CANNABIS: $75B OPPORTUNITY; CATEGORY …...Source: State Reports, NSDUH and Cowen and Company...
Transcript of CANNABIS: $75B OPPORTUNITY; CATEGORY …...Source: State Reports, NSDUH and Cowen and Company...
Equity ResearchCannabis
Alcoholic Beverages
CANNABIS: $75B OPPORTUNITY; CATEGORY CROSS-CURRENTS KEEP US CAUTIOUS ON BOOZEAPRIL 4, 2018
We expect cannabis can generate $75 bn in sales by 2030 (assuming federal legalization), driven primarily by consumers ages 26+ (given that 55+ is the fastest growing cannabis cohort).
Access to legal cannabis drives lower levels of binge drinking (as measured by our proprietary analysis on binge intensity and number of binges per month).
Adult-use cannabis states binge drink 13% fewer times per month than non-cannabis states, and 9% below the national average.
We remain constructive on our Outperform-rated cannabis stocks: KSHB, WEED and LEAF, and cautious on big beer (TAP).
Vivien Azer 646 562 1351 [email protected]
Brian Nicholas Velez 646 562 1353 [email protected]
Gerald Pascarelli, CFA 646 562 1362 [email protected] COWENRESEARCH COWEN.COM
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EQUITY RESEARCH MULTI-SECTOR
April 4, 2018
■ Alcoholic Beverages■ Cannabis
$75B CANNABIS OPPORTUNITY KEEPS USCAUTIOUS ON BOOZE - AHEAD OF THE CURVE
Vivien Azer646 562 [email protected]
Brian Nicholas Velez646 562 [email protected]
Gerald Pascarelli, CFA646 562 [email protected]
THE COWEN INSIGHT
We expect cannabis sales of ~$75 bn by 2030, supported by new analysis on categoryretention gaps and population-weighted, state-based analysis on cannabis first use andbinge drinking (where cannabis access points to more cannabis trial and use, and less bingedrinking, and an opioid solution). Maintain Outperform on KSHB, WEED, & LEAF; and remaincautious on big beer, including TAP.
Bottom Line
Ahead of our 2nd Annual Cannabis Summit, we revise up our cannabis market target by $25bn, as we now look for the industry to generate $75 bn in sales by 2030 (vs. $50 bn by 2026previously). Underpinning this estimate is proprietary analysis on binge drinking behavior,as well as the role that legal cannabis access has in terms of driving trial (measured bycannabis first use rates for 18+ consumers). This work builds on our prior assertions thatcannabis acts as a substitute social lubricant for consumers. We believe this is the first timedetailed state-level binge drinking statistics have been analyzed and juxtaposed againstcannabis use, where we found that legal cannabis states (as of 2016) binge drink 13% fewertimes per month than non-cannabis states.
COWEN.COMPlease see pages 59 to 62 of this report for important disclosures.3
What's New
We now expect the category to generate ~$75 billion in gross sales by 2030 (up from $50bn by 2026). This new forecast reflects:
■ Binge Drinking Intensity Variances. States for which adult use cannabis is available (as of2016) already had binge drinking intensity rates that fall ~9% below the national average,and ~11% below non-cannabis states. Newly added states (like CA, NV) currently havehigher rates of binge drinking intensity, and lower levels of cannabis consumption, thoughwe expect mean reversion for these states too, given the historical precedent. As such,we believe it’s reasonable to assume that as more legal cannabis states come on-line,alcohol binge drinking intensity should fall.
■ Binge Drinking Volumes: Binges Per Month. While the CDC estimates ~17% of the U.S.population reports binge drinking, only 1 in 6 report doing so 4+ times per month. In legaladult use cannabis states, the number binge drinking sessions per month (for states legalthrough 2016) was ~9% below the national average.
■ Category Spending. While we had forecast a 2026 total cannabis market of $50 bn by2026, new forecasts suggest that the market is already that size. As such, we are revisingour forecasting methodology, including a higher per capita spending estimate. With areported 35 mm annual cannabis consumers, current estimates imply annual spendingof $1,500 per year (well ahead of our initial $1,000 forecast). This likely reflects theresponse bias in the number of cannabis users (given its Schedule I status). As such, weraise our estimate by 25% as an offset.
■ Category Retention. Lots of consumers have tried both alcohol and cannabis in theirlifetime: ~209 mm for alcohol and ~115 mm for cannabis (as of 2016, according togovernment forecasts, for which cannabis is subject to a response bias as a Schedule Inarcotic). But, while consumers come back to alcohol at consistently high rates, the sameis not true for cannabis (at least as reported). However, the gap has been closing overthe last decade and we expect that trend to persist. And, despite the convergence inconsumer consumption, our ~$75 bn estimate still puts cannabis category retention ~34pts behind alcohol on a past year basis.
■ First Use Cannabis Benchmarking. Our new analysis introduces cannabis “first use”data (the % of 18+ consumers who have tried cannabis in the last year). To be clear, thisdoes not reinforce the notion that cannabis is a gateway drug; we address that in the“Unintended Consequences” section of the note. But, among consumers over the ageof 18, in legal cannabis states, they show a greater propensity for cannabis trial, whichultimately looks to translate to higher levels of past month cannabis incidence.
■ Expanded Opioid Research. According to a November 2017 White House report,the opioid epidemic costs our country ~$500 bn per year (and that cost is growingexponentially). Newly published research reinforces the work that we have already done,showing that for some, cannabis is an effective opioid substitute (in particular in treatingchronic pain).
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Stock Implications
We remain Outperform rated on the three cannabis companies under our coverage: KSHB,WEED, and LEAF. While this report focuses on the U.S. and has direct implications forKSHB, the trends that we've historically seen for cannabis in the U.S. tend to be mirrored inCanada, building on our conviction around the cannabis opportunity for WEED and LEAF asthe Canadian market expands to adult use later in 2018. Meanwhile, our extensive analysison the impact that legal cannabis access can have on overall drinking patterns reinforcesour conviction that cannabis and alcohol are substitute products. We believe that lower-end beer is most exposed to this substitution risk, such that we remain cautious on MarketPerform-rated TAP.
What to Watch
Growing consumer support for legal cannabis, and increased access, looks to be drivingmeaningful change at the state level. We expect to see ballot initiatives to legalize cannabisfor adult use in both Michigan and Illinois in the upcoming November election. As well, anumber of states are looking at expanding cannabis access (both medical and adult use) viathe legislative and executive branches (with New Jersey the most likely in 2019). Expandedaccess to Maine, Massachusetts and New Jersey could prompt other states in the Northeastto make changes.
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Cannabis: $75B Opportunity; Category Cross-Currents Keep Us Cautious On Booze
Next week, we head to Los Angeles for Cowen’s 2nd Annual Cannabis Summit. We
launched on the sector with a collaborative analysis spanning 10 Cowen Analysts in
September 2016 (here). A lot has changed since then.
18 months ago, we estimated that the legal cannabis market would generate $50 bn in
legal sales by 2026. Today, we think the direct and indirect revenue opportunities (and
risks) are far greater. Assuming federal legalization, we believe cannabis can generate
gross sales of ~$75 bn by 2030 (and ~$17.5 bn in tax revenue), though still far less than
the over $210 bn in sales that the alcohol industry generates today.
Our new proprietary analysis supports our view that cannabis is a substitute social
lubricant for alcohol, and will likely continue to present an incremental headwind to
alcohol sales, in particular beer. Our revised outlook reflects the following:
1. Legal Bud Weighing on Binge Drinking. Herein, we build on our work around alcohol
and cannabis substitution by introducing unique analysis around the evolution of
binge drinking trends across the U.S., segmented by cannabis states. We found that
states with access to adult use cannabis binge drink ~5% less frequently per month
than medical cannabis states (using 2016 legal status) and ~13% less frequently
than non-cannabis states. As cannabis access expands, we expect further pressure
on alcohol sales, given this notable divide in consumer consumption patterns.
2. Extended Outlook: $75 bn Opportunity by 2030. We extend our outlook for the
cannabis market to 2030, while also revising our underlying methodology to reflect
both the market’s evolution and a better understanding of those underlying drivers.
In addition to refining our user evolution analysis, we also adjust our spending
estimates to account for the response bias in government user numbers. Initially,
we had estimated per capita annual spend of ~$1,000 (with no meaningful increase
in the next decade). However, with the market now estimated to be $50 mm, today
this calls into question that rate of spend, given the estimated 35 mm consumers in
the category. As such, we revise up our targeted spend by ~25%, which partially
mitigates this disparity, as we continue to believe that underlying spending is likely
~$1,000 per year.
Figure 1 Per Capita Spend Estimates Reflect a Notable Response Bias Among Consumers
Source: State Reports, NSDUH and Cowen and Company
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Stock Implications
This analysis focuses on the U.S. cannabis market, and thus has implications for
Outperform rated Kush Bottles (KSHB), as well as mixed implications for our publicly
traded alcohol companies, as we continue to build our body of work showing that
alcohol and cannabis are substitute social lubricants.
As well, while we do not cover the Canadian cannabis market in this note, we have
found in our previously published research, that consumer trends in the U.S. and Canada
largely mirror one another when it comes to both cannabis category engagement as
well as the interaction between alcohol and cannabis (in particular among younger adult
consumers). As such, we also reiterate our Outperform ratings on Canadian cannabis
stocks Canopy Growth (WEED) and MedReleaf (LEAF).
Lastly, while we broadly view cannabis and alcohol as substitute social lubricants, we
believe our Top Pick Constellation Brands (STZ) is best positioned to weather this
evolving consumer landscape, as their alcohol portfolio is the most defensible from
cannabis substitution (given the company’s outsized exposure to more affluent, multi-
cultural and gender-diverse consumers), while also having a notable first mover
advantage as the first (and thus far only) publicly traded alcohol company with exposure
to the legal cannabis market (via their 10% stake in medical market share leader WEED
in Canada).
Figure 2 Alcoholic Beverage Stock Implications
Ticker Rating Implications Reason
STZ Outperform Constructive
Positive: First (and thus far only) alcohol company with legal cannabis exposure
Positive: Defensible
Positive: Continues to consolidate share of total beer
Negative: More responsible drinking behavior
BREW Outperform Contructive
Positive: ABI qualified offer optionality
Positive: Diversification with Kona
Positive: Growing in home markets
Negative: Overindexes to West Coast
Negative: Cannabis substitution risk
Negative: More responsible drinking behavior
BF/B Market Perform Neutral
Positive: Over-indexes to premium bourbon, which continues to gain share
Negative: Cannabis substitution risk
Negative: More responsible drinking behavior
TAP Market Perform Cautious
Positive: High degree of confidence in ability to generate targeted cost savings
Negative: Cannabis risk
Negative: Overindexes to lower-income consumers
Negative: Spirits subsitiution risk
Negative: More responsible drinking behavior
SAM Market Perform Cautious
Negative: Share donor within craft
Negative: Cannabis substitution risk
Negative: More responsible drinking behavior Source: Cowen and Company
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Legal Bud Weighs on Binge Drinking
We have consistently argued that cannabis and alcohol are substitute social lubricants.
To be sure, we do not dispute that alcohol will continue to be quite popular in the U.S.
(generating over $210 bn in annual retail sales today). We are, however, focused on the
marginal alcohol unit, which given the cannabis category’s much smaller size, creates a
sizable opportunity for the cannabis industry.
Herein, we examine the relationship between binge drinking statistics across adult use,
medical use and non-cannabis states, by evaluating (1) binge intensity, and (2) number
of binge drinking sessions per month.
We found that adult use and medical use cannabis states have:
Lower levels of binge intensity, and
Fewer binge drinking sessions per month
We believe this furthers our argument that cannabis and alcohol are substitute social
lubricants. Our assertion (better detailed in our Appendix) is further evidenced by our
previously published analysis that shows:
Outsized switching among younger consumers
Shifting risk perceptions among 18-25 year olds
Decelerating per capita alcohol tax revenue generation pressure in legal
cannabis states
Consumer survey work on alcohol consumption among cannabis consumers
Academic research that concludes medical cannabis weighs on alcohol
purchases
Figure 3 Young Adult Alcohol Incidence on the Decline
Figure 4 As Cannabis Is on the Rise, Beer Continues to Fall
Source: NSDUH and Cowen and Company Note: NSDUH lifetime data is Ages 12+, NIAAA per capita consumption is Ages 14+
Source: NIAAA, NSDUH and Cowen and Company
60.9% 60.9% 60.7%
61.5% 61.6%61.2%
61.5% 61.6%61.0%
60.5%59.9%
59.6%59.0%
57.8%
57.0%
58.0%
59.0%
60.0%
61.0%
62.0%
Alcohol Past Month Incidence (Ages 18-25)
1.05
1.15
1.25
1.35
1.45
25.0%
30.0%
35.0%
40.0%
45.0%
19
79
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85
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91
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93
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ate
Lifetime Cannabis Use vs. Beer Per Capita Consumption
Cannabis Beer
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According to the CDC, 1 in 6 adults in the U.S. binge drink four times per month
(consuming seven drinks per binge). A binge drinking session is defined as five or more
drinks for men in about two hours (or four or more drinks for women). According to the
National Institute on Alcohol Abuse and Alcoholism (NIAAA) this is the most common
pattern of excessive alcohol consumption, and unsurprisingly, binge drinking tends to
over-index to younger adult consumers, with over 25% of consumers ages 18-34 having
engaged in binge drinking in 2015. These cohorts, however, have also seen the largest
increases in past month cannabis incidence in the last decade (in percentage points).
Figure 5 Binge Drinking Skews to Younger Adults…
Figure 6 …Where We’re Seeing the Biggest Cannabis Increases
Note: 2015 Youth Risk Behavior Survey conducted through the CDC
Source: CDC and Cowen and Company
Source: NSDUH and Cowen and Company
With increased access to legal cannabis (in particular adult use), we expect to see
pressure on binge drinking behavior. Indeed, adult use states (both from 2016, as well
as new markets that have or will come online by year-end) have binge drinking intensity
rates that fall well below medical and non-cannabis states, while also showing higher
rates of past month cannabis incidence. As well, our analysis found that adult use
cannabis states also have consumers that report meaningfully lower quantities of
alcohol consumed per binge drinking session, relative to medical and non-cannabis
states.
Figure 7 Adult States as of 2016 Report Fewer Binge Drinking Sessions…
Figure 8 …And Lower Levels of Binge Drinking Intensity
Source: CDC, U.S. Census, and Cowen and Company Source: CDC, U.S. Census, and Cowen and Company
17.7%
25.1% 25.7%
19.6%
13.7%
4.6%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
14-17 18-24 25-34 35-44 45-64 65+
Binge Drinking Prevalence by Age
9.3%
16.8%
8.8%
5.5%3.2%
0.2%
9.0%
21.2%
14.9%
8.1%6.3%
2.3%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
14-17 18-24 25-34 35-44 45-64 65+
Past Month Cannabis Incidence by Age
2006 2016
3.7
3.9
4.1
4.3
4.5
4.7
4.9
5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16%
# o
f B
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ess
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on
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Past Month Cannabis Incidence
Legacy (2016) States - Past Month Cannabis
Incidence vs. # of Binge Drinking Sessions
Adult-Use Medical Use Non-Cannabis
6.2
6.4
6.6
6.8
7.0
7.2
7.4
7.6
5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16%# o
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A B
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Se
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Past Month Cannabis Incidence
Legacy (2016 ) States - Past Month Cannabis
Incidence vs. Binge Intensity
Adult-Use Medical Use Non-Cannabis
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Indeed, as we look to the expanded legal states that have or will come online between
2016 and 2018, we can see that the relationship still holds, as adult use states have
lower levels of binge intensity and fewer binge drinking sessions than states with more
restrictive cannabis laws. The key difference is that newly opened states have lower
levels of past month cannabis incidence, on a population-weighted basis, which leads us
to believe that past month cannabis incidence will likely climb as cannabis is more
widely available.
Figure 9 A Similar Trend Holds If We Add Current Legal States…
Figure 10 …Which Show Lower Binge Drinking With Higher Incidence
Source: CDC, U.S. Census, and Cowen and Company Source: CDC, U.S. Census, and Cowen and Company
The evolution of these trends suggests that while excessive drinking is curbed by access
to legal cannabis, those states that don’t have access, in particular non-cannabis states,
have rising rates of binge drinking sessions. Meanwhile, we see medical use states
report 17% more binge drinking sessions per month relative to adult use states (that will
be opened by the end of 2018), while non-cannabis states binge 21% more frequently
per month.
Figure 11 Legacy (2016) Cannabis States…
Figure 12 …And, New (2018) Have Lower Levels of Binge Drinking
4.1
4.4
4.7
3.5
4.0
4.5
5.0
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Legacy (2016) States - Avg # of Binge Drinking
Sessions Per Month (Population Weighted)
Adult-Use Medical Use Non-Cannabis
% Gap Above Adult Use (2016):
Medical Use = +6%
Non-Cannabis = +15%
3.9
4.6
4.8
3.5
4.0
4.5
5.0
20
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New (2018) States - Avg # of Binge Drinking
Sessions Per Month (Population Weighted)
Adult-Use Medical Use Non-Cannabis
% Gap Above Adult Use (2016):
Medical Use = +17%
Non-Cannabis = +21%
Source: CDC, U.S. Census and Cowen and Company Source: CDC, U.S. Census, and Cowen and Company
As well, these legal adult use cannabis states also show that their consumers report
fewer drinks consumed during a binge drinking session. Specifically, non-cannabis
states averaged 7.4 drinks per binge, ~12% higher than the 6.6 drinks per binge seen in
3.7
3.9
4.1
4.3
4.5
4.7
4.9
5% 6% 7% 8% 9% 10% 11% 12%
# o
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on
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Past Month Cannabis Incidence
New (2018) States - Past Month Cannabis
Incidence vs. # of Binge Drinking Sessions
Adult-Use Medical Use Non-Cannabis
6.6
6.8
7.0
7.2
7.4
7.6
5% 6% 7% 8% 9% 10% 11% 12%# o
f D
rin
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A B
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Se
ssio
nPast Month Cannabis Incidence
New (2018) States - Past Month Cannabis
Incidence vs. Binge Intensity
Adult-Use Medical Use Non-Cannabis
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adult use cannabis states (open as of 2016). Meanwhile, when we add new states for
2017 and 2018, we can see that the average moves up to 7.1. This suggests to us as
these new cannabis states mature there is a strong possibility that the number of drinks
per binge session will fall to the levels we have seen for legacy states.
Figure 13 Legacy (2016)
Figure 14 New (2018)
6.6
7.2
7.4
6.0
6.2
6.4
6.6
6.8
7.0
7.2
7.4
7.6
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Legacy (2016) States - Avg # of Drinks During a
Binge Drinking Session (Population Weighted)
Adult-Use Medical Use Non-Cannabis
% Gap Above Adult Use (2016):
Medical Use = +9%
Non-Cannabis = +12%
7.1
7.3
7.4
6.0
6.2
6.4
6.6
6.8
7.0
7.2
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7.6
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New (2018) States - Avg # of Drinks During a
Binge Drinking Session (Population Weighted)
Adult-Use Medical Use Non-Cannabis
% Gap Above Adult Use (2016):
Medical Use = +3%
Non-Cannabis = +5%
Source: CDC, U.S. Census and Cowen and Company Source: CDC, U.S. Census, and Cowen and Company
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Consumption Convergence
As cannabis access has broadened, the makeup of the admitted cannabis user base has
evolved considerably. Over the last decade, as discussed below, the category is
becoming more balanced. For instance, 55+ consumers now make up 17% of past
month users (vs. 5% a decade ago).
New User Outlook. More consumers (all age cohorts) are using cannabis more
frequently (see Fig. 48/49). As such, we re-evaluate our market estimates through an
alcohol lens by juxtaposing category retention rates across these two categories.
Figure 15 Cannabis Trails Alcohol Meaningfully, but We Expect the Category Retention Gap to Close over Time
Note: Ages 18+
Source: NSDUH and Cowen and Company
New Spending Estimates. We agree with STZ’s estimate that the current cannabis
market is likely $50 bn in total sales (legal and illicit). That, however, creates a modeling
disconnect as we rely on government estimates in terms of the number of users
(currently ~35 mm annual, ~22 mm monthly). The government’s user estimate would
imply weighted average spend to be ~$1,450 / person / year. While this is likely high, it
reflects the under-reporting that we believe occurs in these government surveys, as not
all cannabis users will admit to consuming a Schedule I narcotic in a government survey.
While we believe that annual spend of $1,000 is likely more reasonable, we gross that
estimate up by ~25% to account for this response bias.
Figure 16 First Use of Marijuana Gaps Expanded Considerably Over the Last Decade
Source: NSDUH, U.S. Census and Cowen and Company
U.S. Cannabis TAM Assumptions & Key Metrics Population Drivers
5-Yr Avg 2017 2017 2030 2016 2030
Incidence Rates Past Year Retention (18+) 30.9% 43.1% Past Month Users (in mm)
Change in Lifetime Cannabis (18-25) 0.0% 0.0% Past Month Retention (18+) 64.9% 66.5% 18 to 25 7.2 8.1
Change in Lifetime Cannabis (26+) 0.6% 0.2% 26+ 15.2 30.5
Past Month Spend $1,725 $1,725 18+ 65% 22.4 38.6
Change in Past Month Cannabis (18-25) 0.4% 0.2% Past Year, Not PM Spend $400 $400
Change in Past Month Cannabis (26+) 0.5% 0.4% PM Consumption Growth 3.0% Past Year Users (in mm)
PY Consumption Growth 3.0% 18 to 25 11.4 11.8
Change in Past Year Cannabis (18-25) 0.4% 0.1% Inflation 2.0% 26+ 23.2 46.2
Change in Past Year Cannabis (26+) 0.6% 0.6% Cannabis Price Deflation -5.0% 18+ 34.6 58.0
Total Spend $1,259 1,281.3
Change in Past Month Alcohol (18+) -0.2% -0.2% Past Month Can/Alc Gap 16.6% 27.0%
Change in Past Year Alcohol (18+) -0.2% -0.2% Total Cannabis Industry Spend $74.3 Past Year Can/Alc Gap 20.4% 32.2%
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Annual Spending
In calendar 2017, legal cannabis sales (both adult and medical use) totaled $4 bn in CO,
WA, OR, and NV (which opened on July 1, 2017), up 35% YoY. Annualized for a full year
of NV sales, we believe total cannabis sales would be $4.2 bn (+42% YoY). These four
states account for 6.2% of the population, and 6.4% of GDP. Of note, we exclude Alaska
given its small size, and D.C., where formal retail sales are not permitted. If we assume
no illicit sales, and no cross border movement of product, that would imply annual per
capita spend of $1,375 for all admitted past year cannabis users.
Figure 17 Sales Growth Remains Robust…
Figure 18 …As Legal Cannabis Sales Continue to Climb
Note: Total Growth includes Nevada sales in 2017
Source: State Reports and Cowen and Company
Source: State Reports and Cowen and Company
Notably, the $4 bn in sales from these four states accounts for only a fraction of total
cannabis sales in the U.S., as it excludes: (1) legal medical sales, which are not reported,
but we suspect are growing robustly, given the strong patient growth that we are
seeing in the U.S., and (2) illicit sales. Recently, STZ estimated that the total U.S.
cannabis market (legal and illicit) likely generates $50 bn today.
Figure 19 STZ Estimates Current Cannabis Market Is $50 bn
Note: Includes estimated legal and illegal markets in the U.S.
Source: Company Reports, Marijuana Business Daily Factbook 2017, and Cowen and Company
15.3%
53.5%
35.4% 35.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Cannabis Gross Sales 2017 YoY Growth
$0
$1,000
$2,000
$3,000
$4,000
$5,000
2014 2015 2016 2017
Cannabis Gross Retail Sales (in $ mm)
Colorado Nevada Oregon Washington
$1,659
$765
$2,976
$4,018
$110
$77
$60$50
$0
$20
$40
$60
$80
$100
$120
Beer Cigarettes Wine Total Cannabis
STZ's Estimated Cannabis Sales vs. Other U.S. CPG Categories (in $ bn)
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STZ’s current market estimate of $50 bn seems reasonable to us, but does call into
question our previous assumptions around per capita annual spend. Specifically, we had
been using an estimate for ~$1,000 per year for all annual users (with higher spend for
past month users, and lower spend for only annual users). However, that methodology
fails to take into account the response bias.
Our analysis uses government reported data for the number of admitted past month
users. If we assumed that there was no response bias, the 35 mm users would imply a
national per capita annual cannabis spend of ~$1,450. If, however, our assumption for
$1,000 annual spend is correct, that would imply that the number of users in the U.S.
would be closer to 50 mm (~43% ahead of the government’s estimate). As well, we can
also use sales from the biggest legal cannabis states as an additional measure.
Specifically, annualized sales in CO, WA, OR, NV imply annual per capita spend of
$1,375, which assuming a $50 bn total category would imply 36 mm past year cannabis
users in the U.S.
Figure 20 Per Capita Spend Estimates Reflect a Notable Response Bias Among Consumers
Source: State Reports, NSDUH and Cowen and Company
COWEN.COM 15
COWENEQUITY RESEARCH April 4, 2018
Lifetime Use.
Over the last decade, lifetime cannabis incidence (trial) has increased roughly 500 bps,
to 47% (which rate has generally held steady over the last three years). The driver of
the increase in overall cannabis incidence looks to be older consumers (26+), where
lifetime trial steadily approaches the rates seen for 18-25 year olds (between 50-55%).
Figure 21 Steady Increases in Lifetime Cannabis Trial…
Figure 22 …Driven by 26+ Year Old Consumers
42.7% 42.7%42.3%
43.7%
44.7%
45.5%
47.1% 47.0%
40.0%
41.0%
42.0%
43.0%
44.0%
45.0%
46.0%
47.0%
48.0%
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Lifetime Cannabis Use (Ages 18+)
53.8%
51.8%
40.8%
46.2%
40.0%
43.0%
46.0%
49.0%
52.0%
55.0%
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Lifetime Cannabis Incidence
18-25 26+
Source: NSDUH and Cowen and Company Source: NSDUH and Cowen and Company
Our analysis assumes no increase in lifetime cannabis incidence among 18-25 year olds,
as that measure has held relatively constant between 50-53% since 2008. However, we
do assume a continued convergence in lifetime trial among 26+ consumers, a
continuation of the historical trend. In 2002, the gap in cannabis trial between these
two age cohorts was 1300 bps; it narrowed to 560 bps by 2016 (with the gap closing an
average of 20 bps per year). Looking ahead, we conservatively estimate no further
increases in lifetime cannabis trial among 18-25 year olds (though it remains ~30 pts
below alcohol) and assume the gap holds. As such, we expect the number of 18-25
lifetime users to be unchanged through 2030, while we expect the 26+ cohort to grow
at a 1.3% CAGR.
Figure 23 Although Lifetime Growth Will
Slow…
Figure 24 …We Expect Lifetime Trial to Converge
0.3%
2.3%
0.0%
1.3%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
18 to 25 26 or Older
Lifetime User CAGRs
2009A-2016A 2017E-2030E
51.8% 51.8%
46.2%
49.0%
42.0%
44.0%
46.0%
48.0%
50.0%
52.0%
54.0%
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
E
20
18
E
20
19
E
20
20
E
20
21
E
20
22
E
20
23
E
20
24
E
20
25
E
20
26
E
20
27
E
20
28
E
20
29
E
20
30
ELifetime Incidence (Trial) by Age Group
18 to 25 26 or Older
Source: NSDUH and Cowen and Company Source: NSDUH and Cowen and Company
COWEN.COM16
COWENEQUITY RESEARCH April 4, 2018
Lifetime use is a key area of conservatism in our forecasting, as expanded access to legal
cannabis should drive more trial than we are anticipating (across all age cohorts).
This is evidenced by the disparities in state-level cannabis “first use” trends among the
18+ cohort nationally (the percentage of the population that has tried cannabis for the
first time, in any given year). Based on state legal status in 2016 (adult, medical, or non-
use), we can see that there are widening gaps, favoring states with legal access.
When we readjust these state weightings to account for states that have or will change
status through year-end 2018 (CA, NV, MA, ME, VT), we can see that “first use” is
depressed. This shows that newly legalized states lag those already legal two years
ago. So, increased access should drive trial. Ultimately, that should also drive category
retention, as there looks to be a positive correlation between first use trends and past
month incidence.
Figure 25 Legacy (2016) Adult Use States Try Cannabis for the First Time
More Often…
Figure 26 …We Expect New States (2018) to Catch Up
Note: Ages 18+
Source: NSDUH and Cowen and Company
Note: Ages 18+
Source: NSDUH and Cowen and Company
Figure 27 First Use of Marijuana Increasing Across All States…
Figure 28 …Correlates to Cannabis Access, and Drives Past Month
Incidence
Note: Ages 18+
Source: NSDUH and Cowen and Company
Note: Ages 18+
Source: NSDUH and Cowen and Company
1.9%
1.5%
1.3%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
First Use of Marijauna (Population Weighted)
Adult-Use Medical Use Non-Cannabis
% Gap Below Adult Use (2016):
Medical Use = -25%
Non-Cannabis = -34%
1.7%
1.4%
1.3%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
First Use of Marijauna (Population Weighted)
Adult-Use Medical Use Non-Cannabis
% Gap Below Adult Use (2016):
Medical Use = -19%
Non-Cannabis = -26%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
2.2%
5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16%
Ra
te o
f F
irst
Use
of
Ma
riju
ana
Past Month Cannabis Incidence
Past Month Cannabis Incidence vs. First Use of Marijuna (18+)
Adult-Use Medical Use Non-Cannabis
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
5% 6% 7% 8% 9% 10% 11% 12%
Ra
te o
f F
irst
Use
of
Ma
riju
ana
Past Month Cannabis Incidence
Past Month Cannabis Incidence vs. First Use of
Marijuna (18+)
Adult-Use Medical Use Non-Cannabis
COWEN.COM 17
COWENEQUITY RESEARCH April 4, 2018
Past Year Incidence.
Since 2009, we have seen steady increases in past year cannabis incidence among all
age cohorts. Of the nearly 35 mm adults that admitted to past year cannabis use in the
U.S. in 2016, ~23 mm were 26+. This reflects continued mix shift to an older user
cohort, as 26+ now accounts for 67% of past year cannabis users, up from 59% in 2009.
Figure 29 User Mix Moving Toward 26+…
Figure 30 …As Older Past Year Use Continues to Grow
Source: NSDUH and Cowen and Company Source: NSDUH and Cowen and Company
Looking ahead, we expect past year cannabis incidence to grow roughly 50% from our
2017E through 2030. A vast majority of that growth will come from the 26+ cohort.
And, despite that outsized growth, we still expect that 26+ incidence will still be 15.0 pts
below 18-25 year olds (vs. the current 22.0 pt gap).
Figure 31 Alcohol and Cannabis Incidence Have Inverse Relationship
Figure 32 Older Consumers Are Narrowing the Incidence Gap
69.8%
69.2%
10.4%
14.1%
8.0%
10.0%
12.0%
14.0%
16.0%
67.0%
68.0%
69.0%
70.0%
71.0%
72.0%
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
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14
20
15
20
16
Ca
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Past Year Incidence (Ages 18+)
Alcohol Cannabis
33.0%34.4%
11.0%
19.4%
6.0%
11.0%
16.0%
21.0%
26.0%
31.0%
20
09
20
11
20
13
20
15
20
17
E
20
19
E
20
21
E
20
23
E
20
25
E
20
27
E
20
29
E
Cannabis Past Year Incidence (in %)
18 to 25 26 or Older
2016:
22.0 pt Gap
2030:
15.0 pt Gap
Source: NSDUH and Cowen and Company Source: NSDUH and Cowen and Company
41% 33%
59% 67%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
2009 2016
Past Year User Mix by Age
18 to 25 26 or Older
29.8%
33.0%
7.0%
11.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
26.0%
28.0%
30.0%
32.0%
34.0%
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Ag
es
26
+
Ag
es
18
-25
Cannabis Past Year Incidence (in %)
18-25 26+
COWEN.COM18
COWENEQUITY RESEARCH April 4, 2018
Past Year Retention.
These incidence estimates are supported by the evolution in cannabis category
retention. On a past year basis, this is measured by past year incidence divided by
lifetime trial. Overall, among the 18+ cohort, close to 31% report consuming on a past
year basis, which rate of category engagement or retention has risen ~700 bps over the
last decade. However, when segmented by age, we can see that past year category
retention among 18-25 year olds (63.7% in 2016) notably exceeds past year retention
among 26+ consumers (23.8%).
Figure 33 Past Year Category Retention on the Rise
24.4%23.4% 23.7% 23.6% 23.6%
22.9% 22.9%
25.2% 25.3% 25.4%26.4%
26.8%
28.2%29.0%
30.6%
20.0%
22.0%
24.0%
26.0%
28.0%
30.0%
32.0%
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Past Year Category Retention (Ages 18+)
Note: Past Year Retention = Past Year Incidence/Lifetime Incidence
Source: NSDUH and Cowen and Company
While we expect past year cannabis retention to reach ~66% and ~40% for 18-25 year
olds and 26+ consumers, respectively, by 2030, it’s important to view these numbers in
the context of alcohol. In 2016, ~92% and ~79% of 18-25 year olds and 26+ consumers,
respectively, who tried alcohol became past year users. Our numbers reflect a
conservative view on conversion of lifetime (trial) cannabis users, as we expect the
retention gap between 18-25 year olds and those older will only narrow to 26.8 pts by
2030 vs. the current 12.3 pt gap in alcohol.
Figure 34 Cannabis in 2030 Still Below Alcohol
Retention Levels…
Figure 35 …As the Gap Between Older Consumers Is Expected To Narrow Over Time
66.4%
91.5%
39.6%
79.2%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
Cannabis
(2030E)
Alcohol (2016)
Past Year Retention
18-25 26+
63.7%66.4%
23.8%
39.6%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
E
20
20
E
20
22
E
20
24
E
20
26
E
20
28
E
20
30
E
Past Year Category Retention
18-25 26+
2016:
39.9 pt Gap
2030:
26.8 pt Gap
Source: NSDUH and Cowen and Company Source: NSDUH and Cowen and Company
COWEN.COM 19
COWENEQUITY RESEARCH April 4, 2018
Past Month Incidence.
Over the last decade, past month cannabis incidence has climbed over 50%, to 9.1% in
2016. As is true of past year incidence, age cohort gaps remain wide. With 100% of
population growth coming from 26+, we expect this population segment to drive a
majority (93%) of past month cannabis user growth. In absolute terms, we expect the
number of consumers that report using cannabis on a past month basis to increase ~16
mm, or grow at a 3.9% CAGR for the next 13 years.
Figure 36 Cannabis Past Month Users by Age
6.6 6.8 6.9 7.2 7.2 7.3 7.3 7.3 7.4 7.5 7.6 7.7 7.7 7.8 7.9 7.9 8.0 8.1
11.4 13.5 13.6 15.2 16.2 17.2 18.2 19.2 20.3 21.4 22.4 23.6 24.7 25.8 27.0 28.1 29.3 30.5
0
10
20
30
40
20
13
20
14
20
15
20
16
20
17
E
20
18
E
20
19
E
20
20
E
20
21
E
20
22
E
20
23
E
20
24
E
20
25
E
20
26
E
20
27
E
20
28
E
20
29
E
20
30
E
Past Month Cannabis Users (in mm)
18 to 25 26 or Older Source: NSDUH and Cowen and Company
This outsized growth in older users 26+ is a function of faster population growth rate
relative to 18-25 year olds in the U.S., as well as higher expected changes in incidence
rates. While past month incidence for 18-25 year olds averaged ~+50 bps per year
between 2009 and 2016, we expect this to moderate to +~20 bps per year through
2030, reflecting roughly flat population growth for the cohort and given incidence is
already ~2x the rate of users 26 or older. Meanwhile, users 26 or older have seen
changes in past month incidence average +~40 bps in the prior 7-year period, a trend
that we expect to continue through 2030, given much of the conversion to cannabis
usage will occur in this cohort and the population is expected to grow ~90 bps per year
over the next 13 years.
Figure 37 Cowen Model Expects 18-25 Change in Incidence To Moderate, While 26+ Will Continue Its Trend
18.2%
4.6%
20.8%
7.2%
23.6%
12.8%
0%
5%
10%
15%
20%
25%
18 to 25 26 or Older
Past Month Cannabis Incidence
2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E
2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E
Avg. Incidence Change
2009-16 = +50 bps
2017E-30E = +20 bpsAvg. Incidence Change
2009-16 = +40 bps
2017E-30E = +40 bps
Note: Ages 18+
Source: NSDUH and Cowen and Company
COWEN.COM20
COWENEQUITY RESEARCH April 4, 2018
Past Month Retention.
The growing rate of category engagement is also evident when we examine the
percentage of past year users that also report consuming cannabis on a past month
basis. Among 18+ year old consumers, past month category engagement has also been
on the rise, having increased 560 bps since 2007. Interestingly, however, these age-
specific gaps are far less evident when we look at the percentage of past year users that
also report cannabis use on a past month basis. Indeed, past month cannabis category
retention does not differ meaningfully between 18-25 year olds and 26+, as there have
been steady increases in category engagement for both age cohorts.
Figure 38 Past Month Category Retention Also on the Rise…
Figure 39 …With Similar Rates of Category Engagement
57.7%58.4%
59.0%60.0% 60.2%
60.8%
63.9%63.2%
54.0%
56.0%
58.0%
60.0%
62.0%
64.0%
66.0%
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Past Month Category Retention (Ages 18+)
57.1%
65.5%
58.1% 63.0%
55.0%
57.0%
59.0%
61.0%
63.0%
65.0%
67.0%
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Past Month Category Retention
18-25 26+
Note: Past Month Retention = Past Month Incidence/Past Year Incidence
Source: NSDUH and Cowen and Company
Note: Past Month Retention = Past Month Incidence/Past Year Incidence
Source: NSDUH and Cowen and Company
The latter trend, in terms of consumers transitioning from past year to past month use
makes sense to us as per capita consumption data from the U.S. government has also
shown a trend toward daily use as consumers migrate along the per capita consumption
curve.
Figure 40 Cannabis Frequency Among Past Month Users
40.4%
11.4%6.8%
9.4%
32.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
1-6 7-12 13-18 19-24 25-30
Cannabis Frequency Among Past Month Users (# of Days Per Month)
2002 2003 2004 2005 2006 2007 2008 2009
2010 2011 2012 2013 2014 2015 2016
Source: NSDUH and Cowen and Company
COWEN.COM 21
COWENEQUITY RESEARCH April 4, 2018
Consumer Support at Record Levels
The growth in consumer support for full cannabis legalization for adult use continues to
be readily apparent. Across the U.S., 64% of adults support legalization. Much of the
change in sentiment has occurred over the last 20 years, as support has roughly
doubled. This improved view of adult use cannabis legalization coincides with the initial
introduction of medical cannabis (beginning in CA if 1996), and has accelerated as a
growing number of states have legalized cannabis for medical use (now 29, and D.C.),
and adult use access (9 states, and D.C.).
Figure 41 National Support Has Increased Meaningfully in the Last 20 Years
12%
28%23% 25%
31%36%
46%
58%64%
0%
10%
20%
30%
40%
50%
60%
70%
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
20
05
20
08
20
11
20
14
20
17
Do you think the use of marijuana should be made legal, or not?
Source: Gallup and Cowen and Company
Encouragingly, this support looks to be increasingly diverse. While Republicans favor
legal access less than Democrats and Independents as of October 2017, a majority (51%)
of Republicans also support adult use. We expect this support to continue to grow.
While as 77% of adults aged 18-34 in 2016 supported legalization of marijuana (up 33
pts since 2003/05), the 35-54 and 55+ age cohorts also saw 26 pt and 16 pt increases,
respectively, over the same time period.
Figure 42 Marijuana Support Across All Political Parties…
Figure 43 …With Growing Support Across All Age Groups
20
51
35
72
4767
0
20
40
60
80
20
03
20
05
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Support for Legal Marijuana by Political Party
Republicans Independents Democrats
35%44%
35%29%
60%
77%
61%
45%
0%
20%
40%
60%
80%
100%
National
Adults
18-34 35-54 55+
Support for Legalization of Marijuana, by Age
2003 and 2005 2016
Source: Gallup and Cowen and Company Note: Based on aggregated data from 7/10/13, 7/8/15, 7/13/16, and 7/5/17
Source: Gallup and Cowen and Company
COWEN.COM22
COWENEQUITY RESEARCH April 4, 2018
Shifts in Consumer Demographics
Cannabis Use by Age. The growing support for cannabis legalization, as discussed
above, not only reflects the increased access to cannabis, but also the coincident growth
in admitted cannabis use. The data referenced below sources for the U.S. government’s
NSDUH, which likely under-reports actual usage, as not all consumers are likely willing
to admitting to use of a Schedule I controlled substance. Despite this response bias,
there have been steady increases in admitted cannabis use in the U.S. over the last
decade. Among consumers 18+, ~22 mm report past month cannabis use (at 9.1%
incidence), while a greater ~35 mm report annual cannabis use (at 14.1% incidence).
Figure 44 Diverging Trends on a Past Month…
Figure 45 …and Past Year Basis, As Alcohol Falls
54.9%
55.0%
6.0%
9.1%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
52.0%
53.0%
54.0%
55.0%
56.0%
57.0%
58.0%
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
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Past Month Incidence (Ages 18+)
Alcohol Cannabis
69.8%
69.2%
10.4%
14.1%
8.0%
10.0%
12.0%
14.0%
16.0%
67.0%
68.0%
69.0%
70.0%
71.0%
72.0%
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
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10
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Past Year Incidence (Ages 18+)
Alcohol Cannabis
Note: Ages 18+
Source: NSDUH and Cowen and Company
Note: Ages 18+
Source: NSDUH and Cowen and Company
Unsurprisingly, admitted cannabis incidence materially overindexes with younger adult
consumers, with past month incidence among consumers under the age of 40 exceeding
the national average. However, it is interesting to see that universally cannabis
incidence has been on the rise for all age cohorts above the age of 18 over the last
decade.
Figure 46 Past Month Use on The Rise with Most Age Cohorts (2006 v. 2016)
16%
10%
7%6% 5% 5% 4%
1% 2%0%
21%
17%
13%
10%
6%8%
6%7%
4%2%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
18-25 26-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65+
Past Month Cannabis Incidence by Age
2006 2016
Source: NSDUH and Cowen and Company
COWEN.COM 23
COWENEQUITY RESEARCH April 4, 2018
What is less apparent, but perhaps far more telling, is the growth rates in the absolute
number of admitted past month cannabis users of the last 5 and 10 years. Indeed, while
the number of reported past month cannabis users has grown with every cohort,
growth has been most apparent among older consumers, where we have seen double-
digit growth with every cohort age 55 and above.
Figure 47 Older Cohorts Posting Outsized Growth in Cannabis Use
6.5%
11.2% 10.1%6.4%
8.3%
2.3%
17.8%
12.9%16.4%
30.0%
5.5%7.8%
5.2%
0.5%3.8% 3.9%
21.5% 21.4%
15.3%
31.3%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
26-29 30-34 35-39 40-44 45-49 50-54 55+ 55-59 60-64 65+
Past Month Cannabis Users by Age Cohort
5-Yr CAGR 10-Yr CAGR
Source: NSDUH and Cowen and Company
This outsized user growth among older consumers has driven a notable shift in
underlying past month cannabis user demographics. Consumers under the age of 30 are
still a large block (38% of admitted consumers in 2016, vs. 45% in 2006). However, the
far more notable change has been the proportion of past month users over the age of
55, who now account for 17% of past month users, up from only 5% 10 years ago.
Figure 48 21-25 Year Olds Remain the Largest Cohort…
Figure 49 …But, 55+ is the Fastest Growing
21-25
29%
26-29
16%30-34
12%
35-39
11%
40-44
11%
45-49
9%
50-54
7%
55+
5%
Past Month User Mix (2006)
21-25
23%
26-29
15%
30-34
14%
35-39
10%
40-44
7%
45-49
7%
50-54
7%
55+
17%
Past Month User Mix (2016)
Source: NSDUH and Cowen and Company Source: NSDUH and Cowen and Company
COWEN.COM24
COWENEQUITY RESEARCH April 4, 2018
Cannabis Use by Education Level. The shift in cannabis consumption by age cohort is
mirrored by changes in other consumer segments. From an education perspective, we
continue to see outsized admitted past month incidence led by consumers with lower
levels or educational attainment. However, as was true with the age segmentation, the
most robust growth is coming from more highly educated consumers, that have
historically under-indexed to cannabis consumption.
Figure 50 Cannabis Growing in Popularity with Most Cohorts
Figure 51 Strong Cannabis Uptake Among Highly Educated Consumers
6.6%
11.3%
10.0%
8.3%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Past Month Cannabis Incidence
< High School High School GraduateSome College College Grad
-1.4%
4.1%
10.0%11.6%
1.4%3.1%
8.6%7.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
< High School High School
Graduate
Some College College Grad
Past Month Cannabis Users by Education
5-Yr CAGR 10-Yr CAGR
Note: Ages 18+
Source: NSDUH and Cowen and Company
Note: Ages 18+
Source: NSDUH and Cowen and Company
Interestingly, these past month user rates don’t seem to be a function of lifetime trial.
Indeed, lifetime trial is in fact higher among consumers with higher levels of educational
attainment. This helps to explain the outsized growth that we are seeing from more
highly educated consumers, as these adults had already tried cannabis, and simply look
to be re-engaging with the category, as the groups’ past month use to lifetime trial ratio
looks to be approaching levels that we have seen for consumers with lower levels of
educational attainment.
Figure 52 While Incidence Varies by Education…Trial Is Generally High
8.3%
32.6%
10.0%
44.5%
11.3%
53.5%
6.6%
48.5%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Past Month Lifetime
Cannabis Use by Education
< High School High School Graduate Some College College Graduate
Note: Based on 2016 data
Source: NSDUH and Cowen and Company
COWEN.COM 25
COWENEQUITY RESEARCH April 4, 2018
Cannabis Use by Income. This normalization in consumer cannabis trends by age and
educational cohort is also mirrored by income-specific data. Growth in the absolute
number of users has been fairly consistent by income cohort. What’s perhaps more
interesting is the consistency in lifetime trial, which is over 40% regardless of income
bracket. As such, while past month use has historically been inversely correlated with
household income, the normalization of cannabis consumption would point to an
outsized opportunity to re-engage lapsed, higher-income consumers.
Figure 53 Lower-Income Consumers Over-Index to Cannabis
Figure 54 Cannabis Trial Consistent Across Income Groups
3.1%
2.3%2.7%
2.3%
3.9%
2.8%
3.7%3.1%
0.0%
2.0%
4.0%
6.0%
< $20K $20K-$49.9K $50K-$74.9K > $75K
10-Yr Change in Cannabis Incidence by Income (2005-2015, in %)
Past Month Past Year
11.3%
41.0%
8.9%
41.0%
7.8%
45.2%
6.6%
47.3%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
Past Month Lifetime
Cannabis Use by Income
< $20K $20K-$49.9K $50K-$74.9K > $75K
Note: Ages 12+
Source: NSDUH and Cowen and Company
Note: Based on 2015 data
Source: NSDUH and Cowen and Company
Cannabis Use by Gender. While the gender gap in past month and past year cannabis
use remains wide (with male incidence higher than for women), the gap has been
closing. Specifically, in 2016 male cannabis incidence was 11.7%, while female cannabis
incidence was 6.7%, both on a past month basis. However, over the last decade, male
past month cannabis incidence has risen 3.5 pts, while female cannabis incidence has
increased 2.9 pts.
Figure 55 While Male Incidence Surpasses Female Incidence…
Figure 56 …Female Usage Has Been Accelerating Faster
13.3%
17.3%
7.7%
11.2%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Cannabis Past Year Cannabis Incidence
Male Female
8.0%
11.7%
4.1%
6.7%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Cannabis Past Month Cannabis Incidence
Male Female
Source: NSDUH and Cowen and Company Source: NSDUH and Cowen and Company
COWEN.COM26
COWENEQUITY RESEARCH April 4, 2018
Political Pivot
As we think ahead to expanded cannabis access, increased consumer support should
continue to drive a political pivot. Seemingly, the robust support that was broadly seen
during the 2016 election cycle was a good earlier indicator that consumer demands and
political action likely needed to converge further.
Since the 2016 election, there is already ample evidence that political momentum
around cannabis (both medical and adult use) continues to build. Indeed, we have
already seen:
1) West Virginia. Governor Jim Justice (R) signed a medical cannabis bill in April 2017.
In a deep red Republican state, this move is telling, given that West Virginia has one
of the highest rates of opioid morbidity in the country (as discussed below).
Implementation won’t occur sooner than July 2019.
2) Vermont. Vermont became the first state to legalize cannabis for adult use through
their state legislature. While the measure does not include taxation or legal retail, it
is an interesting shift from the 100% ballot-led moves we have typically seen.
3) Utah. In mid-March, Governor Gary Hubert (R) signed House Bill 195, which will
give restrictive medical marijuana access to terminally-ill patients.
2018 Elections
1) Michigan. MI is close to approving a ballot measure for adult use cannabis in the
upcoming 2018 election, which requires supporters to obtain ~250,000 verified
signatures before moving on. After approving medical cannabis in 2008, MI is one
of the largest medical cannabis states in the country, with almost 270,000 qualified
patients as of September 2017 (representing over 20% growth since the year-ago
period).
While the election is still seven months away, it is already becoming a relevant issue
in the upcoming primaries. Among Democratic candidates for Attorney General,
Dana Nessel has been a vocal supporter; her Democratic opponent Patrick Miles
recently flipped into the “yes” column, after not having commented.
2) Illinois. After state senators voted 37-13 in March 2018 to put adult-use
legalization on the November 2018 ballot, it’s already become a hot-button topic in
the upcoming Gubernatorial race. Incumbent Bruce Rauner (R) opposes marijuana
legalization (though he did decriminalize small possessions and extended the state’s
medical cannabis program through 2020). His Democratic opponent J.B. Pritzker,
who won a 6-candidate primary with 45% of the vote (~20 pts ahead of the runner-
up), has made legalizing adult use cannabis as a key campaign point.
Of note, the primary election that determined these candidates in Cook County
included a non-binding measure on adult use legalization. Cook County, which
covers Chicago, the second largest municipality in the U.S., voted overwhelmingly
for adult use cannabis (at 63%), which we find to be a noteworthy straw poll.
COWEN.COM 27
COWENEQUITY RESEARCH April 4, 2018
3) Oklahoma. After Jeff Session announced the repeal of the Cole Memo, Oklahoma’s
Governor Mary Fallin (R) announced the inclusion of a medical marijuana ballot
measure for the state’s June 26, 2018 primary. This move comes as a result of a
2016 petition that gathered ~66,000 signatures from state residents in support of
adding the measure to the ballot.
If successfully passed, the measure would allow those aged 18 or older to carry
“small amounts” of cannabis and grow a “restricted number” of plants, with both
requiring a doctor’s permission.
Adult-Use States on the Horizon
1) New Jersey. NJ has been contemplating the legalization of adult use cannabis since
2016. Then Senate President Stephen Sweeney (D) noted that legalization would
be a “game-changer” for the state and indicated his intention to pursue legalization
in 2018 (upon the election of a new governor). Newly-elected Governor Phil
Murphy (D) unveiled his budget in late March, which included a provision for
legalization by January 2019 (with an estimate for $60 mm in tax revenue
generation). The State Assembly has until June to ratify the budget.
2) Connecticut. While exiting Governor Dannel Malloy (D) has historically been against
cannabis legalization, in the Governor’s FY19 Budget, while not in the formal
budget proposal, his administration did include an alternative to the recommended
revisions, which included the possibility for “legalizing and taxing the recreational
use of marijuana.”
CT’s Gubernatorial primary, which has crowded fields on both sides, will be held on
August 14, 2018 (ahead of the general election in November). In the meantime, the
General Assembly has the opportunity to consider legalization as well, with several
bills in Committee, though the measure continues to see Republican opposition.
3) Delaware. The Adult Use Cannabis Task Force studied the issue for six months,
with the committee concluding their work in March 2018. While the vote was
close, the committee will release their report, which findings can be utilized by the
General Assembly in crafting potential legislation.
4) Rhode Island. In April 2017, Governor Gina Raimondo (D) endorsed the formation
of an exploratory committee around the legalization of adult use cannabis.
5) New Mexico. In February 2018, the Senate Rules Committee voted four to three to
include a ballot in the upcoming November election to vote on adult use cannabis
legalization. As well, the state legislature is considering adding opioid use disorder
as a qualifying condition for medical cannabis patients.
6) Minnesota. House File 2714 and House File 926 were submitted in May and
February 2017, respectively, in order to have the question of adult use cannabis
legalization appear on the November 2018 ballot. Out of the Democratic-Farmer-
Labor candidates, five out of six of them, including the retiring DFL Governor Mark
Dayton, have said they favor legalizing cannabis for adult use.
COWEN.COM28
COWENEQUITY RESEARCH April 4, 2018
Medical States on the Horizon
1) Nebraska. In January 2018, Legislative Resolution 293CA was introduced by
Senator Anna Wishart (D) to add a constitutional amendment for medical cannabis
use, subject to regulation. Governor Pete Ricketts (R), a known cannabis-opposer,
will face opposition from cannabis-enthusiast Krystal Gabel (R) in the upcoming
election.
2) Missouri. New Approach Missouri, the leading campaign trying to bring legal
medical cannabis to Missouri recently collected 250,000 signatures to get medical
cannabis on the November 2018 ballot. The petition has until May 2018 to collect
signatures before filing with the secretary of state for verification.
3) Utah. In addition to approving restrictive medical marijuana use to terminally ill
patients, Governor Gary Hubert (R) also approved House Bill 197 and Senate Bill
130, which would allow the state Department of Agriculture and Food to contract
the production and storage of approved marijuana products, and to approve the
sale of CBD oil, respectively.
This mounting focus on cannabis is not a surprise given the broad-based support for
legalizing cannabis evident in the November 2016 elections, where 8 out of 9 cannabis
ballot measures passed (and Arizona losing by a small 130 bps margin). As a result,
~60% of the U.S. population now resides in a state that has (or will have) access to
medical cannabis. And, by year-end 2018, assuming MA and ME open on time, adult-use
cannabis will cover ~25% of U.S. GDP.
Figure 57 Clear Support For Cannabis Across Most Voting States in 2016
Election 2016 - Cannabis Ballot Results
State Ballot Number Approval Disapprove
Legalization Ballot Initatives
California Proposition 64 57.1% 42.9%
Maine Question 1 50.3% 49.7%
Massachusetts Question 4 53.7% 46.3%
Nevada Question 2 54.5% 45.5%
Arizona Proposition 205 48.7% 51.3%
Medical Ballot Initiatives
Arkansas Issue 6 53.1% 46.8%
Florida Amendment 2 71.3% 28.7%
Montana I-182 57.9% 43.7%
North Dakota Measure 5 63.8% 36.2%
Source: Ballotpedia and Cowen and Company
COWEN.COM 29
COWENEQUITY RESEARCH April 4, 2018
Attractive Tax Revenue Opportunity
One reason that we believe cannabis legalization will continue to gain momentum is that
in CO, WA and OR collectively, tax revenue generation has meaningfully exceeded
expectations. According to the Cato Institute: “One area where legal marijuana has
reaped unexpectedly large benefits is state tax revenue.”
In total, CO, WA and OR are now expected to generate $1.4 billion in cannabis tax
revenue in the upcoming biennial fiscal year, 24% higher than was expected 12 months
ago. Moreover, each of these three states has consistently raised their tax revenue
forecasts on a 12-month basis (e.g., 12 months before the preliminary data was
released), in each of the full fiscal years that adult use cannabis has been legal.
Impressively, cannabis is expected to account for 1.3% of GDP for these three states
between 2017 and 2019 (according to state budget forecasts), with the contribution
from cannabis taxes to GDP having doubled in 2016, and having increased another 50%
in 2017 in CO, WA and OR combined.
Taking our 2030 estimate for total gross cannabis sales of $75 bn, and assuming all of
that is through legal channels, we estimate that the cannabis category could ultimately
generate ~$17.5 bn in tax revenues, including:
1) ~$3 bn in Federal Taxes (assuming a 5% federal excise tax),
2) $11.5 bn in States Taxes (assuming a 20% state excise tax),
3) ~$3 bn in Local Taxes (assuming a 5% tax rate).
Figure 58 Tax Revenues Generally Ahead of Expectations
Figure 59 CO Has Been a Consistent Positive Revision Story
1.7%
1.1%
0.3%
1.0%
2.4%
1.0%0.8%
1.3%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
CO WA OR CO+WA+OR
Cannabis % Contribution to Overall Revisions
(2017-2019 - Biennium)
12 Month Ago Expectations Current Expectations
0.3%
0.6%
0.9%
1.3%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
2015 2016 2017 2017-
2019E
% Cannabis Tax Contribution (CO+WA+OR)
Note: CO and WA based on Sept Expectations and OR based on May expectations for current year, June expectations for past year; Not adjusted for changes in tax structure
Source: Colorado Legislative Council Staff, Washington Economic and Revenue Forecast Council, Oregon Office of Economic Analysis, and Cowen and Company
Source: Colorado Legislative Council Staff, Washington Economic and Revenue Forecast Council and Cowen and Company
COWEN.COM30
COWENEQUITY RESEARCH April 4, 2018
Colorado
FY 16/17 tax receipts of $211 million, ~75% higher than expected two years
ago (Dec. 2015).
~50% increase in taxes YoY, in the 4th year of adult use.
Figure 60 CO Steadily Raised Outlook…
Figure 61 …As Tax Receipts Grow 50% in Year 4
$0
$50
$100
$150
$200
$250
Total Proposition
AA Taxes
Total 2.90% Sales
Tax
Total Taxes on
Marijuana
CO Projected Cannabis Taxes (FY 16/17)
Dec-14 Dec-15 Dec-16 Dec-17
+75%+83%
+50%
2%6% 6%
11%15%
11%14%
19%22%
33%32%
44%49%49%
0%
10%
20%
30%
40%
50%
60%
Se
p-1
4
De
c-1
4
Mar
-15
Jun
-15
Se
p-1
5
De
c-1
5
Mar
-16
Jun
-16
Se
p-1
6
De
c-1
6
Mar
-17
Jun
-17
Se
p-1
7
De
c-1
7
CO Projected Growth for FY 16/17 Cannabis
Taxes
Source: Colorado Legislative Council Staff, Washington Economic and Revenue Forecast Council and Cowen and Company
Source: Colorado Legislative Council Staff and Cowen and Company
Oregon
FY17 tax receipts came in over 2x what was forecast in the prior year, at $70
million (up from $33 million in May 2016).
The biennium tax outlook for OR looks equally encouraging, with an expected
$160 million in receipts as of December 2017, up 156% since May 2016.
Figure 62 Tax Revenue Generation in Oregon…
Figure 63 …is Expected to Accelerate
$11$12
$28$22
$33
$21
$70
$0
$20
$40
$60
$80
FY 2016 FY 2017
Gross Marijuana Revenue Projections (not incl. licenses and fees), USD in mm
HB2041(2015) SB 1511 (2016) May-16 Actual
$47$62 $62 $62
$157 $160 $160
$0
$50
$100
$150
$200
Gross Marijuana Revenues Porjections (FY 2017-
19 Biennium), USD in mm
Source: Oregon Legislative Revenue Office, Oregon Office of Economic Analysis and Cowen and Company
Source: Oregon Legislative Revenue Office, Oregon Office of Economic Analysis and Cowen and Company
COWEN.COM 31
COWENEQUITY RESEARCH April 4, 2018
Nevada
While Nevada is a relatively newer state, trends look encouraging. In the first seven
months of legalization (after the market opened on July 1, 2017), tax revenue collection
has totaled ~$36 mm. What is more, in the last four months, tax revenue generation
has exceeded $5 mm (which is the targeted collection that the state budgeted for). On
its current trajectory, tax revenue generation looks poised to at least come in $11 mm
ahead of the state’s two-year estimate (for $120 mm in tax collection).
Figure 64 After Seven Months, Nevada’s Run-Rate Is On-Track to Meet Its 2-Yr Target
$36
$131
$0
$50
$100
$150
Jul-
17
Au
g-1
7
Se
p-1
7
Oct
-17
No
v-1
7
De
c-1
7
Jan
-18
Feb
-18
Mar
-18
Ap
r-1
8
May
-…
Jun
-18
Jul-
18
Au
g-1
8
Se
p-1
8
Oct
-18
No
v-1
8
De
c-1
8
Jan
-19
Feb
-19
Mar
-19
Ap
r-1
9
May
-…
Jun
-19
Nevada Cumulative Cannabis Taxes at T3M Run-Rate ($ in mm)
Note: Assumes a $5.6 million run-rate beginning in February 2018 (which is the trailing 3-month average)
Source: Nevada Department of Taxation and Cowen and Company
Washington
WA is a cautionary tale on excessive taxation, in particular when competing with a large
and established illicit market.
Biennial total cannabis excise taxes and license fees for 2015 – 2017 came in
at $469 million, 250% higher than the February 2014 projected cannabis
excise taxes and license fees.
Washington originally set their cannabis tax as a 25% tax rate on the producer,
processor and retailer, but changed it to a single 37% rate charged at retail in
July 2015. This change coincided with a change to tax modeling methodology,
which has improved the accuracy of Washington’s forecasting.
Figure 65 WA Made a Notable Tax Change…
Figure 66 …Though Tax Growth Rates Remained Impressive
$749
$0
$200
$400
$600
$800
Feb-
14
Sep-
14
Nov-
14
Feb-
15
Jun-
15
Sep-
15
Nov-
15
Feb-
16
Jun-
16
Sep-
16
Nov-
16
Mar
-17
Jun-
17
Sep-
17
Nov-
17
Feb-
18
WA Projected Cannabis Excise and License Taxes (FY 2017-2019 Biennium), USD in mm
96%
75%64%
86%
67%63%60%58%55%55%47%46%
58%58%60%
0%
20%
40%
60%
80%
100%
120%
Sep-
14
Nov
-14
Feb-
15
Jun-
15
Sep-
15
Nov
-15
Feb-
16
Jun-
16
Sep-
16
Nov
-16
Mar
-17
Jun-
17
Sep-
17
Nov
-17
Feb-
18
WA Projected Growth (FY 2017-2019 Biennium)
Note: Legislation was passed changing the tax structure between the Feb 2015 and June 2015
Source: Washington Economic and Revenue Forecast Council and Cowen and Company
Note: Legislation was passed changing the tax structure between the Feb 2015 and June 2015
Source: Washington Economic and Revenue Forecast Council and Cowen and Company
COWEN.COM32
COWENEQUITY RESEARCH April 4, 2018
Criminal Justice Cost Savings: $3bn + Opportunity
According to the ACLU, over 8 mm individuals in the U.S. were arrested for cannabis
related charges between 2001 and 2010 (with 88% arrested for simple possession).
Indeed, in 2010, cannabis accounted for 52% of total drug-related arrests. And, among
those arrested, African-Americans are four times more likely to be arrested, even
though use rates between African Americans and Whites are fairly similar (with even
higher proportions of arrests in select states). While cannabis clearly represents an
important social justice issue, legalization would also offer meaningful cost savings. The
same ACLU study estimated that states spend $3.6 billion annually enforcing marijuana
laws.
Figure 67 Cannabis Arrests…
Figure 68 …Disproportionately Target African Americans
4.7x
4.8x
5.2x
6.0x
6.0x
7.6x
7.8x
8.1x
8.3x
4.0x 5.0x 6.0x 7.0x 8.0x 9.0x
NY
NE
SD
PA
KY
WI
IL
MN
D.C.
Times More Likely Blacks Are Arrested Than Whites For Marijuana
Source: ACLU, FBI/Uniform Crime Reporting Program Data, U.S. Census Source: ACLU, FBI/Uniform Crime Reporting Program Data, U.S. Census and Cowen
and Company
Growing Approval Among Law Enforcement
In terms of police opinions on cannabis legalization, a Pew Research survey from
January 2017 of nearly 8,000 police officers found that a majority (69%) support some
form of legalization (at least medical). Meanwhile, 32% support full adult use
legalization. As a point of comparison, this survey also studied the broader civilian
population and found 49% approval for adult use cannabis (below the Gallup readings
from October 2017 of 64%). 30% of police officers do not think cannabis should be legal
at all, compared to only 15% among all Americans in this same survey. For police
officers under the age of 35, support for full legalization was 37%. Meanwhile, for those
over the age of 50, support was a lower 27%.
Figure 69 32% of Police Support Legalizing Cannabis for Adult Use
Source: Note: Survey of law enforcement conducted 5/16-8/16, survey of U.S. adults conducted 8/16-9/16
Source: Pew Research and Cowen and Company
32%49%
37%
35%
0%
20%
40%
60%
80%
100%
Police Officers General Public
Views on Marijuana Use (% Approval)
Medical + Adult-Use Medical Use Only
COWEN.COM 33
COWENEQUITY RESEARCH April 4, 2018
Robust Medical Demand, When It’s Done Right (& Until Adult Use)
In medically legal, non-adult use states, cannabis patient counts have been posting
robust growth. This consistent momentum underscores the increasing demand for
cannabis and herein we look at 3 such states (FL, AZ, and NY), which continue to benefit
from actions / enhancements to their respective medical cannabis programs.
Figure 70 Medical Cannabis Patient Counts in Non-Adult Use States Have Been Growing at a Torrid Pace
Source: State Reports and Cowen and Company; Note: Dates below state acronyms represent the time-periods used to calculate growth rates
Momentum Markets:
Florida. FL benefitted from expanded medical cannabis access as a result of the
election, as the program now allows for access to high THC products (as opposed to only
low-THC / high-CBD). While early days as the market expands for broader access to
medical cannabis (as the bill also included increased licenses), the patient count in FL
(where the population is 16 mm) has increased 5x since May 2017. And, just since the
end of 2017, we have seen the number of patients grow 41% in the first three months
of 2018, matched by 41% growth in the number of qualified physicians (at 1,246 as of
March 23).
The much broader access to medical cannabis should continue to drive growth in
patients and prescribing physicians, given the severity of the opioid crisis in FL.
Specifically, the Florida Department of Law Enforcement found that in 2016 the state
saw a 97% increase in fentanyl-related deaths (to 1,390 deaths). Meanwhile, opioid-
related deaths were up 35% (to 5,725).
050,000
100,000150,000200,000250,000300,000
MI AZ FL NM NY IL CT MT HI RI MN NH
9/16-
9/17
2/17-
2/18
5/17-
3/18
2/17-
2/18
3/17-
3/18
6/17-
1/18
5/17-
3/18
2/17-
2/18
2/17-
2/18
12/16-
12/17
12/16-
12/17
12/16-
12/17
Medical Cannabis Patients (Non-Adult Use States)
+23% +33% +440% +45% +219% +44% +34% +110% +31% +17% +102% +128%
COWEN.COM34
COWENEQUITY RESEARCH April 4, 2018
Figure 71 With a New Framework…
Figure 72 …Medical Cannabis Is Off to the Races in FL
Source: State Reports and Cowen and Company Source: State Reports and Cowen and Company
Arizona. Since becoming legal, Arizona’s medical cannabis market has expanded
considerably, ending December with ~153,000 patients. This marks a ~34% increase
relative to 2016, which grew 30% YoY. Through the first 2 months of 2018, Arizona has
added an additional ~5,500 patients. The annual growth in medical patients is notable
when considering Arizona is bordered by 3 adult use states (CA, NV and CO).
Lawmakers recently introduced SB 1420, which main purpose is to protect patients
through increased regulation by requiring dispensaries to have their product tested by
state-licensed laboratories. This bill also originally included a provision to lower the cost
of registration cards from $150 to $50, with $25 renewals, though the provision was
pulled from the bill.
Figure 73 Arizona’s Medical Market Has Been Steadily Increasing
Note: YTD18 reflects data through 2/28/18
Source: State Reports and Cowen and Company
New York. The medical cannabis market in NY has been steadily increasing as
evidenced by the number of certified patients partaking in the program. The increase in
patient count has been amplified through a series of enhancements, which include
adding chronic pain and PTSD as qualifying conditions. Indeed, in early August, the NY
Department of Health indicated that NY’s certified patient count was up 77% since
adding chronic pain as a qualifying condition roughly four months earlier in late March
2017. PTSD is a more recent enhancement, taking effect in late December 2017. As of
March 20, 2018, NY had over 48,000 certified patients, representing a 25% increase
since early December 2017.
17 2027
36 3847
5764
72
8491
0
20
40
60
80
100
May
-17
Jun
-17
Jul-
17
Aug
-17
Sep
-17
Oct
-17
No
v-1
7
Dec
-17
Jan-
18
Feb-
18
Mar
-18
Florida Medical Patients (in thousands)
~5x increase in 10 months
02004006008001,0001,2001,400
-
20,000
40,000
60,000
80,000
100,000
12/
29/2
017
1/5
/20
18
1/1
2/2
018
1/1
8/2
018
1/2
6/2
018
2/2
/20
18
2/9
/20
18
2/1
6/2
018
2/2
3/2
018
3/2
/20
18
3/9
/20
18
3/1
6/2
018
3/2
3/2
018 Q
ualif
ied
Phy
sici
ans
# o
f R
egis
tere
d P
atie
nts
Florida Medical Cannabis Market
Qualified Physicians Registered Patients
17.9
34.743.1
61.3
87.9
114.4
153.0 158.5
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
2011 2012 2013 2014 2015 2016 2017 YTD18
AZ Medical Cannabis Patients (in thousands)
COWEN.COM 35
COWENEQUITY RESEARCH April 4, 2018
Figure 74 The NY Medical Market Is Approaching 50,000 Users
Source: State Reports and Cowen and Company
Impact of Adult Use on Medical
Colorado. Colorado had been increasing its medical patient count consistently prior to
the legalization of adult use, which took place in late 2014. We can see that post adult-
use legalization, the number of medical cannabis patients has declined for the last 3
consecutive years, and is down almost 20% from its peak of over 115,000 patients in
2014.
Figure 75 Medical Patients Had Been Growing Consistently in Colorado Until Adult Use Legalization
82
109111
115
108
95 93
60
70
80
90
100
110
120
2011 2012 2013 2014 2015 2016 2017
CO Medical Cannabis Patients (in Thousands)
Source: State Reports and Cowen and Company
The decline in patient count post legalization makes good sense to us, as certain medical
participants would seemingly transition to adult use in order to avoid having their name
in a registered patient database, as well as to avoid potential co-pays on office visits.
We can see below that the adult use market has more than offset the headwind from
lower patient counts. Adult use cannabis revenues continue to post strong DD growth
(averaging almost 30% in 2017), while the sales mix shift of adult use has increased 20
pts since January 2015, making up three quarters of the total Colorado cannabis market
as of December 2017.
11 12 14 15 17
22 24 27 29
31
39
46 48
0
10
20
30
40
50
60 NY Medical Cannabis Patients (in Thousands)
COWEN.COM36
COWENEQUITY RESEARCH April 4, 2018
Figure 76 Adult Use Sales Notably Outpacing Medical…
Figure 77 …Resulting in Increased Mix Shift
Source: State Reports and Cowen and Company Source: State Reports and Cowen and Company
The impact of adult use cannabis can be seen using Oregon as a case study as well. Over
70,000 people were medical patients in 2014, which number grew 10% in 2015, topping
out at over 77,000 patients. Oregon began selling adult use cannabis in early 2016,
which resulted in a 13% YoY decline. Most recently in 2017, the amount of medical
cannabis patients decreased notably, down 25% YoY.
Figure 78 Oregon Cannabis Patients Continue to Fall Post Adult Use Legalization
Source: State Reports and Cowen and Company
-50.0%
0.0%
50.0%
100.0%
150.0%
200.0%
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
Oct
-16
Jan
-17
Ap
r-1
7
Jul-
17
Oct
-17
YoY Change in Sales - CO
Medical Recreational
$0
$50,000,000
$100,000,000
$150,000,000
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
Oct
-16
Jan
-17
Ap
r-1
7
Jul-
17
Oct
-17
CO Sales Mix
Medical Recreational
70
77
67
50
0
10
20
30
40
50
60
70
80
90
2014 2015 2016 2017
OR Medical Cannabis Patients (in Thousands)
COWEN.COM 37
COWENEQUITY RESEARCH April 4, 2018
OG Kush to Offset Opioids?
According to the White House Council of Economic Advisors November 2017 report,
opioids have a total annual cost to the U.S. of $500 bn.
To frame the scope of this problem, the Department of Health and Human Services
reported that in 2016:
o 11,500,000 individuals misused opioids,
o 2,100,000 people had an opioid use disorder,
o 2,100,000 people misused prescription opioids for the first time,
o 42,249 individuals died from an opioid overdose,
o An additional 19,413 people died from a synthetic opioid overdose, and
o 15,469 overdoses on heroin.
While legalizing cannabis will certainly not be a comprehensive solution, as discussed
herein, there is growing compelling evidence that it could help significantly. Indeed,
should the U.S. experience the same 6% decline in opioid deaths seen in CO in the first
two years of legalization that would reduce the cost of the opioid crisis by $30 bn
(assuming 2016’s total $504 bn opioid burden nationally).
Figure 79 Opioid Deaths Are Skyrocketing
Source: CDC
COWEN.COM38
COWENEQUITY RESEARCH April 4, 2018
New Research Is Increasingly Encouraging
The body of compelling research supporting our assertion that cannabis is an
underappreciated policy solution for the opioid crisis continues to grow, with two
noteworthy studies out already in 2018 (see the Appendix for additional peer-reviewed
research).
Minnesota. A 2018 study published by Minnesota’s Department of Health on the state’s
medical marijuana program was particularly encouraging. Looking at medical cannabis
patients (N=2,174) that were being treated for “intractable pain” from August –
December 2016, and purchased medical cannabis during the survey period. Patients
reported that:
o 63% were able to reduce or eliminate opioids after six months
o 62% reported a reduction in pain severity
o 54% indicated marijuana provided “a high level of benefit”
These results were validated by the prescribing physicians, who reported that 58% of
patients were able to reduce or eliminate their opioid reliance.
Israel. A 2018 Israeli Study published in the European Journal of Internal Medicine
evaluated the use of medical cannabis for cancer patients, which has been approved
since 2007. The nearly 3,000 cancer patients tracked between 2015 and 2017 were of
an average age of 60, and reported the following symptoms:
o 78% sleep problems
o 73% weakness
o 65% nausea
o 49% lack of appetite
After six months of follow-up:
o 25% had died
o 19% had stopped treatment
o 4% reported no change
Of the remaining close to 60%: 96% reported an improvement of condition
The study concluded: “Cannabis as a palliative treatment for cancer patients seems to
be well tolerated, effective and safe option to help patients cope with the malignancy
related symptoms.”
COWEN.COM 39
COWENEQUITY RESEARCH April 4, 2018
Cowen Proprietary Analysis
Below, we expand on the prior research using data on opioid overdose mortality from
the CDC spanning from 2000 to 2016. In evaluating states where cannabis has been
legal as of 2000 (CA, AK, OR, WA, ME, and HI), we can see that over time while opioid
overdose mortality contintues to climb, overdose incidence consistently trails in states
where medical cannabis is available. Indeed, over the last 10 years, growth in opioid
mortality in legal medical cannabis states has trailed non-legal states by ~30%.
Figure 80 Opioid Overdose Mortality Has Increased In All States But Slower in Medical Cannabis States
18.4
14.6
4.0
7.0
10.0
13.0
16.0
19.0
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Opioid Overdose Mortality Per 100,000 Population
States Legal as of 2000 Non-Legal States
Note: Non-legal states exclude states that legalized medical cannabis between 2001 and 2016. Data is based on crude rates.
Source: CDC and Cowen and Company
Looking at more recent data, given that 8 states have introduced legal medical cannabis
between 2001 and 2010, we can see that these trends impressively still hold.
Figure 81 Including States That Have Legalized Cannabis More
Recently…
Figure 82 …This Trend Holds True
1.6% 1.8%
5.6%
4.1%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
5-Yr CAGR 10-Yr CAGR
Opioid Overdose Mortality Per 100,000
States Legal as of 2005 Non-Legal States
4.2%
5.6%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
States Legal as of 2010 Non-Legal States
Opioid Overdose Mortality Per 100,000 Population (2011-2016 CAGR)
Note: Non-legal states exclude states that legalized medical cannabis between 2006 and 2016. Growth is based on crude rates.
Source: CDC and Cowen and Company
Note: Non-legal states exclude states that legalized medical cannabis between 2011 and 2016. Growth is based on crude rates.
Source: CDC and Cowen and Company
COWEN.COM40
COWENEQUITY RESEARCH April 4, 2018
Colorado Case Study: $30 Billion Opportunity in 2 Years
While much of the research on opioid and cannabis use focuses on medical marijuana, a
recent study published in the American Journal of Public Health examined the impact of
adult use cannabis on opioid overdoses in Colorado.
After steady increases in opioid overdoses, the study found that overdoses declined 6%
in CO in the first two years post legalization of adult use cannabis (2014/2015).
Adjusting for changes to the state’s opioid program, the researchers estimated the
decline would have been 6.5%.
If we extrapolate that decline nationally, we would estimate that national cannabis
legalization could save the country $30 bn in the first two years of legalization
(assuming the current $504 bn in annual costs, which will likely only rise from here
without effective policy solutions, and a 6% two-year decline in opioid deaths).
Figure 83 Legal Cannabis Driving Declines in Opioid Deaths in Colorado
Source: American Journal of Public Health
California Case Study
As the first legal cannabis state in the U.S. (1996), California serves as the most robust
case study in terms of the interaction between opioids and legal cannabis (in addition to
being the country’s most populous state). Impressively, CA now has one of the lowest
levels of opioid morbidity in the nation, at 13.7 deaths per 100,000. And, relative to the
national average, CA has consistently trailed below the national average opioid
mortality rate for 12 consecutive years. Ironically, the LA Times recently published an
article noting this phenomenon, also indicating however that experts cannot explain
why. Reader comments consistently pointed to cannabis access.
COWEN.COM 41
COWENEQUITY RESEARCH April 4, 2018
Figure 84 Opioid Deaths in CA Have Trailed that of the U.S…
Figure 85 …For 12 Straight Years
4.0
9.0
14.0
19.0
24.0
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Opioid Overdose Mortality Per 100,000
California U.S.
0.50
0.70
0.90
1.10
1.30
1.50
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
CA vs. U.S.: Relative Opioid Overdose Mortality Per 100,000 Population
Note: Data is based on crude rates.
Source: CDC and Cowen and Company
Note: Data is based on crude rates.
Source: CDC and Cowen and Company
Arizona Case Study
Looking at a more recent medical cannabis state, Arizona (which legalized medical
cannabis in 2011) has also shown signs of progress in combatting the state’s above
average opioid mortality. In Arizona, where ~75% of medical cannabis patients report
severe chronic pain as an indication, we have seen AZ’s mortality rate relative to the
U.S. decrease over the past 4 years, while patient count has grown to ~153,000
(representing ~34% YoY growth).
Figure 86 In Arizona, Relative Overdose Mortality Began to Fall…
Figure 87 …As the Medical Cannabis Program Continued to Grow
0.80
1.00
1.20
1.40
1.60
1.80
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
AZ vs. U.S.: Relative Opioid Overdose Mortality Per 100,000 Population
17.934.7
43.1
61.3
87.9
114.4
153.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
2011 2012 2013 2014 2015 2016 2017
AZ Medical Cannabis Patients (in thousands)
Note: Data is based on crude rates
Source: CDC and Cowen and Company
Source: Arizona Department of Health Services and Cowen and Company
COWEN.COM42
COWENEQUITY RESEARCH April 4, 2018
Unintended Consequences
Gateway Drug/Addiction
In an attempt to define clearly what is meant by the term “addiction” and which drugs
are most addictive, Dr. Jack E. Henningfield of the National Institute on Drug Abuse and
Dr. Neal Benowitz of the University of California at San Francisco offered the rankings
on six different substances. Among them, marijuana broadly ranks as the least
addictive, with particularly low rankings for dependence and addiction potential,
relative to nicotine, heroin, cocaine, and alcohol. Indeed, it is perhaps most telling that
for ~67% of these addiction measures cannabis in fact scored below caffeine.
Figure 88 Cannabis is Less Addictive Than Other Drugs
0
1
2
3
4
5
6
Nicotine
[LEGAL]
Heroin
[ILLEGAL]
Cocaine
[ILLEGAL]
Alcohol [LEGAL] Caffeine
[LEGAL]
Marijuana
[ILLEGAL]
Substances Compared
Withdrawal Reinforcement ToleranceDependence Intoxication Addiction Potential
Source: NY Times and Cowen and Company
COWEN.COM 43
COWENEQUITY RESEARCH April 4, 2018
Impaired Driving: Alcohol Is A Bigger Problem
The legalization of cannabis raises the issue of intoxicated driving. The Governors
Highway Safety Association’s Drug Impaired Driving Guide for States (April 2017) offers
some relevant insights. Among the drug tested drivers that were fatally injured, ~12%
tested positive for marijuana in some form. Meanwhile, ~37% of fatally injured drivers
tested positive for alcohol. This was consistent with findings from Canada.
Figure 89 In U.S. Fatal Crashes, Alcohol Is a Big Factor…
Figure 90 …As Is True in Canada
44.6%37.3%
18.9%12.2%
7.4%3.2% 2.9%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
All
Dru
gs
Alc
oho
l
Oth
er
Dru
gs
Mar
ijua
na
Dru
g N
ot
on
FA
RS
Lis
t
Am
ph
eta
min
e
Un
kno
wn
U.S. % of Fatal Crashes
39.1%
34.2%
21.6%
13.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
Alcohol All Drugs Other Drugs Marijuana
Canada % of Fatal Crashes
Source: GHSA and Cowen and Company Source: GHSA and Cowen and Company
A secondary analysis the GHSA relied upon was roadside testing, where results varied
notably between the U.S. and Canada. In the U.S., marijuana was the most often
detected, though alcohol closes the gap significantly on the weekends. In Canada, like
the fatality reports in both markets suggest, alcohol is far more prevalent than
marijuana in roadside tests. We find the data from Canada to be more compelling,
given:
1) Absence of reliable cannabis testing technology (as opposed to alcohol)
2) The reduced stigma around cannabis in Canada, vs. the U.S., which could eliminate
some of the subjectivity found in road-side cannabis testing.
Figure 91 U.S. Screens High for Weed in Roadside Stops…
Figure 92 …Canada Data Is More Consistent with Fatality Records
10.3%
7.3%
11.7%12.6%
1.1%
8.3%
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
Weekday Weekend
U.S. Roadside Suvey (2013-2014)
Medication Marijuana Alcohol
7.4%
6.5%
3.3%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Any Drug Alcohol Marijuana
Canada Roadside Survey (2012)
Source: GHSA and Cowen and Company Source: GHSA and Cowen and Company
COWEN.COM44
COWENEQUITY RESEARCH April 4, 2018
Clearly, testing methodology needs to be improved, and that innovation will likely
accelerate as California and Canada both legalize cannabis in 2018. In the meantime, it
has been encouraging to see that in CO, the total number of DUI/DUID citations has
fallen steadily since 2014, with marijuana’s contribution down through September
2017.
Canada Testing. Ahead of 2H18 legalization, Canada had begun roadside
testing, which the federal government deemed successful. Police officers from
seven jurisdictions administered roadside testing via random stops and
roadblocks, collecting over 1140 saliva samples using 2 kinds of devices
between mid-December and early March. These portable screening devices
can be used to detect the recent presence of several drugs including THC. Of
all the roadside tests, 80% were taken from drivers and 20% from passengers
and approximately 15% of the tests registered a positive drug reading. Testing
remains a work in progress, however, as questions remain on timing of
ingestion (as a positive reading could indicate someone smoked the day or
week before).
Colorado. After legalizing recreational cannabis in an attempt to documents
trends, the Chief of the Colorado State Patrol ordered the specific tracking of
marijuana-related citations beginning in January 2014. While overall
DUI/DUID citations have been declining YOY, marijuana’s share as a
percentage of total DUI/DUID citations has increased over the past 2 years,
contributing just over 17% in 2016. This trend looks to have reversed through
September 2017, however, as marijuana’s contribution to total DUI/DUID
citations has decreased to just over 14%.
Figure 93 DUI/DUID Citations Falling Steadily in CO…
Figure 94 …While Also Showing Improvements Relative Other Citations
in 2017
5,546
4,546 4,458
3,657
0
1,000
2,000
3,000
4,000
5,000
6,000
2014 2015 2016 2017E
Total DUI/DUID Citations - Colorado
12.15%
14.63%
17.21%
14.38%
0.00%
5.00%
10.00%
15.00%
20.00%
2014 2015 2016 2017E
Marijuana as a % Total DUI/DUID Citations
Note: 2017 data is through October 4, 2017
Source: Colorado Department of Transportation and Cowen and Company
Note: 2017 data is through October 4, 2017
Source: Colorado Department of Transportation and Cowen and Company
COWEN.COM 45
COWENEQUITY RESEARCH April 4, 2018
Overdoses
Unlike other Schedule I narcotics, the risk from overdosing on cannabis is non-material.
“No death from overdose of marijuana has been reported.” – Drugs of Abuse |
A DEA Resource Guide: 2017 Edition
“Available evidence suggests that cannabis use is not associated with an
increased risk of all-cause mortality.” – National Academy of Sciences
Cannabis Review (2017)
“People have tried to ingest as many plant cannabinoids as possible and there
is no fatal overdose that has ever been documented in human beings.” – Johan
Marcu, Chief Science Officer, Americans for Safe Access
Underage Use
Research suggests that the earlier the age of cannabis initiation (among other factors),
the higher the likelihood of cannabis dependence; that is true of nicotine and alcohol as
well, as developing brains do not benefit from exposure to any regulated substances.
However, there is little evidence to suggest legalization increases cannabis use among
youth. In fact, data from Colorado points to the exact opposite:
NSDUH data through 2016 shows that in the two years since legalization
cannabis incidence rates among 12-17 year olds has fallen more sharply than
the national average (and interestingly, so has alcohol, tobacco and heroin use).
Figure 95 Outsized Declines in Youth Incidence in CO
12.6%
9.1%
7.2% 6.8%
6.0%
8.0%
10.0%
12.0%
14.0%
20
02
-20
03
20
03
-20
04
20
04
-20
05
20
05
-20
06
20
06
-20
07
20
07
-20
08
20
08
-20
09
20
09
-20
10
20
10
-20
11
20
11
-20
12
20
12
-20
13
20
13
-20
14
20
14
-20
15
20
15
-20
16
Past Month Cannabis Use (Ages 12-17)
Colorado United States
Dotted line denotes
adult-use legalization
Source: NSDUH and Cowen and Company
COWEN.COM46
COWENEQUITY RESEARCH April 4, 2018
The Colorado Department of Public Health and Environment found of 17,000
middle and high school students in CO in 2015, past month incidence was 21%,
slightly below the national average (and down from 25% in 2009). And, the
percentage of teens that had tried cannabis remained well below 2009 levels
within two years of legalization.
Figure 96 CO Teen Use Below National Trends…
Figure 97 “Never Tried” Teen Trends in CO Improved Since 2009
17.0%
19.0%
21.0%
23.0%
25.0%
27.0%
2005 2007 2009 2011 2013 2015
Past Month Use Incidence
Colorado National
57.6% 57.7% 57.4%
60.5%
63.1%
62.0%
54.0%
56.0%
58.0%
60.0%
62.0%
64.0%
2005 2007 2009 2011 2013 2015
CO Youth - Never Tried Cannabis
Source: CDC, State Reports and Cowen and Company Source: CDC, State Reports and Cowen and Company
One of the reasons that we believe legalization of cannabis has little impact on teen
incidence, is that access does not seem to be a problem. According to the University of
Michigan’s Monitoring the Future Survey for 2017, 80% of 12th graders indicated it was
easy or fairly easy to obtain cannabis, compared to 78% for cigarettes (which generally
has a lower threshold age for purchase of 18, vs. 21 for legal cannabis).
Figure 98 Cannabis Is Generally as Easy to Obtain as Cigarettes and Alcohol
46.2 44.135.2
53.262.5 66.3 64.6
71.577.9 78.2 79.8
87.1
0
20
40
60
80
100
Cigarettes Vaping Device Cannabis Alcohol
% of Students Saying It Is Faily Easy or Very Easy to Obtain (2017)
8th Grade 10th Grade 12th Grade
Source: Monitoring the Future and Cowen and Company
COWEN.COM 47
COWENEQUITY RESEARCH April 4, 2018
APPENDIX
The Consumer Waterfall: Underlying Population Estimates
The benefits of aging cannabis consumer base are amplified by expected shifts in
underlying consumer demographics. Our absolute user estimates are all based on cohort
incidence, underpinned by Census estimates.
According to the U.S. Census Bureau’s 2017 national population projections through
2030, the overall 18-25 year old cohort is expected to be essentially unchanged (vs.
+0.5% CAGR in the prior seven years). Population growth among 26+ is also expected to
slow 40 bps: +1.3% 2009-2016 vs. 0.9% 2017-2030. In other words, 26+ is expected to
drive 100% of the population growth through 2030.
Figure 99 The U.S.’s Aging Population…
Figure 100 …Will Shift Age Distribution in the U.S.
Source: U.S. Census, U.S. Department of Commerce Source: U.S. Census, U.S. Department of Commerce
COWEN.COM48
COWENEQUITY RESEARCH April 4, 2018
First Use Underlying Analysis
Figure 101 First Use of Marijuana Gaps Expanded Considerably Over the Last Decade
Source: NSDUH, U.S. Census and Cowen and Company
Figure 102 First Use of Marijuana Gaps Expanded Considerably Over the Last Decade
Source: NSDUH, U.S. Census and Cowen and Company
Legacy (2016) States
First Use of Marijuana 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Adult-Use 1.1% 1.2% 1.3% 1.3% 1.4% 1.5% 1.5% 1.7% 1.7% 1.9% 1.9%
Medical Use 1.0% 1.0% 1.1% 1.2% 1.2% 1.3% 1.4% 1.4% 1.4% 1.5% 1.5%
Non-Cannabis 0.9% 0.9% 0.9% 1.0% 1.1% 1.1% 1.1% 1.1% 1.2% 1.3% 1.3%
Total United States 0.9% 1.0% 1.0% 1.1% 1.2% 1.2% 1.3% 1.3% 1.3% 1.4% 1.4%
Relative to Total U.S.
Adult-Use 19.3% 23.6% 24.2% 21.7% 21.8% 23.7% 23.1% 28.3% 28.1% 36.8% 36.8%
Medical Use 0.7% 2.3% 4.8% 4.2% 4.7% 5.3% 7.4% 6.1% 5.1% 3.3% 3.3%
Non-Cannabis -3.4% -5.9% -9.0% -7.8% -8.3% -9.4% -12.1% -11.5% -10.3% -10.0% -10.0%
Total United States 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Adult Use/Non-Cannabis Delta -22.6% -29.4% -33.2% -29.4% -30.1% -33.1% -35.2% -39.8% -38.4% -46.7% -46.8%
New (2018) States
First Use of Marijuana 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Adult-Use 1.0% 1.1% 1.2% 1.3% 1.3% 1.4% 1.5% 1.6% 1.6% 1.7% 1.7%
Medical Use 1.0% 1.0% 1.0% 1.1% 1.2% 1.2% 1.2% 1.3% 1.3% 1.4% 1.4%
Non-Cannabis 0.9% 0.9% 0.9% 1.0% 1.1% 1.1% 1.1% 1.1% 1.2% 1.3% 1.3%
Total United States 0.9% 1.0% 1.0% 1.1% 1.2% 1.2% 1.3% 1.3% 1.3% 1.4% 1.4%
Relative to Total U.S.
Adult-Use 5.8% 10.6% 17.6% 15.5% 12.9% 18.3% 22.0% 21.0% 19.3% 19.4% 19.4%
Medical Use 0.1% 0.7% -2.3% -2.0% 0.6% -2.4% -2.4% -1.8% -2.3% -2.8% -2.8%
Non-Cannabis -3.7% -8.2% -10.5% -8.9% -10.0% -11.0% -14.9% -14.7% -12.3% -11.6% -11.6%
Total United States 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Adult Use/Non-Cannabis Delta -9.5% -18.7% -28.1% -24.4% -22.8% -29.3% -36.9% -35.7% -31.5% -31.0% -31.0%
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COWENEQUITY RESEARCH April 4, 2018
Cannabis’ Impact on Alcohol Consumption
As we have detailed in our previous work, we believe that cannabis has, and will
continue to have, a negative impact on alcohol consumption.
Outsized switching among younger consumers. Among consumers ages 21-25
(as well as 18-25) we have seen steady increases in reported past month and
past year cannabis incidence since 2009. Within a year of that inflection, we
began to see steady declines in reported past year and past month alcohol
incidence.
Figure 103 Declines in Alcohol Use Accelerated…
Figure 104 ...While Cannabis Use Continued To Rise
Note: Ages 21-25
Source: NSDUH and Cowen and Company
Note: Ages 21-25
Source: NSDUH and Cowen and Company
Shifting Risk Perceptions. One of the key drivers of this category switching, we
believe, is the evolving risk perceptions among these younger consumers (18-
25) around alcohol and cannabis. Over the last decade, while risk perceptions
around alcohol consumption have been on the rise, they’ve fallen by roughly
50% for cannabis.
Figure 105 Young Adults View Alcohol Increasingly More Harmful Than Cannabis
Note: Ages 18-25
Source: NSDUH and Cowen and Company
66.8%
67.6%
15.8%
20.2%
14.0%
16.0%
18.0%
20.0%
66.0%
67.0%
68.0%
69.0%
70.0%
20
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nn
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Past Month Incidence (Ages 21-25)
Alcohol Cannabis
82.0%
82.6%
27.4%
31.9%
25.0%
27.0%
29.0%
31.0%
33.0%
81.0%
82.0%
83.0%
84.0%
85.0%
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Past Year Incidence (Ages 21-25)
Alcohol Cannabis
32.7%
37.0%33.7%
27.0%
36.7%
19.1%
10.0%
20.0%
30.0%
40.0%
5+ Drinks 1x-2x / Week Smoke 1x or 2x / Week
Perception of Greater Risk (in %)
2005 2010 2015
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COWENEQUITY RESEARCH April 4, 2018
National Substitution (All Age Cohorts). This pressure on alcohol is reinforced
by our multidecade analysis on per capita alcohol consumption in the U.S.
Looking at data since 2009, when this youth incidence divergence began, we
can see that on a national basis (for all age cohorts) we have seen a consistent
decline in per capita alcohol consumption, and an increase in reported cannabis
incidence. As well, it would also seem that cannabis category retention is on
the rise (as measured by past year incidence divided by lifetime trial).
Figure 106 Cannabis Retention Increasing…
Figure 107 …As Alcohol Looks to be In Another Contraction Cycle
26.0%
27.0%
28.0%
29.0%
30.0%
31.0%
32.0%
20
09
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10
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20
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Past Year Retention (2009-2016)
-5.0% -3.0% -1.0% 1.0% 3.0% 5.0% 7.0% 9.0%
2009
2010
2011
2012
2013
2014
2015Past Year Cannabis Use vs. Ethanol Per Capita Consumption
Ethanol Cannabis
Alcohol
Down 4
Years
Cannabis
Up 6
Years
Note: Past Year Retention = Past Year Incidence / Lifetime Incidence
Source: NSDUH and Cowen and Company
Note: Ages 12+ for incidence
Source: NIAAA, NSDUH, WHO and Cowen and Company
Survey Says: Consumer Substitute. Our own research in North America yielded
similar results in terms of consumer behavior. In the U.S. we find 64% of
consumers report a reduction in their alcohol consumption, while a greater 72%
of Canadians report cutting back. In both instances, over 30% of cannabis
consumers report “drinking a lot less.”
Figure 108 Cannabis Consumers Tend to Drink Less
Source: Cowen Proprietary Survey
28%36%
21% 17%
18%16%
32%31%
0%
20%
40%
60%
80%
Cowen Canada Survey Cowen U.S. Survey Cowen Canada Survey Cowen U.S. Survey
How Does Cannabis Impact Alcohol Consumption?
Drink the Same Amount Drink a Little Less Drink Moderately Less Drink A Lot Less
72%64%
Reduced Alcohol Consumption
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COWENEQUITY RESEARCH April 4, 2018
Number of Binge Sessions per Month: Underlying Analysis
Figure 109 # of Binge Sessions Per Month
Source: CDC, U.S. Census and Cowen and Company
Figure 110 # of Binge Sessions Per Month
Source: CDC, U.S. Census and Cowen and Company
Legacy (2016) States
Weighted # of Binge Sessions Per Month 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Adult-Use 3.8 3.9 4.1 3.9 4.0 4.0 4.1 4.2 4.2 4.2 4.1
Medical Use 3.9 4.2 4.2 4.2 4.1 4.0 4.2 4.3 4.2 4.1 4.4
Non-Cannabis 4.2 4.2 4.4 4.3 4.2 4.3 4.4 4.4 4.4 4.5 4.7
Total United States 4.0 4.2 4.3 4.3 4.2 4.1 4.3 4.3 4.3 4.3 4.5
Relative to Total U.S.
Adult-Use -6.3% -5.8% -5.6% -7.6% -3.9% -3.9% -5.6% -1.9% -3.4% -2.9% -9.1%
Medical Use -3.0% 0.9% -2.3% -1.0% -1.7% -3.1% -2.3% -1.4% -2.7% -5.6% -3.8%
Non-Cannabis 3.4% -0.3% 2.7% 1.7% 2.0% 3.1% 2.6% 1.5% 2.8% 5.1% 4.3%
Total United States 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Adult Use/Non-Cannabis Delta 9.7% 5.5% 8.2% 9.3% 5.8% 7.1% 8.3% 3.4% 6.2% 8.0% 13.3%
New (2018) States
Weighted # of Binge Sessions Per Month 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Adult-Use 3.9 4.2 4.0 4.0 3.9 3.8 4.0 4.0 4.2 4.0 3.9
Medical Use 4.0 4.2 4.3 4.4 4.2 4.1 4.3 4.4 4.2 4.2 4.6
Non-Cannabis 4.1 4.1 4.4 4.3 4.3 4.3 4.4 4.4 4.4 4.6 4.8
Total United States 4.0 4.2 4.3 4.3 4.2 4.1 4.3 4.3 4.3 4.3 4.5
Relative to Total U.S.
Adult-Use -4.5% -0.2% -7.0% -7.3% -6.7% -7.2% -7.0% -7.7% -3.4% -8.3% -13.4%
Medical Use -0.2% 1.7% 0.3% 2.8% 0.3% 0.4% 0.3% 2.7% -1.4% -2.4% 1.4%
Non-Cannabis 2.6% -1.9% 3.3% 0.6% 3.2% 3.3% 3.3% 1.0% 3.4% 6.6% 4.9%
Total United States 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Adult Use/Non-Cannabis Delta 7.1% -1.8% 10.3% 7.9% 9.9% 10.5% 10.3% 8.6% 6.8% 14.9% 18.3%
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Number of Drinks per Binge Session: Underlying Analysis
Figure 111 Binge Intensity (# of Drinks Per Binge)
Source: CDC, U.S. Census and Cowen and Company
Figure 112 Binge Intensity (# of Drinks Per Binge)
Source: CDC, U.S. Census and Cowen and Company
Legacy (2016) States
Weighted Binge Intensity 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Adult-Use 6.6 6.6 6.8 6.4 6.5 6.6 6.8 6.8 6.6 6.6 6.6
Medical Use 7.0 7.2 7.1 7.0 6.8 7.1 7.1 7.1 7.1 7.0 7.2
Non-Cannabis 7.4 7.3 7.4 7.1 7.1 7.4 7.4 7.5 7.4 7.3 7.4
Total United States 7.2 7.2 7.2 7.0 6.9 7.2 7.2 7.3 7.2 7.1 7.3
Relative to Total U.S.
Adult-Use -7.3% -8.8% -6.6% -8.1% -6.4% -8.4% -6.6% -6.1% -8.3% -7.7% -9.3%
Medical Use -2.0% -0.5% -2.0% -0.5% -1.7% -1.7% -2.0% -2.1% -1.9% -2.0% -0.9%
Non-Cannabis 2.6% 1.3% 2.5% 1.3% 2.2% 2.4% 2.5% 2.6% 2.6% 2.6% 1.8%
Total United States 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Adult Use/Non-Cannabis Delta 9.9% 10.1% 9.1% 9.3% 8.6% 10.8% 9.0% 8.7% 10.9% 10.3% 11.1%
New (2018) States
Weighted Binge Intensity 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Adult-Use 6.9 7.0 7.0 6.8 6.7 6.9 7.0 7.0 7.1 7.0 7.1
Medical Use 7.1 7.3 7.2 7.1 6.8 7.2 7.2 7.3 7.1 7.0 7.3
Non-Cannabis 7.4 7.3 7.4 7.0 7.1 7.4 7.4 7.5 7.5 7.4 7.4
Total United States 7.2 7.2 7.2 7.0 6.9 7.2 7.2 7.3 7.2 7.1 7.3
Relative to Total U.S.
Adult-Use -4.2% -3.1% -3.6% -3.2% -2.9% -4.9% -3.6% -4.4% -1.7% -2.3% -3.1%
Medical Use -0.6% 0.4% -0.7% 1.1% -1.2% -0.3% -0.7% 0.0% -1.8% -1.9% -0.1%
Non-Cannabis 3.0% 1.2% 2.7% 0.6% 2.9% 3.0% 2.7% 2.4% 2.9% 3.3% 1.8%
Total United States 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Adult Use/Non-Cannabis Delta 7.2% 4.3% 6.3% 3.8% 5.8% 7.9% 6.3% 6.8% 4.6% 5.6% 4.9%
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COWENEQUITY RESEARCH April 4, 2018
Survey Says: Consumer Substitute. Cannabis’ negative impact on alcohol sales
was also evident in research from the University of Connecticut and Georgia
State University published in October 2017. The study found that alcohol sales
in counties that bordered counties with access to medical cannabis between
2006 and 2015 showed an average 13% decline in alcohol purchases.
Figure 113 Alcohol Sales Under Pressure in Legal States…
Figure 114 …With Falling Alcohol Sales Increasingly Evident over Time
Source: University of Connecticut and Cowen and Company Source: University of Connecticut and Cowen and Company
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Cannabis & Opioids: Additional Published Research
A 2017 study published in the American Journal of Public Health found that
access to adult use cannabis led to a “reversal” in opioid overdoses in 2015.
A 2017 study from the University of New Mexico showed a 47% reduction in
daily opioid dosages among consumers participating in their medical marijuana
program.
A 2017 study from the University of California, San Diego found that opioid
painkiller dependence and abuse fell an average 23% after medical cannabis
was legalized, and opioid-related hospitalization rates fell 13%.
A 2016 study from Columbia University (looking at 18 medical states from
1999-2013) concluded "we would expect the adverse consequences of opioid
use to decrease over time in states where medical cannabis is legal.”
A 2016 study from the University of Michigan found that patients who used
medical cannabis to control chronic pain reported a 64% decrease in their use
of Vicodin, OxyContin and other prescription opioids.
A 2016 study from the University of Georgia found that the average physician
wrote 12% fewer painkiller prescriptions for Medicare D patients than in states
where cannabis was still prohibited.
A 2015 study from the Rand Corporation suggested a 20% decrease in
admissions to treatment programs for opioid addiction in states that allowed
medical cannabis dispensaries.
A 2014 study published in JAMA Internal Medicine found that death rates from
opioid overdoses were 25% lower in states that had approved medical
cannabis.
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Ticker Rating Price* Price Target
SAM Market Perform $194.35 $195.00WEED Outperform C$27.99 C$44.00BREW Outperform $18.60 $23.00TAP Market Perform $73.64 $85.00
Ticker Rating Price* Price Target
BF/B Market Perform $53.97 $57.00STZ Outperform $225.09 $265.00KSHB Outperform $5.02 $9.50LEAF.CN Outperform C$16.05 C$26.00
*As of 04/03/2018VALUATION METHODOLOGY AND RISKS
Valuation Methodology
Our valuation methodology is primarily based on Price-to-Earnings (P/E), followed byRelative Price-to-Earnings (vs. the S&P 500), Price-to-Sales (P/S) as well as Enterprise Valueto EBITDA (EV/EBITDA). In cases where GAAP net income includes large, non-cash items(e.g., restructuring charges), we may use non-GAAP EPS.
Cannabis:
Our valuation methodology is primarily based on DCF, followed by Price-to-Sales. In caseswhere GAAP net income includes large, non-cash items (e.g., restructuring charges), we mayuse non-GAAP EPS.
Investment Risks
The global beverage industry is subject to a number of potential headwinds. For alcoholicbeverages, heightened regulation and taxation are key risks, as is emerging access to legalcannabis. For non-alcoholic beverages, declining consumption, in particular for carbonatedsoft drinks, represents a key headwind, as do health and wellness concerns around artificialsweeteners. What is more, energy drinks have also come under scrutiny, which has resultedin softer demand, as well as litigation and regulatory risks.
Cannabis: Cannabis is an emerging industry and is subject to regulatory headwinds. Whileover 50% of the population is in favor of legalization, only a few states have thus farlegalized cannabis for recreational use and the product remains illegal at the federal level.Looking forward, much work and change still needs to occur in order for this industry torealize its full potential.
Risks Pertaining to U.S. Cannabis-Related Companies: If you are considering investing in aU.S. company that is connected to the cannabis industry, be aware that cannabis-relatedcompanies may be at risk of federal and/or state criminal prosecution. The Department ofTreasury has issued guidance that The Controlled Substances Act (“CSA”) makes it illegalunder U.S. federal law to manufacture, distribute, or dispense cannabis and cannabis-relatedproducts. Many states impose and enforce similar prohibitions. Notwithstanding the federalban, however, many U.S. states and the District of Columbia have legalized certain cannabis-related activities.
Risks Pertaining to Canadian Cannabis-Related Companies: In Canada, cannabis is anemerging industry and is subject to regulatory headwinds. While medical cannabis is legalin Canada, legislation has also been introduced to legalize adult-use sales no later than July2018. An initial regulatory framework has been laid out for the adult-use market, lookingahead, the category will be subject a number of potential headwinds, including taxes andrestrictions on from factors and packaging.
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COWENEQUITY RESEARCH April 4, 2018
ADDENDUM
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Additionally, the complete preceding 12-month recommendations history related to recommendation in this research report is available at https://cowen.bluematrix.com/sellside/Disclosures.action
The recommendation contained in this report was produced at April 03, 2018, 17:30 ET. and disseminated at April 04, 2018, 05:28 ET.
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Outperform (1): The stock is expected to achieve a total positive return of at least 15% over the next 12 months
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Cowen and Company Equity Research Rating DistributionDistribution of Ratings/Investment Banking Services (IB) as of 03/31/18Rating Count Ratings Distribution Count IB Services/Past 12 MonthsBuy (a) 460 62.33% 111 24.13%Hold (b) 266 36.04% 13 4.89%Sell (c) 12 1.63% 0 0.00%(a) Corresponds to "Outperform" rated stocks as defined in Cowen and Company, LLC's equity research rating definitions. (b) Corresponds to "Market Perform" as defined in Cowenand Company, LLC's equity research ratings definitions. (c) Corresponds to "Underperform" as defined in Cowen and Company, LLC's equity research ratings definitions. Cowen andCompany Equity Research Rating Distribution Table does not include any company for which the equity research rating is currently suspended or any debt security followed by CowenCredit Research and Trading.
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POINTS OF CONTACT
Analyst Profiles
Vivien Azer
New York
646 562 1351
Vivien Azer is a senior analyst coveringbeverages and tobacco. She joined Cowen in2014.
Brian Nicholas Velez
New York
646 562 1353
Brian Nicholas Velez is an associatecovering beverages. He joined Cowenin 2017 and is a graduate of ColumbiaUniversity.
Gerald Pascarelli, CFA
New York
646 562 1362
Gerald Pascarelli is an associate coveringbeverages. He joined Cowen in 2014.
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