A new study published in the journal PLOS ONE suggests that when cannabis is legalized or decriminalized that it will cost pharmaceutical firms billions!
Is this something that Thailand can look forward to or is PLOS ONE leading us to dodgy conclusions?
The Argument In Favor Of The Loss
The paper entitled, “US cannabis laws projected to cost generic and brand pharmaceutical firms billions” is certainly hoping to grab our attention from the outset.
It argues in the abstract that a “single legalization event” will cost big pharma $3 billion in annual sales on average.
Digging into this figure we find that the authors of the report used the stock market valuation of each company before and after legalization in the 10 days following legalization. This was compared to the stock price prior to the legalization event.
They examined medical and recreational legalization, though they study’s authors note that there is a shortage of recreational events to base accurate predictions on.
They then used the stock price changes to estimate the effect on the drug company’s revenue to reach their figure of $3 billion per event, though they do note that the variability in the data was large and this figure may not be entirely accurate.
The authors also had some strict limitations in their approach: they can only observe the market for publicly listed pharmaceutical companies (private companies don’t share such data and some of the biggest companies are private not public), they worked on “cannabis legalization events” despite the fact that investors don’t tend to respond to events but rather to data, the model applies to a limited window of time (which is in keeping with financial modeling) and there is an assumption that investors always behave rationally (something that is not always true).
Despite all of the above, they say there is a statistically significant drop in share prices following the legalization of medical marijuana which they expect to persist (oddly, for recreational marijuana there was no such conclusion and no evidence of persisting effects).
The Argument Against The Loss
The trouble is that while this study offers lots of data, its conclusions are a huge reach.
They found, for example, that a single event had an impact of around $63 million on a firm’s market value and scale this up to a $9.8 billion valuation across the whole industry.
This is then extrapolated to mean a $3 billion loss annually across the industry based on a 20 day window of stock valuation.
They also can’t include companies that are likely to have seen dramatic impact on their bottom line if their theory was correct – Purdue Pharmaceuticals is, for example, missing because it’s a private business. You’d expect the legal opioid market to be most vulnerable to legal weed.
This is an interesting data set on what may occur following cannabis legalization, but you would need much deeper data to suggest that, for example, a generic manufacturer of diabetes drugs is suddenly millions or billions poorer for the legalization of cannabis.
In fact, it’s their data that legalized weed impacts across all branches of the industry and for both generic and brand name entities that suggests there’s a flaw in the methodology.
Sure, you might use cannabis to cure the pain from diabetic related conditions, but you won’t stop taking Metformin unless your physician pronounces your diabetes cured.
This is an interesting study and it certainly provides a case for further research but does it prove that cannabis is robbing the pockets of big pharma? No, it doesn’t.
We would expect to see, with the exception of drug companies dealing with pain management who might see a big earnings hit, to see no real change in drug sales due to legal cannabis.
Cannabis is mainly a complementary therapy for other drugs not a replacement for them.
And there’s one other thing that makes us confident of this assessment: Thailand’s pharmaceutical industry is not baying for blood due to lost earnings. And they would be if they felt that cannabis was sending them to the poor house.