Responsible Investing in the Emerging Cannabis Industry
Size Matters : Why Cannabis, Hemp and CBD will be More Impactful than any Analytical Prediction
Every single day sets a new horizon for the cannabis industry, but at a time when regulatory constraint is loosening and the U.S. seems poised to finally remove federal prohibition, the predictions for how big the market can be remain tethered to a linear mindset that would not seem to lead to accurate cannabis industry predictions.  Imagine for a second that the states that have recently considered changes to their regulatory frameworks - on the medical side: South Carolina, Texas, Tennessee, North Carolina; and on the adult-use side: New Mexico, New Jersey, New York, Pennsylvania and Connecticut - all achieve their goals in the next twelve months. While this would add hundreds of millions of dollars, if not billions, of revenue to the cannabis industry, most analysis uses legal TAM and a linear CAGR model for prediction.  This is understandable but I would argue that this model may not be accurate as we move into 2019 and beyond, particularly as one must also consider states who have recently changed their legal structures - Oklahoma, Michigan, Massachusetts and even California - making it difficult to predict addressable market sizes.

There are many ways to analyze the future of cannabis/hemp and how big they can be as markets and catalysts for related economic activity.  We can start by looking at the innumerable industrial applications of the hemp plant. I’m still blown away by videos of the strength of hempcrete which was first used in France in the renovation of the Maison de la Turque in Nogent-sur-Seine in 1986.  More than thirty years ago and I hadn’t heard of it until nine months ago which is a humbling reminder about how much interesting information exists in the world and the cannabis space in particular. We can also take a swing at predicting hemp-based CBD sales as nutraceutical or medical formulation over the next ten years.  We can reference the amount of total predicted cannabis sales for adult-use in 2025.  We can extrapolate ancillary spending from current levels and get a sense of what that will look like in 2025. We can also glance at the current state of medical markets and project what those look like in 2025 (or can we? More on this point in a bit).  We can then take a reasonable guess at what type of ancillary activity would have to occur to support the plants’ cultivation, manufacturing, productization and shipping (and hempcrete!). There are limitless ways to get to a cannabis prediction model but tradition, linear methodology does not seem to be ideal if accuracy is the goal. Just today, Seaport Securities released a 200-page global coverage report initiating coverage on many names - the key one for us is the $10 price target put on our portfolio company KushCo - but which also projects $600B+ cannabis market by 2040 and also thinks that Kush's analyst projections on revenues are "too conservative." We also think their industry projections are too conservative since product sales and ancillary spending will be much larger than $600B in 21 years.
Credits: Getty Images/iStockPhoto
I remember a conversation I had about six months ago with Todd Harrison, CEO of CB1 Capital, a fund manager in our space, about the size of the cannabis market (including hemp) by 2023-25. We began discussing the assumptions one would need to make to be remotely accurate in such a prediction. Since we agreed to revisit this later in more detail with more of a scientific method rather than a back-of-the-envelope breeze-shooting, we started thinking big. Within ten minutes, the word "trillion" was introduced. As this was a private conversation, this obviously was not Trumpian “yuge” puffery; we were just combining some tailwinds with a dash of optimism about regulatory movement and eventual markets yet to be open. I wasn’t sure I had heard the “T” word and since I spend most of my time with sober-minded realists (many of them Merida employees), you can understand why. It’s diminishing, but the prevalent puffery of the space is tough to swallow and so we go out of our way to dial it back a bit.
 
I also spend plenty of time reading reports from New Frontier Data, MJ Business Magazine, Cowen, Canaccord, Seaport (as of today) and other financial analysts and data/media sources that use varying standards of methodology to hit a target moving so wildly it makes the Golden Snitch look like a manatee. (SEE: Harry Potter). Yet something has gnawed at me since that conversation with Todd. One trillion is a big number for any industry. Todd is no wild-eyed utopian (though his CB1 colleague Loren is called the King of Cannabinoids). Yet, even as he worked his way towards justifying a $2 trillion TAM (total addressable market), a stupendously huge number, it still seemed rational. I walked away from that conversation and started looking at what estimates I could get my hands on (and anyone who has read a commentary from us is aware of the opaqueness of the still-developing state of cannabis information flow) and began to explore the natural extensions of the industry and other applications of cannabis. 

We often tell investors who are new to the cannabis space that it should be considered several industries with analogs that are easy to understand: Cultivation (indoor agriculture), adult-use products (recreational use/consumer packaged goods), medical (OTC drug market), retail (boutiques/drugstores), formulation or extractions (pharma/biotech), scientific discovery (life sciences/biotechnology) and ancillary (agtech/industrial) to name a few. At Merida we sometimes go off the deep end on the data and information when we see an angle of the space that hasn’t been analyzed directly and it just feels like there has been a comprehensive, "this is how big it could be" summary report. And there still won't be after this humble attempt to inform.

As our research cascaded and the facts piled up, it occurred to me that people who were assessing the space intelligently might not be able to articulate all of the potential multidimensional aspects of cannabis, which would naturally lead to an underestimation of the width (and in some cases, the depth) of how cannabis and hemp will affect a variety of industries and how that would translate to an acceleration of TAM for the industry writ large.

What shocked me was how traditional industries lack the analytical mechanics to even consider disruptive changes, including any sense of how they could be impacted by cannabis. Think of the magazine industry in 1997 projecting a 10-year CAGR of 3%. Hello World Wide Web, goodbye long term growth of traditional magazines. In 2005, did any research analyst predict that Amazon would kill Toys R Us but elevate UPS within the next 10 years? I read (ok, in some cases I skimmed) dozens of different market research reports on subjects ranging from alcohol to digestive tract drugs to sleep aids to eczema/psoriasis topicals. Throw in pet prescriptions as well. In a few isolated cases, they mentioned cannabis/hemp or CBD. Most simply used methodologies don’t consider potential disruptors, which I understand as they focus on market size rather than what fulfills needs within that market. However, it seems a bit crazy to create research that drives huge investment decisions and fails to consider an obvious disruptor, especially when you are projecting a positive CAGR for the next seven years based on the release of new drugs for migraines (as one example), where cannabis is almost certain to dent the market of existing and new medicines. 
Returning to what I now call the “multi-trillion dollar conversation,” it started to sound less crazy the more I dug. I don’t intend to preach that cannabis is going to change the world tomorrow. However, if you think of the impact cannabis could have on consumer markets for certain goods, and its impact on OTC drugs and the creation of new medicines, and the massive amount of changes that will be ushered in by things like my new favorite industrial material, hempcrete , then maybe we are talking about some pretty big world changes. Flintstone to Jetson changes? Can’t say, but it’s big and seems bigger than the estimates I was able to get my hands on.
 
I’m not going to even try and quantify it here, but I am starting to think that the methodology for analyzing macro markets can’t do justice to the impact of cannabis at this stage while still seeming grounded or rational. Given the nature of cannabis, that’s a legitimate occupational hazard most professionals want to avoid. As an example, South Korea announced in September that it would potentially prosecute its citizens who partake in cannabis during any trips to Canada after the adult-use legalization there in October. South Korea then voted to legalize medicinal cannabis in November and will allow imports of low-THC, cannabis-based medicines over the next two months. (Shameless plug alert: If this is news to you, follow us on Twitter since we highlighted this strange 180 twist several times - @meridacap.) How do you analyze that dichotomy and its effect on usage in a country nearly double the size of Canada with any sense of certainty?
    
I love the folks at New Frontier Data but if they made a speech about the trillion-dollar impact of cannabis in just a few short years, only the truest of true believers would not be eye-rolling or waiting for CEO Giadha DeCarcer or Head of Industry Analytics John Kagia to come off the stage to ask for a hit of what they were smoking. That’s what makes their research so incredibly compelling and a must read: The difficulty of cross-referencing and finding raw data and then turning it into actionable intelligence is as much art as science.  Reread the title of this commentary and you will see that we are going to leave the projection of dollar amounts to the “experts” and instead try and highlight the places where the impact of cannabis will be felt.  The conclusion we reached is that even the most intelligent and professional analysts are likely underestimating the full impact of cannabis over time.  If you find yourself short on time, you can stop reading here since I just gave you the conclusion (and underlined it) just 10 paragraphs in.

In case there is a misperception that this is some wild-eyed hagiography of the upside economics of cannabis, rest assured that we aren’t quite ready to go all Uma Thurman (as Mia Wallace) in the bathroom of Jack Rabbit Slim in support of the multitrillion dollar thesis, and none of this means that you should run out and buy stocks today. This is simply a conversation starter for how the impact of cannabis can be contextualized today, years before that impact is felt in certain places. In many cases, I’m not sure how some of these insights can be monetized, though I have a sneaking suspicion that we will figure it out in due time. It’s probably easier to predict which industries will be affected negatively by cannabis. For example: if you are long on the stock of a drug company that is relying on a new Crohn’s disease or chronic pain drug in its pipeline, let this be a gentle reminder to start monitoring the canary daily, because it could easily get ugly quickly when cannabis adoption and the shift to cannabis-based medicines goes parabolic. And Zolpidem tartrate…trust us that whatever growth is projected for it, cannabis is going to put that to a screeching halt.

Let’s also be clear on one thing as we span the evolution of cannabis to a legal substance and its potential impact. Adult-use/medical-use/recreational - they are all artificial divisions that regulators have created to describe their programs. New Frontier Data’s groundbreaking consumer study dismantles this concept. I was also lucky enough to also be part of a panel where a wide range of smart folks were talking about this very thing, so we take no credit in thinking we are the only ones discussing it. We have an ongoing conversation internally at Merida about aspects of the cannabis landscape that are distorted by these artificial designations and how it helps us find value, like our most recent investment in CB2 Insights , a medical data company (going public in Canada on the CSE shortly) that just released a fascinating report about what people are getting medical marijuana cards for.

There is a perception that chronic pain is the primary driver of medical card issuance. CB2 analyzed 463 patients from four medical states (Maine, Delaware, Massachusetts, and Connecticut) for one month. Nearly 35 percent indicated mood disorders like ADHD, anxiety, or PTSD. Coming in at a close second, 33 percent of those surveyed said they used cannabis for chronic pain conditions, such as arthritis. What is interesting is that PTSD is really the only mood disorder on most state condition lists, likely because of the alleged connection between mental illness and cannabis usage, something anti-cannabis advocates have constantly pushed in their "Reefer Madness-like" pursuit of perpetual illegality. See Sessions, Jeff, or Berenson, Alex for more hysteria and inanity on this count. The key takeaway is that people use chronic pain to get their cards but when they can anonymously report their real reason, it's often about stress or other stress-related conditions. And it's these types of reports that will help medical professionals and industry professionals alike begin to do a better job at developing education, products and data because the medical side won't really go very far until the facts and data are there.

The medical side is just getting started because right now, there is just cannabis the plant and the only differentiators are why people use it and what regulators call it. The plant itself in raw form doesn’t change if you use it for spasms, pain, sleep, entertainment or relaxation. Products differ, delivery forms differ, and obviously extracts differ from the raw flower, but cannabis is simply a plant with incredible properties. That isn’t to diminish the specific medical approach of many companies (our portfolio companies included) or the formulations being created for specific delivery, it’s just reality for the time being.

You have to read CB2's research or New Frontier’s report to get a deeper sense of how this will change as people go from using cannabis for “relaxation,” which could mean they have a medical card to treat anxiety, or have been recommended cannabis to treat PTSD. Over time, doctors will prescribe (as opposed to recommend) cannabis in some form and treatment method like other “traditional pharmaceuticals” and everyone else will use it for whatever reason they want and that will be the medical/recreational dividing line. It will still be blurry because of OTC applications but let’s be honest; cannabis has crossover potential that will always beget blurry lines only made clear in hindsight.  
Merida's Framework for the Shifting Mindset Around Cannabis
Recreational/Adult-Use

I think it’s safe to say that if you are reading this you have a sense of the size of the legal cannabis market in the United States and globally, and believe the transition from illegal to legal markets will be a driving force for future value. This is the most intriguing element of the potential of cannabis as an industry. I’ve seen estimates of the global black market as high as $200B to $250B recently. No substance consumed illegally at any time in history comes close to that. Ever. From the perspective of either economic size or percent of population using it, the numbers dwarf any illegal substance in the history of mankind by a mile. 

A wide historical misconception is that alcohol was illegal globally in the 1920s or early 1930s. That is 100% false. Outside of small pockets of Prohibition in certain countries, alcohol was largely legal except in the United States. It certainly was thriving in Mexico, the Caribbean and Canada where Americans went to drink to their hearts’ content. More Americans drank Cubra Libres in the 1920s than Cubans. The end of Prohibition was a massive event because it broke down a barrier that mostly existed in the U.S and nowhere else. That is probably the reason most people can tell you when Prohibition ended (December 1933) but could not tell you when it started (January 1920). Cannabis, on the other hand, is medically legal in many places but is still largely illegal as a consumer product outside of Canada, Uruguay and that thriving island metropolis, the Marianas Islands. With U.S., Europe, Mexico and others looking to follow suit, think of how big of a market it is that simply needs to convert to a legal one. It’s happening faster than most anticipated, including those of us at Merida. But predicting what all of the legalizing of a $250B black market means over a period of four to six years is like asking Bobby Fischer to beat AlphaZero. 

But enough from the bird’s-eye view. What does this really mean on the ground, and why do we think most rational estimates are underestimating the consumer impact of cannabis?
The framework is simple: Legalization leads to Destigmatization which leads to an evolving mindshare we call Colonization (the good kind - like the moon), which then leads to a change in macro behavior and societal mores and, ultimately, Normalization . New Frontier’s study has some incredibly deep insights about consumers and potential consumers, with data that seems to support the concept that illegality profoundly affects potential consumers and existing consumers alike. As that changes, the depth of the iceberg of cannabis opportunity will finally be measurable. 

It’s interesting to note that ~119MM Americans have tried cannabis and 20% of those are pretty consistent users. So think about the fact that ~50% of American adults have tried a substance that is entirely illegal, socially stigmatized and, until recently (in the past 20 years or so) was mostly consumed in a manner that made it obvious that you were using it. That’s basically the shift we call “Lowhangingfruitifacation,” which takes place after Colonization and sometime before Normalization.

We invented the word “Lowhangingfruitifacation” to describe our thoughts on the current cannabis landscape. Essentially, it means that the current global legal and illegal users are the low-hanging fruit of the consumer/medical landscape. Put another way, the vast majority of historical and current cannabis users are pretty much the easy pickings. Twenty years ago, a cannabis consumer had to tolerate a fair amount of risk, the effort expended to acquire it, shoddy or inconsistent quality, the presence of pesticide or other contaminants, and potential stigma to consume. Even the products available up until recently largely put pressure on users. How many times would someone come walking into a room and everyone would make a comment about someone smelling like weed? That’s because 95% of usage was flower so you basically had to work really hard to mask the smell after consuming. And it failed every time. Flash back to your college years and think about the person who always smelled like cannabis.
  
Now? You might never consider smoking before your child’s 5th grade school play, especially if you are in terrible chronic pain. But today you have choices. You may alternatively pop a micro-dosed 2.5mg THC tablet or a CBD tincture. No smell, no residue, all relief and no problem. That changes from finding an illegal source, accepting something of unknown quality and smoking it, to having access to discreet, lab-tested, quality-controlled products and more precise dosing; that is the change from low-hanging fruit to a broader consumer base. That’s a movement from lowhangingfruitifacation to normalization, and over the next few years, it will be clear that the base of consumers (medical, adult-use or otherwise) is just starting to broaden from the “movement” to anyone seeking relaxation, pain relief, sleep assistance and yes, those who just want to laugh and watch a movie. 
  
A recent observation helped drive the conversations at Merida that led to the creation of this framework, and broadly show how quickly things are moving and how pervasive the changes are.
Early one Saturday night recently I was sitting with my wife and NBC happened to be on for some type of true-life experience show (or so it seemed). My wife and I were chatting and not paying attention when some guy named Johnny Bananas was getting ready to prepare food for six people on some type of mountain and then he dropped a bomb. He said, “I will be your cannabis sommelier for the evening as well.”  It’s 7 pm on a Saturday night and well NBC, now you have our attention. 

They ate, and then they smoked, right there on TV. This wasn’t a news reel which allows more latitude; this was a scripted segment. Yet, there they were smoking out of glass pipes. On TV. At 7 pm. The fact that both NBC allowed it, and that the people, who seemed like young professionals, didn’t care to be seen smoking was encouraging but slightly shocking. I’m not even sure that it’s legal (like banking or ancillary components of cannabis, it’s not clear that you can try and make money off filming illegal activity unless it's news). The fact that it was at a time when kids could easily be watching also seemed to indicate that NBC just does not care about that aspect. Knowing the rules and risk-aversion of network TV, this is paradigm shifting on several levels. I found out later (actually yesterday as I researched for this commentary) that at least a few of the folks were cannabis-industry folks so you can discount at least a little of what I just said but focus more on what it means.  

It means NBC thinks that people want to see this. NBC does not think people will see this and go “stoners eating, yay” (insert sarcasm) and shut it off. NBC’s executives are less sensitive to what risks exist by showing this (i.e. parents calling and complaining when kids ask what the guy is smoking, or the huge bags of green stuff he keeps sniffing). NBC’s FCC censors approved this. If you’ve seen Howard Stern’s Private Parts you know how hilarious those censor discussions can be. And yes, six professionals and a good ole’ Johnny Bananas had no compunction about being front and center on using cannabis. Finally, it wasn’t corny. It was good TV. We won’t try and quantify what this means to the addressable market size of the industry but that is some whiplash-inducing activity from where this issue was 12 months ago. The other thing that I noticed was that this seemed to be coverage of cannabis that was authentic and not of the “Gorillas in the Mist” quantity, as in “look at how incredible and unique” this is. It was very matter of fact. That exemplifies normalization.

We have a huge existing market coming out of the dark, changing behavior (on both individual and institutional levels), shifting beliefs and on the ground experiences that are starting to highlight this confluence. It all starts with legalization - which is why our framework does.
Merida's Four-Part Mindset Evolution
1 - Legalization      

This is very straightforward. It’s the process of regulatory bodies changing laws so that cannabis is no longer illegal. The curve of acceleration of legalization has greatly steepened globally with more than 33 countries moving towards some type of countrywide decriminalization or medical or adult-use legalization. Ironically, because this has started in the United States at the state level, it is much more difficult to predict what the federal/state system will look like.
 
Legalization is the first step in opening minds to potential use for a wide variety of people. Obviously, those who we described as “low hanging fruit” will continue their use regardless of whether it is illegal, right up to the point where they suffer some type of setback that could enhance the risk of their usage. Since that no longer is a true risk, a strong majority of consumers identified in New Frontier’s study who describe themselves as consistent users indicated that they would likely increase their use if legal. It’s not clear how they could increase use if they are already using daily, but it is important to note that legalization had an effect even on the minds of those who have already reconciled illegality as a risk.
2 - Destigmatization      

As legality broadens, the most significant impact will be on the stigma around cannabis usage. People may not decide to consume, but it becomes much harder to judge others for using a legal substance. Drug testing for employers will have to change which means many employees who avoid cannabis for professional reasons are going to be able to consume. The most profound effect will be on lawmakers and law enforcement officials, who will find themselves treating cannabis like other legal substances. A few years of speaking about cannabis and dealing with laws or regulations around cannabis tends to soften the mindset of even the most resistant people. One area of that softening will come down to the fact that they can no longer point to consequences of it being illegal as a reason why they must take action against cannabis users, or distance themselves from consumers. Those days are over. The more conversations that take place, the more it will simply become something discussed like alcohol. 
    
In many ways, people often reserve judgment of drinkers unless that person consumes in a manner that is destructive or excessive. If cannabis moves along the same trajectory, it is likely that within two to three years, people will find themselves discussing why they don’t use cannabis, or at minimum, why they haven’t tried it, rather than the negative tone non-users have often taken towards users. Saying it’s illegal was an easy reason for many to brush off cannabis as a potential substance to use. Add in some medical efficacy and many of these same “nevers” will become “possibles” or consumers themselves.   

I was at a Bar Mitzvah in Denver in the fall and every East Coaster there was hitting dispensaries. It wasn’t a second thought; it was top of mind. People I have known for years who had never really shown much interest in cannabis were even interested in trying something because of the prevalent “when in Rome” attitude. This simply does not happen in an illegal market where obtaining something with some level of transparency is impossible. But remove the illegal tag and curiosity kicks in. 58% of the 1,700 “potential consumers” in New Frontier’s study said they would try cannabis if it were legal in their state. Two thirds said they would try it if a doctor recommended it for a medical condition. Those are large preferences for people who have never tried a substance and point to societal changes once legality’s march is complete. 

Even consistent cannabis users (27MM people in the U.S. and counting) who live in state-legal jurisdictions are affected by federal illegality. 61% of those 3,000+ consumers surveyed said that legalization made them more interested in visiting other states where they could consume.
  
This Denver experience definitely opened my eyes a bit wider to the fact that non-consumers and “nevers” are already watching the quickening of legality and adjusting their thinking.
3 - Colonization      

Since people often refer to their state of mind, it is worth thinking of the mind as a state. That state is about to be colonized by the concept that cannabis is legal, available in many places, and if used responsibly, mostly harmless. That is a pretty interesting holy trinity of temptation. People drink because it relaxes them, lubricates their sociality or otherwise is something enjoyable. Pencil in cannabis as something that will become an alternative to alcohol on the recreational side because it doesn’t have the same short-term downside effect of a hangover, and with cannabis it’s far cheaper to get a buzz. As that becomes part of the landscape, it will inhabit a place in the (current) non-consumer’s mind. When someone indicates they want to learn more about cannabis or CBD, that is the Jamestown 1607 moment. That colony of thought becomes a country in many cases and will turn a fair amount of non-consumers into consumers. Remember when people actually had the nerve to predict that people would communicate electronically like writing letters to each other? It took a little while to take hold but when something doesn’t have a natural constraint (illegality or severe harm) and has a wide base of consumers extolling its virtue, it's going to be sticky on consumer thoughts. E-mail colonized the heck out of an entire generation’s minds. Cannabis has such a huge base of existing consumers that it is hard to imagine it won’t do the same for potential consumers. 

On the medical side, the colonization is going to be far more intense as research starts to validate the anecdotal benefits of cannabis, CBD and all of the various cannabinoids and terpenes. Once it becomes an arrow in the doctor’s quiver, it will be in every conversation around sleep disorders, chronic pain, chemotherapy-related pain, or appetite loss and numerous other ailments. That is the definition of inception but rather than use a mind-bending Leonardo DiCaprio movie to make our point, we will simply say that cannabis, hemp and CBD are here to stay as something people discuss in relevant moments. There is no way it will get dislodged as a colony of thought in people’s minds, particularly as it helps them through a wide swath of discomforts, ailments and in some cases, terminal illnesses or hospice.
4 - Normalization      

When cannabis moves through the governmental stage and the societal judgmental stage to the fundamentally-free-to-use stage, it will be considered normal to use it, or at least consider using it. Remove the threat of any type of legal repercussion and people’s minds change quickly. It is almost impossible to imagine what happens when stigma, societal risk, and any legal risk disappear from activity. Twenty years ago, people looked at online dating as a bit strange. Now there are twenty commercials a day for specific verticals like religious folks, Jdate.com, Farmers Only, alt lifestyles and so on. Is there anyone reading this that thinks of anything remotely strange about someone going on Match.com to meet someone? That is the power of normalization and, for a market already cranking at over $100B (and possibly $250B) globally, the tidal wave started deep in the ocean and now there are thousands of surfers who are on it. When it hits, everyone is going to get wet and some people who would have never gone in the water are going to like it…a lot. Sayonara Coors Light, auf wiedersehn Beck’s, hello HiFi Hops and the Kaiser’s Kush (a made up name because it’s alliterative and German).

Which leads us to the real story - the medicalization of cannabis and what will be the second tidal wave coming from the cannabis Krakatoa that is just starting to erupt.
Medical Cannabis Becomes Cannabis-Based Medicine     

As most industry participants note, there isn’t medical cannabis or adult-use cannabis. For purposes of this section, let’s include CBD and hemp in all discussions of cannabis. Cannabis is just a plant that people consume. That is about to change. Until something is legal, it is very difficult to get the buy in of doctors, researchers and financing sources who will pay for long term research. Doctors spend eight years of schooling/residency just to be able to properly identify ailments and potential treatments and they need information and validated data to feel comfortable guiding their patients to a specific treatment. That data/research is about to explode like a Daisy Cutter all over the medical field as critical mass of research builds over the next two years.   

Anyone who thinks the ~$400MM of “medical” sales in Colorado last year, or $125MM in New York for 2018 is the highest evolution of medical cannabis is very, very misinformed. Ever heard of Anandamide? You will be hearing about it more as we move from the primordial sludge to a walking, talking pharmacological evolution. If the mature version of cannabis-based medicines is a baseball game in mid-April, then we are at the winter meetings where GMs make trades, and the schedule has just been released. Teams are still looking at openings and rosters haven’t been set yet and no one really knows what their team will look like five months from now when the game starts. That’s where we are in timeline of cannabis-based medicines.

A few historical examples is necessary to illustrate how nascent the field of cannabis-based medicines truly is.   

THC was “discovered” by Dr. Raphael Mechoulam in 1964, who isolated it in a lab at Hebrew University. In 1992, Lumir Hanus, who was working with Dr. Mechoulam, isolated Anandamide which is what accelerated the discovery of the soon-to-be named Endocannabinoid system. According to William Devane and Hanus, the discovery of Anandamide confirmed that the human brain produces cannabinoids of its own, which bind with cannabinoid receptors throughout the brain and body. These cannabinoid receptors don’t do much…except help control motor coordination, central nervous system regulation, memory processing, appetite control, pain modulation, and act as neuroprotectant. There’s more, but why quibble? 
That was a mere 27 years ago, which in the context of creating safe, effective medicine, is a blink of an eye. These discoveries kicked off a slew of related research that validated the existence of this cannabinoid receptor system, which was eventually named the endocannabinoid system. Soon after, researchers and doctors began analyzing cannabis differently and were looking to isolate other cannabinoids, terpenes, polyphenols. Most of this was occurring in Israel (population 1/5th of California) even though most consumption was occurring in North America.

In the late 1990s, “medical” cannabis became legal in California and other states that helped advance research but really did little to engage the broad community of doctors or researchers. Here we are 20+ years later and three things are clear: Researchers now have a veritable treasure trove of research to begin segmenting the molecular compounds of cannabis; “medical cannabis” will yield to cannabis-based medicines; and patients are going to start seeing specific medicines to treat their ailments rather than buying the same product a 21 year-old is buying to laugh at while watching Caddyshack. And that is going to usher in an era of medical discovery that could be worth $250B per year in just a few short years.

Sounds like a typical cannabis snow job right? The headline writes itself. “Cannabis PE Fund Manager Projects Huge Numbers That Validate His Thesis.” Cowen, New Frontier Data, Canaccord, BDS Analytics, MJ Biz, recent Merida investment CB2 Insights, or Headset (to name a few)-can’t predict these huge numbers because the validated methodology required to make a prediction is a moving target. So they all responsibly stick with proven methodology…which we think underestimates the TAM by a great deal. You decide for yourself if the corpus of mainstream analysis is underprojecting cannabis’ medical impact by significant magnitude.
It is helpful to start with a few specific examples of the process of discovery for substances prevalent in the over-the-counter market to give us a sense of when medical cannabis will yield to cannabis-based medicines. Bear in mind that the following examples took place with fully legal substances in mature research areas that came with a deep understanding of the internal systems with which these substances interact, unlike the study of the endocannabinoid system which is really just starting to accelerate with the discovery of new receptors and signaling compounds over the past few years.

Take isobutylphenyl propanoic acid. It is a carboxylic acid, a substance that British researchers identified as the analgesic agent in aspirin sometime in the mid-1950s. Looking for a competitor to aspirin or acetaminophen, British drug manufacturer Boots Laboratories tested more than 600 compounds derived from carboxylic acids before discovering one twice as strong as aspirin, which had been the main treatment for aches and pains since 1899. The most active carboxylic acid, propionic acid, had been discovered in 1844, smelled like body odor and failed to help rheumatoid arthritis sufferers. Instead, the most effective one they tested, isobutylphenyl propanoic acid, was discovered by Dr. Stewart Adams who patented it in 1961 and began selling it in prescription form in England in 1964.
 
Fast forward ten years to 1974, when the Upjohn company used its non-exclusive license to offer a prescription arthritis drug made from isobutylphenyl propanoic acid. Several years later, Boots offered its own prescription drug, Rufen. If the story ended there, you may not have heard much about Rufen. However, the U.S. Food & Drug Administration approved OTC sales of isobutylphenyl propanoic acid at lower doses in the mid-1980s. It is at that time that the Whitehall Laboratories division of American Home Products came out with a version that would take the world by storm. Called Advil, it put Ibuprofen on the map as a substance that worked like aspirin without the effect that aspirin can have on the stomach. Advil did $472MM of sales in the United States in 2018. Not bad for a smelly acid, whose close cousin was discovered in 1844 but not commercialized until 1964.

Look at the route Advil took to becoming an OTC medicine in the context of cannabis-based medicines. Advil came from one of the 600 compounds researched and tested for efficacy over a period of years. It took nearly 25 years from discovery of the substance to OTC commercialization. Aleve (Naproxen) has a similar timeline. Those 25 years making the way to broad commercialization are five times the length of broad cannabis medical legalization that began in earnest in the U.S. in 2012, and very similar to the length of time we have known about the endocannabinoid system. The 25+ years of awareness of the endocannabinoid system is in stark contrast to the knowledge of cyclooxygenase isoenzymes that Advil targets, which had been studied since in the late 1800s by Felix Hoffman of the Bayer Company which led to aspirin’s creation. Suffice it to say that research on cannabis (or derivatives) that simply identifies which cannabis or hemp compounds, from CBG to THC-V, interact with which systems and in what way is just beginning and can now go into hyperdrive with Canadian legality, more investment in Israel, the legalization of hemp and the coming cannabis legalization in some form in the U.S.
  
Let’s now look at a substance discovered by Edward Calvin Kendall and Harold Mason in 1929, when they identified a substance as one of several end-products of a process called steroidogenesis. The process started with the synthesis of cholesterol, which then proceeded through a series of modifications in the adrenal gland, to become any one of many steroid hormones. The particular steroid that researchers found most compelling was cortisone. By 1949, Merck was producing cortisone commercially and over the next 15 years, researchers discovered how to replicate the substance which would become the basis for a variety of autoimmune drugs as well as skin treatments. When an athlete gets a cortisone shot in a swollen joint, the underlying discoveries of Mssrs. Kendall and Mason enabled that.
 
When you rub hydrocortisone on your child for a skin ailment, bear in mind that it took nearly 35 years after the discovery of cortisone for Merck to broadly replicate it, and another 10-15 years for other pharmacological forms to develop. If you again look at the nascent nature of cannabis research in the context of cortisone, it is impossible to say that the creation of cannabis medicines is in the second or third inning.
I chose the examples of ibuprofen and cortisone specifically to make the point that research and development of cannabis drugs is going to take several years at least. Advil and itch cream now seem like simple every day substances yet they both took nearly 25 years to hit shelves. As in the example of ibuprofen, drug companies will test hundreds of compounds to look for the strongest or most effective for the chosen condition, before diving in deeper on commercialization. In the case of cannabis, it could take years for companies to decide what isolates or compounds to include in pharmaceuticals.

Both ibuprofen and cortisone are also likely to face stiff challenges from cannabis-based medicines (I’m including CBD/hemp-based medicines in this as well). According to the Center for Disease Control and Prevention, an estimated 78 million (26%) of the U.S. adults aged 18 years or older are projected to have doctor-diagnosed arthritis by 2040. Cortisone makers can read tons of market research showing they will have a 5.3% CAGR to 2023 largely driven by arthritis and cortisone shots for aging populations. 5.3% you say. I’ll be taking that under. As I said above, drug companies and market research companies lack the framework to measure the disruption of the current cannabis-based medicines and they have no idea how badly they will be hurt by even the prehistoric version of cannabis-based medicines we have now. Skin creams and pain medicines are right in the cannabis wheelhouse. Good luck hitting a 5.3% CAGR on the growth of cortisone over the next three years.
 
Let’s survey the landscape for other industries that are likely to get cannibalized by both the prehistoric “medical cannabis” we have now and future cannabis-based medicines.

Opioids…too easy a target. Alcohol…same thing. Topical OTC pain creams or OTC NSAIDs are all going to be deeply affected by cannabis-based medicines. What about sleep service centers?
 
Did you know that sleep labs are a $10B business? Attributed mainly to rise in obesity-related sleep issues (think sleep apnea) and smartphone or other e-screen related issues, people attend sleep labs to get guidance on how to improve or simply be able to sleep. $10B is a lot of sleep issues being worked out in a cozy sleep lab. Factor in pharmaceuticals, special pillows, OTC sleep aids, and other sleep related spending and this can look like a $100B annual market pretty quickly. Sleep labs alone have a projected CAGR of 12.9%. I am pretty sure that ain’t happening. In a world where your only choice for sleep is Zolpidem tartrate (Ambien), then sleep labs make sense. Roseanne Barr, Tiger Woods and Kerry Kennedy could not be reached for comment but let’s assume they wish they had opted for a sleep lab instead of Ambien.

I can’t foresee a scenario in which people neglect to address their desperation for sleep with non-toxic alternatives, and the $10 billion spent on Sleep Labs becomes more of a fading trend, like POM drinks that never quite achieved the takeover of the juice market that people predicted for the “superfood” pomegranate.
 
Areas you may not consider: Anti-bacterial soaps, cleansers, household products and maybe even antibiotics. That would be a big one. Cannabis, and its close cousin, hops, have profound anti-bacterial qualities. When researchers spend a fraction of their budgets exploring that, expect some dislocation in those areas. So while the beer market may decrease, maybe hops can be used for healthy purposes in conjunction with cannabis derivatives. 
Nutraceuticals/Wellness

CBD is clearly one of the most important stories emerging in the Wellness category.  It could be the story of the century if many advocates are to be believed.  It’s also pretty well analyzed so we will stick to the nutraceutical side here.  Let’s move to dietary products and general nutraceutical ingredients, where cannabis and hemp are going to play major roles.  As an example of how, for the past five to ten years, there has been an explosion of products using ACGC, which comes from green tea, as a metabolic accelerant. Plant-based ingredients and derivatives are crucial to this market.  With illegality fading, we are about to see cannabis and hemp-based derivatives explode.   Grand View Research predicts the dietary/nutraceutical market globally at $278 Billion by 2024.  That is a CAGR of 9.6% from 2016-2024. You know where the CAGR is predicted to be even higher? Asia Pacific, with a CAGR of 11.2%.  It’s interesting to note that culturally, India, China and other Asia-Pac countries would seem to be target rich environments for cannabis/hemp products because of their historical reliance on homeopathic remedies and non-Western medicinal techniques.
These cultures already use hemp-based remedies liberally (China in fact is by far the largest producer of hemp in the world today) but we can imagine a future with emerging middle classes in these countries using cannabis both medicinally and for recreational uses, although many people (including Todd Harrison) argue that most recreational users are looking for relaxation from some type of stress and therefore the use is somewhat medicinal.  That will likely become moot as illegality goes away and the usage itself matters less, but the product used to achieve a desired result matters more.  It could take years for some Asia-Pacific countries to liberalize their laws but it is absolutely going to happen eventually. 

As for the nutraceutical side, we think THC-V and other variants of cannabis/hemp will end up making enormous inroads in this market.  THC-V is an appetite suppressant and we know of several companies innovating how to separate it from cannabis through extraction and formulation.  It’s also non-psychoactive (according to the 20 people we locked in a room and forced to vape it last week; we do science at Merida), which is another huge benefit.  Since Oprah is both involved in Weight Watchers and a cannabis supporter, this story is perfect for prime time - THC-V Weight Watchers products!  More seriously, while many medical patients want appetite assistance, particular those on chemo or suffering from Cachexia or other wasting ailments, THC-V could help address obesity or simply be a nutraceutical additive to help control appetite without stimulants.  Little known fact?  Some smokers believe smoking helps suppress their appetite and that is why they fear quitting.

We could go on about other applications of cannabis and CBD, but we aren’t trying to solve the “sleep crisis” with this commentary so let’s move to hemp.        
Industrial

By way of a royal decree, King James I required every property owner in Jamestown to grow 100 plants of hemp for export in 1619.  Talk about the irony of our current society returning to a plant that everyone knew had value in 1619.  As England’s first permanent settlement in North America, Jamestown required raw materials used in shipping that could be easily sourced.   From sails to rope to rigging, hemp was used to provide many of the required components for a ship-based empire like Britain in the 1600s.  Steve Bannon even wants to use it to build the U.S./Mexico wall (hempcrete!). Even that guy gets it! 

Hemp has already deeply permeated nutrition (hemp protein and hemp seed are common additives in high-end wellness food products) and is an important biomass used in automotive applications as well as fuels. Hemp has 25,000 estimated uses according to New Frontier, which also reports that France led Europe in cultivation with Estonia in second.  New Frontier projected global hemp sales at $3.7 billion in 2018 and it's likely that the explosion of CBD will push that up significantly over the next few years. What is most intriguing is that you can extract CBD from the flower while the bast and hurd fibers of the plant satisfy industrial needs. With a large percentage of the plant in high-leverage uses, hemp is well on its way to replacing soybeans, cotton and canola as staple crops.  

With all of these virtues, it’s quite likely that hemp could also play an important role in helping address plastic pollution as well as many other climate change-related material concerns.  Hemp doesn’t require an abundance of water, has almost limitless uses, can be food, nutrition, biomass, CBD.  As Todd and I discussed that fateful day, it’s a couple hundred billion dollar opportunity without trying that hard. 
Add the potential of hemp to the $250B of global black market cannabis usage, cannabis-based medicines, and all of the derivatives and we are going to find out just how long it takes to get to the trillion dollar mark. We think analysts are simply forced to be ultra-conservative in their assessment because of the methodology they must use in their projected TAM. We sympathize with those analysts because cannabis is the thing everyone wants to talk about but at the same time, true actionable intelligence on TAM can be scarce at times. We aren’t tethered to the same constraints and it is our prediction that we will hit the trillion dollar mark for total size cannabis/hemp/CBD and their direct ancillary supports sometime in the 2025 range, which is far sooner than most estimates. As for societal impact, it too will be greater than most predictions as it affects everything from health care, consumer goods, alcohol and tobacco consumption, to skin creams and chronic pain management as well as areas we can’t even rationally or analytically predict…today.
Here's to a rich, unpredictable future.

Best,

Mitch

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