Now that two US states have legalized marijuana—not just for medical use, but for people to just plain enjoy—are we about to see an explosion in the pot industry? Probably not.
Starved for funds, an increasing number of state governments have been looking to the weed as a way to boost tax revenues. There are now 18 states that allow for the regulation and distribution of basic medical marijuana to approved cardholders who have a prescription from their doctors. The decision by voters on Nov. 6 in Colorado and Washington to permit recreational use extends that policy.
The first $40 million of tax revenues on marijuana sales in Colorado will be set aside for public schools. If that much is raised, it would equal nearly 20% of the state’s increase in education spending under a budget proposed by Governor John Hickenlooper. Colorado thinks it can raise $5 to $22 million in revenue after legalization in sales tax alone—not to mention licensing fees or reduced police expenditures. Washington thinks that, all told, legalization will raise $1.9 billion over the next five years.
But the key complication with turning grass into big business is that though states may give it the thumbs-up, it remains illegal at the federal level, creating a legislative gray area. The federal government agreed in 2009 not to prosecute medical-marijuana growers and dispensaries in states where it was legal, but prosecutors began to act after the stuff began to be smuggled across state lines.
Robert Kane, the head of investor relations for medical research firm Cannabis Science, says that the green shoots are nowhere near full bloom. In fact, he calls the recent referendums a “setback” for medical cannabis research. “I’m happy that our voice was heard that this needed to be changed,” he says, adding that he himself voted for Amendment 64, which legalized pot in Colorado. “But the backend is that the industry should be run as a medicinal model, not an alcohol model…You’ve just taken maybe the holy grail of health products and slapped a red A on it.”
Kane’s definition of medicine is admittedly loose. Cannabis Science has researched—with promising signs—the treatment of patients with HIV/AIDS and post-traumatic stress disorder using organic cannabinoids (derivatives of the natural cannabis plant). But his “medicinal” definition extends to a normal person who would prefer taking cannabis to a sedative like Ambien.
The potential medical uses of marijuana are many and not yet completely known. Cannabinoid products are gaining ground elsewhere in the world. An Israeli company grows cannabis without its mind-altering component, THC, but with higher concentrations of cannabidiol, an anti-inflammatory, to help patients with chronic pain. Multiple sclerosis treatment Sativex, derived from the cannabis plant, has been licensed for the treatment of multiple sclerosis in the UK, Spain, Germany, Denmark, the Czech Republic, Sweden, New Zealand and Canada, and could soon be approved for many more.
Yet such research remains in its infancy, particularly in the US. While research is being done on “synthetic cannabinoids”—which mimic the chemical reactions caused by organic cannabis—by major US drug companies, work using the real plant is blocked. Companies like Cannabis Science can’t get an okay from the federal government to conduct a clinical trial, even in a state where the drug has been legalized. ”We’re still in the process of establishing this as a legitimate industry,” Kane explains.
Which is why, though he’s all for opening up access to pot for adults, he’s concerned that regulating marijuana like alcohol will make medical research harder. Stories of children getting weed from older friends or siblings will, he worries, sully the positive public image that cannabis as medicine would create. “The $100 million you need to get through the Federal Drug Administration [drug tests] is never going to come from the government if you’re out there selling hemp t-shirts,” he says. That is why Cannabis Science doesn’t market products to legal dispensaries: if they are raided by the feds, it doesn’t want its name in the muck.
But the stigma and legalities aside, there’s a bigger obstacle to developing the weed industry: it just doesn’t make (big) business sense. The current crop of growers for medical use are small and fragmented, and already struggle to make a profit under burdensome restrictions. The new Colorado law exposes them to even more competition: it permits adults to own six plants personally and provides for the legal licensing of new growers and dispensaries. And larger growers that would mimic tobacco companies and capitalize on economies of scale still draw the wrath of the federal government, even in states that make growing the crop under certain licenses legal.
Moreover, sellers of marijuana have no place to put the money they make. Because the drug remains federally illegal, banks can’t accept the profits from its sale; that would compromise their federal deposit insurance (FDIC) protection. Thus, growers and retailers will have to manage their income, their payroll, their bills and their taxes in cash. That makes it extremely hard, and dangerous, to run any business, let alone mirror the economies of scale enjoyed by Big Tobacco.
Kane, who spent 11 years at Wall Street brokerage Stifel Nicolaus, said that many are interested in investing in the cannabis business, but that it will be a while before they’ll actually do it—or cannabis companies are even ready to take it. “This [legislation in WA and CO] is all about the smoking side of the industry. That [the commercial] side of the industry is dead,” Kane says. At the very least, the spark won’t ignite until the green plant gets the green light from the feds.