pharmaceutical companies lose billions due to US legalization wave

VAccording to a new study published last week in PLOS ONE, the legalization of cannabis in several US states is causing drug companies to lose billions as the population uses cannabis as an alternative to conventional pharmaceutical drugs.

Legalization of cannabis in a US state cuts drug manufacturer sales by an average of $3 billion

The scientists examined how cannabis legalization affected the stock returns of publicly traded generic and branded pharmaceutical companies between 1996 and 2019 and found that 10 days after legalization, returns were 1.5-2% lower.

Returns declined in response to both medical and recreational cannabis legalization, for both generic and branded drugs. Investors are anticipating that a single cannabis legalization will cut drug manufacturers’ annual sales by an average of $3 billion.

They also write, loosely translated:

By expanding access and thus use, legalization could allow cannabis to compete with conventional drugs. Cannabis is largely non-patentable and can act like a new generic entrant after medical legalization, leading some individuals to substitute other drugs for cannabis. However, unlike a conventional new generic drug, cannabis use is not limited to a single or limited set of conditions. This means that cannabis acts as a new entrant to many different drug markets at the same time.

While a 1.5-2 percent drop in drug company returns may not seem like much to the lucrative pharmaceutical industry, the study authors said the difference is “statistically significant and persists through the 20 business days after legalization.”

“We find that the average change in a company’s market value per legalization is $63 million, with a total impact on the market value of all companies per legalization of $9.8 billion,” the study said.

However, there are limitations to the study that the authors describe:

The economic significance of an estimated $9.8 billion loss in intercompany market value per cannabis legalization is extremely large, but our results should be interpreted with caution. An important limitation is that we model investors as rational, which can exaggerate the economic significance of our results. Second, we are limited to publicly traded companies and past legalization events. Third, we note that estimates can be sensitive to our choice to use 150 to 50 days before legalization. Finally, we expect that there will be measurement errors due to heterogeneity in the legalization and subsequent regulatory processes.

“For private and public drug manufacturers, we expect the response to legalization to include investment and marketing,” the study concludes, citing that Pfizer has spent billions to acquire a “biotech company focused on cannabinoid-like therapies.” ”

“Pharmaceutical companies have spent significant lobbying efforts and dollars fighting the legalization of cannabis,” it continues. “These are signs that the pharmaceutical industry is currently a long way from a marketing perspective [Food and Drug Administration]-approved therapeutic equivalent, and this could explain why pharmaceutical companies have made less effort to accurately describe doctor visits.”

“Looking beyond the effects across different stakeholder populations, our research suggests cannabis could be a useful tool to increase competition in US drug markets,” the authors said.

Big Pharma has been seen for years as one of the major opponents of cannabis legalization by the majority of cannabis enthusiasts. So this study seems to show why.