Size Matters: The Total Addressable Market of Cannabis/Hemp is Far Bigger than Analyst Predictions

By Mitch Baruchowitz

As Illinois becomes the 11th state to legalize cannabis for adult-use, and other states look to follow suit, it is important to look at what the normalized, total addressable market (TAM) is in cannabis since that is one of the driving factors of the global opportunity.  At Merida, it is our belief that the market is in fact far larger than most predictions; we see the market potentially hitting $1 trillion in global economic impact by 2027.  ‘Total economic impact’ includes cannabis sales, cannabis derivatives (like isolated cannabinoids or terpenes) hemp-based CBD products, the ancillary spending on cannabis/hemp-related activity, and the cost to regulate the industries.  Pause to consider: a $1 trillion market in 8 years while currently there is not a single company in the space that generates anywhere close to $500 million in revenue.  That fragmentation, and the wholly unique phenomenon that a black market with an existing – and massive – consumer and patient base is transitioning to a regulated market, is what makes cannabis such a compelling opportunity.

Recent market volatility notwithstanding, cannabis will create tremendous disruption across many old line businesses in health care, biotechnology, pharmaceuticals, alcohol, tobacco, health and wellness and nutraceuticals to name a few.  In the present, intermediate term and for the next 10 years, responsible and thoughtful exposure to the cannabis industry is an essential part of a well-balanced portfolio.

Canaccord Genuity projects that Illinois alone will become a $3 billion adult-use market.  The state stands to add roughly $2.75 billion of legal sales in the first 12 months of its adult-use program to its current run rate of $225 million of medical cannabis sales.  New Frontier Data, a leading cannabis predictive analytics company, predicts that Michigan, currently a $600 million medical market, will reach $1.4 billion in 2020 when its recreational law goes in effect.  When Merida invested in New Frontier Data several years ago, they projected total U.S. cannabis sales for 2020 at around $14 billion.  That number now stands at $16+ billion reflecting state legalizations which moved faster than could be predicted(such as Oklahoma).  This is a flaw that has plagued most analysts until early 2019, when regulatory movement became much more transparent at the state level.    

The need for legislators to “test” the message of legalization within their state drives this transparency and has led to many states having a long lead time before they pass, and ultimately implement, laws pertaining to adult-use (as with Illinois), or putting a ballot measure forward (as with Michigan).  This makes TAM prediction much easier going forward, and has enhanced Merida’s ability to use our data analysis and asymmetric information, gained through voracious information consumption, to achieve returns that are far above the normalized alternative asset bucket in which cannabis falls.        

Having just closed a second cannabis-focused fund and recently launched our third, Merida focuses on the largest verticals within the space where we predict the least amount of friction to TAM expansion.  We also recognized the limitation that traditional financial institutions face in predicting any of the economics around cannabis, driven by the lack of traditional information sources, the opaque nature of cannabis data and analytics, and the difficulty in assessing greenfield markets that are shifting from illegal to legal.    

There are many ways to analyze the future of cannabis/hemp and how big they can be as both markets and as catalysts for related economic activity.  We can start by looking at the innumerable industrial applications of the hemp plant. We can also take a swing at predicting hemp-based CBD sales as nutraceutical, or medical formulations over the next 10 years.  We can reference the amount of total predicted cannabis sales for adult-use in 2027.  We can extrapolate ancillary spending from current levels and get a sense of what that will look like in 2027. We can also glance at the current state of medical markets and project what those look like in 2027.  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.  There are limitless ways to get to a cannabis prediction model but a traditional linear methodology has not proven ideal when accuracy is the goal.

We often tell new investors to the space that cannabis has to be considered as several industries: cultivation (indoor agriculture); adult-use (recreational use/consumer packaged goods); medical (OTC drug market); formulation or extractions (pharma/biotech); scientific discovery (life sciences/biotechnology); and ancillary (agtech/industrial) to name a few.  We at Merida sometimes go off the deep end on the data and information when we spot an angle that has yet to be analyzed directly.  As our research has cascaded and the facts piled up, it occurred to me that while many assess the space intelligently, they perhaps lack the ability to articulate (or haven’t realized) all of the potential multidimensional aspects of cannabis.  This lack naturally leads to an underestimation of the width (and in some cases, the depth) of how cannabis and hemp will affect a variety of industries. 

We feel that traditional industries lack the analytical mechanics necessary to comprehend disruptive changes wrought 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 media.  In 1999, did any research analyst predict that Amazon would kill Toys R Us but save the US Postal Service?  I recently read (ok, in some cases skimmed) dozens of market research reports on subjects ranging from alcohol to digestive tract drugs to sleep aids to eczema/psoriasis topicals and pet remedies.  In a few isolated cases, the reports mentioned cannabis/hemp or CBD.  Most reports, however, failed to consider potential disruptors, which is understandable given that they focus on market size rather than what shapes and fulfills market demand.  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.                  

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. 

The conclusion we reached is that even the most intelligent and professional analysts are likely underestimating the full impact of cannabis/CBD over time by orders of magnitude and are failing to account accurately for how fast the global industry is evolving.

Consider this 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, the ability to monetize these insights will be revealed over time.  For now, it is probably easier to predict which industries will be affected negatively by cannabis.  If you happen to be long 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 nudge that cannabis adoption and the shift to cannabis-based medicines will probably affect the long- term sales.  As a second example, whatever growth is projected for Ambien in market research, cannabis will affect it.  

Let’s be clear on one thing as we span the evolution of cannabis and its impact.  Adult- use/medical-use/recreational – they are all artificial divisions created by regulators to describe their programs.  New Frontier Data’s groundbreaking consumer study released in early 2019 dismantles these artificial concepts.  We have an ongoing conversation internally at Merida about aspects of the cannabis landscape that are distorted by these artificial designations and how that helps us find value, as with our recent investment in CB2 Insights, a medical data company.  The medical side is just getting started because right now, there is simply 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 New Frontier’s report to get a deeper sense on 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 as with 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 that will only become clear in hindsight.   

Merida’s Framework For the Shifting Mindset Around Cannabis

Recreational/Adult-Use

Recent estimates of the global black market for cannabis are as high as $200 billion to $250 billion.  No substance consumed illegally at any time in history has approached that.  Ever.  From the perspective of economic size and the percentage of the population using cannabis, the numbers dwarf the use of 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.  Cannabis is exactly the opposite.  It’s a $200B+ global market according to New Frontier that is largely federally illegal everywhere except Canada and Uruguay.   

A huge existing market is emerging, changing behavior (on both individual and institutional levels) and shifting both beliefs and on-the-ground experiences that are starting to highlight this confluence. We have created a four-part framework for analyzing this emergence and evolution.  You will have to write us for a longer form commentary which drills much deeper but the 4 components of shifting behavior are: Legalization; De-stigmatization; Colonization (as in the hive mindset); and Normalization.

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 no difference between medical cannabis and adult-use cannabis (for purposes of this section, let’s include CBD and hemp in all discussions of cannabis).  Cannabis is simply a plant that people consume in various ways.  This is about to change.  Until something is legal, it is very difficult to get the support of doctors, researchers and financing sources to fund 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 ~$400 million of “medical” sales in Colorado last year, or $125 million in New York for 2018 is the pinnacle of medical cannabis is very misinformed.  A short history 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, he isolated Anandamide which is what accelerated the discovery of the soon-to-be named Endocannabinoid system.  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 more. 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. 

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 while watching Caddyshack.  This will usher in an era of medical discovery that could be worth $250B per year in just a few short years. 

Add to this a robust, regulated consumer market, and all the capital necessary to support a global industry and you have an incredibly large industry that is only just beginning to mature into its toddler stage. 

About Merida Capital Partners

Merida Capital Partners is a private equity firm targeting fundamental growth drivers which accelerate the rapid development of the cannabis and hemp industries. Our motto, Responsible Investing in the Cannabis Ecosystem, highlights our focus on cultivation technologies, products, and services associated with the evolution of cannabis and hemp as agricultural products, plant-based medicines, constituents in pharmaceutical formulations and recreational consumer products. For more information, please visit www.meridacap.com or follow us on twitter @meridacap.

Mitch Baruchowitz

917.301.8758

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