into the medical potential of the controversial herb, "including phytochemicals beyond tetrahydrocannabinol (THC) and cannabidiol (CBD)."


View the original study.


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