Will big US pharma swamp big Canadian pot growers?

As we wrote in an INK Research subscriber post on February 12th, the widespread belief that the cannabis industry is a disruptive force in the medical and consumer markets may well be in the process of playing out right now. The stakes are clearly high, especially if John Rubino from DollarCollapse.com is right.

Rubino: the pot legalization tide has turned in the United States.

He is firmly in the camp with those who think legalization is not that far off in the United States:

You can't put the genie back in the bottle. It doesn't really matter what happens in the next U.S. election. The trend is going to be for states to progressively legalize it or for Federal government just to announce the ending of the Schedule one listing of weed and make it legal across the board. That is a multi-billion business once it really gets going.

As Rubino explains, the marijuana market is just now springing to life and the industry structure is still to be sorted out. At the end of the day, however, he suggests that large mainstream established companies are likely to be the big players:

What started out as a burst small entrepreneurism, ends up being just another corporate sector. That would be a shame, but that tends to be the way things go.

Part of the evolution will be driven by competitive forces. As Rubino sees it, big pharma is particularly at risk:

CBD that is a component of marijuana has a lot of health effects and because of that it is a competitor for a lot of pharmaceuticals. So, we could see big pharma lose out in this proposition, the opioids and some of the other pain killers along with a lot of the psychoactive drugs, losing ground to weed. Or, we could see the big pharma companies step in and bring out related products that they find a way to patent and dominate the market that way.

Despite the enormous potential of the American market, we doubt that a corporate takeover of the marijuana space will lift all boats. Instead, some of today's big Canadian players could eventually get swamped in the wake of larger US established players moving in.

We appear to be in the late stages of the recent cannabis stock rally

The process of separating the winners from the losers may be unfolding now. We are moving into what we believe is the late stages of the recent cannabis stock rally (read our October Top 20 Gold Report to see how our Pharma Indicator helped us call the top in cannabis stocks). In light of Rubino's observations, it is worth noting that all the major Canadian pot stocks with market caps of more than $1 billion have mixed INK Edge outlooks or worse, with the exception of Cronos Group (Mostly Sunny; CRON). That leads us to believe that the race for disruptive domination could leave many unhedged investors who are holding existing players underwater, similar to what happened in the internet search engine race 20 years ago.

Meanwhile, some smaller and cheaper cannabis companies could outperform as they are bought out by big new entrants looking to secure relatively low-risk industry entry points or by existing players desperate to gain global scale and differentiation. As such, we continue to stress the importance of stock selection within the marijuana industry. Even with a rising S&P/TSX Pharma Index, laggards may have a hard time keeping up.

INK Edge outlook ranking categories (Sunny, Mostly Sunny, Mixed, Cloudy, Rainy) are designed to identify groups of stocks that have the potential to out- or under-perform the market. However, any individual stock could surprise on the up or downside. As such, outlook categories are not meant to be stock-specific recommendations. For background on our INK Edge outlook, please visit our FAQ #5 at INKResearch.com.