Morningstar - Winter 2019 - 30

Edibles Topicals
<1
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10
11
Spotlight: Cannabis
17
16

EXHIBIT 3

1 100%

11
21

75
50

The Highs Have It Support for
legalization in the U.S. has steadily
risen, indicating growing
2015
2016
2017
public
acceptance
of cannabis.

Percentage of Survey Respondents

Yes, legal

No, illegal
100%
75
50
25

0
1969

oversight. Expansion of retail distribution has been
sluggish. Toronto, Canada's largest city by
population, had only five locations as of September,
leading to long wait times. Nevertheless, we
think the slow pace of the initial rollout will have
a minimal impact on the long-term potential
of legalized cannabis.

1985

2000

2018

Source: Pew Research Center.

Asia
Europe United States
themselves. We use the 17% estimate for painrelated medical expenses paid out of pocket as a
limiting assumption for the ability of patients
to pay for medical cannabis. This leads to a market
estimate of roughly $14 billion. If medical cannabis
were to be covered by Medicare, Medicaid,
private insurance, and other major healthcare
providers, we estimate the market would expand
sixfold to roughly $80 billion to $90 billion. We
view this as a possibility over the very long term
2008
2009
2010
2012
2013
but
don't anticipate
any major
changes
on 2014
this front over our forecast period through 2030.

After the legalization of recreational use, the
Canadian Medical Association stated a desire to
see the medical cannabis system eliminated,
arguing there is no reason for a separate
system. In addition, the association argued that
many doctors remain unclear on cannabis' efficacy,
evidence, dosing, and potential interactions
with other drugs. For now, Health Canada will
continue to operate the medical system but
plans to evaluate its effectiveness and necessity
in five years.
The Canadian market is massively underpenetrated
relative to its potential, leaving room for
Total Net Assets
it to grow 9 times larger than it is today. In 2018,
30%
the entire Canadian cannabis market was
estimated at roughly $1.6 billion.6 Our 2030
forecast estimates the market at nearly $15 billion
20
in constant dollars, an average annual growth
rate of nearly 20%.
Our robust growth forecast stems from 2018's 10
nationwide legalization, leading to the conversion
of black-market consumers into the legal market 0
2015
2017
2018 nonconsumers
2019
and the 2016
conversion
of previous
into consumers.

Canadian Market to Grow 9 Times Larger

Huge Growth in International Medical Markets

In stark contrast to the confusing U.S. cannabis
laws, Canada's laws are very clear. In June
2018, Canada's House of Commons and the Senate
approved the Cannabis Act, which legalized
recreational cannabis throughout the country. The
law took effect Oct. 17, 2018, making Canada
the second country after Uruguay to fully legalize
cannabis for adult use.

Medicinal cannabis' benefits are only starting to
be recognized, with more and more countries
legalizing its use. The global market (excluding
the U.S. and Canada) remains severely
underpenetrated, leaving room for it to expand
more than 11 times its current size.

Although cannabis is now legal for recreational
adult use nationally, the structure and execution
of retail distribution was left for provincial

We size the current global medicinal cannabis
market (excluding the U.S. and Canada)
at roughly $3.7 billion based on estimates ranging
from $3.5 billion to $11 billion. We forecast
total market potential of nearly $43 billion

6 State of the Legal Marijuana Market by Arcview Market Research and BDS Analytics.

Morningstar Winter 2019

by 2030, but we narrow this estimate to a market
of $20 billion.
Given how few people live in countries with
significant cannabis production, the opportunity
for medical cannabis exports is very large
at face value. However, the lack of supportive laws,
regulated cultivation and distribution networks,
and societal attitudes limit the potential to
a smaller market. Nevertheless, we estimate that
the market for Canadian exports could reach
nearly $20 billion in sales by 2030 in current dollars,
compared with nearly $4 billion currently.
Green Decade

Prohibition has kept cannabis largely in the
hands of criminal enterprises. However,
legalization is gaining momentum. In the U.S., 11
states and Washington, D.C. have legalized
recreational cannabis, and 35 states have legalized
medical cannabis or low-THC/high-CBD products.
This is despite the fact that it remains illegal
at the federal level. We think the U.S. government
will eventually allow states to choose the legal
status of cannabis within their borders.
Meanwhile, Canada already has legalized
recreational cannabis, with distribution continuing
to expand. Internationally, more countries are
recognizing the benefits of medical cannabis and
expanding access.
With cannabis' popularity growing, widening
legalization will further catalyze demand. Our
research indicates that legal cannabis sales will
grow nearly 9 times larger than their current
size by 2030. Large, underserved demand in the
U.S., Canadian, and global medical markets
will drive massive top-line growth and fixed cost
leverage for cannabis companies, supporting
a green rush through at least the next decade. K
Kristoffer Inton is director of equity research, basic
materials, with Morningstar.
Rachel Elfman is associate equity analyst with Morningstar.
Morningstar equity analyst Seth Goldstein, CFA,
contributed to this article.

Morningstar - Winter 2019

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