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New Study, Pharmaceutical Companies Losing Billions After States Legalize Cannabis

The legalization of cannabis has had a significant effect on pharmaceutical companies. A new study research project titled “U.S. Cannabis Laws Projected to Cost Generic, and Brand Pharmaceutical Firms Billions” used CRSP US Stock North America Daily Update, a third-party dataset; found that, since 1996, when legalizations began in U.S states for both generic and brand-name drugs alike, there have been 1 to 2% lower returns at ten days following such announcements. Moreover, this trend persists regardless if the drug being sold is medicinal or recreational use based—meaning investors predict a single event logistically reducing annual sales for listed drugmakers projection at around $3 billion on average with an average market loss of nearly $10 billion for drugmakers per each legalization event.

By 2020 33 states had legalized medical access to cannabis for severe, debilitating conditions despite its federal classification as a Schedule I drug, with means it has no medical use and a high risk of abuse. In addition, legalization could allow cannabis to compete with conventional pharmaceuticals by expanding access to cannabis’s potential therapeutic benefits for a broad range of conditions. 

Alternative to Traditional Medications

It appears that cannabis acts as a new entrant across many different drug markets simultaneously because it is not restricted to a single or limited set of conditions it can treat, unlike a conventional new generic drug. Moreover, access to recreational cannabis is similar to traditional over-the-counter medications in that it no longer requires healthcare provider oversight, leading some people to substitute away from other drugs toward cannabis.

Legal medical cannabis is linked to a decline in prescription drug use, according to an emerging body of research that explores how state legalization affects healthcare providers and their patients. For example, the “Is There Less Opioid Abuse in States Where Marijuana Has Been Decriminalized, Either for Medicinal or Recreational Use? A Clin-IQ” study found legal cannabis was associated with lower rates of opioids among Medicaid enrollees, while another reported similar trends within Medicare populations despite no change in total medication intake between those two groups over time. 

Another work, “Recreational marijuana legalization and prescription opioids received by Medicaid enrollees,” Suggests that recreational cannabis can serve as therapy for a broader range of conditions and might also reduce prescription drug usage by attracting new patients with unapproved medical conditions or those who were previously unwilling or unable to register as medical patients.—U.S. cannabis laws projected to cost generic and brand pharmaceutical ….


Following the legalization of recreational cannabis, several studies, including “Using recreational cannabis to treat insomnia: Evidence from over-the-counter sleep aid sales in Colorado,” show a significant decrease in sales of Schedule III opioids and over-the-counter sleep aids and antacid sales among Medicaid enrollees. The Pharmaceutical industry has noticed and appears to recognize the threat and has responded strategically, including lobbying against state legalization.

The pharmaceutical sector has been anything but bleeding money overall. On the contrary, returns grew consistently in the weeks following states ending prohibition—just not as fast or higher than many analysts had initially expected based on their past performance before legalization. That difference in expected versus actual returns, in addition to decreased drug sales, appears to be partly attributable to legalization.

Additionally, brand drugmakers should note that post-legalization, returns deviate from the control, with the difference being smaller and disappearing a few days after the event.” However, it’s a different story for generic drug companies, where the investor response to Cannabis reform “is larger in magnitude and is persistent.”—Pharmaceutical Industry Suffers Billions In Losses After States ….


The author of the study stated four primary limitations of the research.

  1. He only observed the effects on publicly listed pharmaceutical companies. While most large pharmaceutical manufacturers are publicly listed, including Purdue Pharma, some are not.
  2. His treatment—cannabis legalization—brought challenges for estimation. i.e., investors respond to information, not policy events.
  3. The event study framework relied on a baseline model that used historical data to predict hypothetical returns in the absence of the event. 
  4. The author assumed that investors behave rationally. As a result, the author may have overestimated the effect of cannabis legalization on drugmaker market value and the implied impact on drug spending in the U.S.

“The economic significance of an estimated $9.8 billion loss in market value across firms per cannabis legalization event is extremely large, however our results should be interpreted cautiously. A key limitation is that we model investors as rational, which may overstate the economic significance of our results. Secondly, our scope is restricted to publicly traded companies and prior instances of legalization. Third, we note that estimates may be sensitive to our choice of using 150 to 50 days before the legalization event. Finally, we expect there to be measurement error due to heterogeneity in the legalization and subsequent regulatory processes.”—U.S. cannabis laws projected to cost generic and brand pharmaceutical ….


The author’s results suggest that cannabis is a viable therapeutic alternative to some pharmaceutical drugs for patients. However, there are limits to substitution:

  1. The difficulties of standardizing cannabis.
  2. There are limits on the patentability of cannabis.
  3. Due to a limited understanding of therapeutic mechanisms, cannabis currently offers a restricted alternative for many patients and their insurance providers in competing with FDA-approved medications, and it may never fully compete with some.

Although cannabis may remain outside pharmaceutical markets in the short and foreseeable future, limiting insurance coverage, many patients are opting for cannabis over pharmaceuticals post-legalization despite higher out-of-pocket costs.

“The Pharmaceutical industry has devoted substantial lobbying efforts and dollars into fighting the legalization of cannabis,” it continues. “These are signs that pharmaceutical companies, from a marketing perspective, cannabis currently remains far from a (Food and Drug Administration)-approved therapeutic equivalent, which might explain why pharmaceutical firms have spent less effort on detailing doctor visits.”—Pharmaceutical Industry Suffers Billions In Losses After States ….

Finally, the author concluded, “Looking beyond effects for different stakeholder populations, our study suggests cannabis might be a useful tool for increasing competition in U.S. drug markets.” As evident in Pfizer’s acquisition of clinical-stage company Arena Pharmaceuticals for a total equity value of around $6.7 billion, “For private and public drugmakers, we expect the response to legalization to include investment and marketing,” the study concludes, citing the fact that Pfizer spent billions to acquire a “biotech company that focuses on cannabinoid-type therapies.”

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