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The 1 Industry Not Thrilled With Canada's Decision to Legalize Marijuana

Sean Williams, The Motley Fool

In case you've missed it, big things are happening with the legal cannabis industry in North America.

Within the U.S., Republican-leaning Oklahoma became the 30th state to have legalized medical cannabis since 1996, with nine of those states also approving the use of cannabis by adults. Mind you, all of this is happening while marijuana remains a Schedule I drug at the federal level.

Meanwhile, to our north and south we've also seen the steady expansion of legal cannabis. Mexico wound up giving the green light to medical cannabis back in June 2017, while Canada did what no other industrialized country has ever done before: It legalized recreational marijuana. As of Oct. 17, according to Prime Minister Justin Trudeau, it'll be legal for adults to purchase cannabis.

Jars filled with dried cannabis lying on a counter.

Image source: Getty Images.

The legalization of marijuana in Canada is expected to be a serious moneymaker for the industry. Currently generating a few hundred million dollars in annual revenue from the sale of medical cannabis domestically, and via exports to foreign countries that've given the green light to medical pot, recreational marijuana could add up to $5 billion a year in sales. These big dollar signs are exactly why investors have pushed pot stocks through the roof.

Not everyone is happy with marijuana's proliferation in Canada

But not everyone is thrilled with Canada's decision to wave the green flag on marijuana. In particular, health insurance companies have been increasingly hesitant to cover medical marijuana for a variety of reasons, chief of which are rising costs.

According to a recent Reuters report, Canada's second-largest insurer, Sun Life Financial (NYSE: SLF), is one of those hesitant voices. Even though Canada legalized medical cannabis back in 2001, only now are insurers like Sun Life Financial slowly beginning to include it on covered plans. What Sun Life and other insurers have discovered is that medical cannabis can, in some instances, actually cost more than established pharmaceutical products.

An example cited by Reuters involves patients with spasticity related to multiple sclerosis. Established pharmaceutical drug Baclofen runs CA$28.82 for a 10-day supply, while a gram of Canadian medical cannabis, which covers only one day of treatment, costs about CA$8. Over a 10-day period, that's roughly triple the cost for insurers.

Another issue is that medical marijuana is being used to treat a widening variety of ailments, many of which haven't been verified as benefiting from cannabis use, according to insurers. Sun Life Financial covers only select indications, including pain associated with cancer, multiple sclerosis (MS) and spasticity arising from MS, and chemotherapy-induced nausea, to name a few. Insurers believe that if their narrow list of indications were broadened to include a larger patient pool, it could greatly increase their costs.

A tipped over white bottle full of dried cannabis lying on a messy pile of cash bills.

Image source: Getty Images.

One solution insurers have tinkered with is simply charging members more. Though Manulife Financial (NYSE: MFC) doesn't officially offer broad medical marijuana coverage in Canada (it's still in the process of evaluating whether it'll cover the drug), it has included medical cannabis coverage in rare situations where corporate clients have requested it. In such instances, Manulife has passed along an annual reimbursement limit of CA$1,500 to CA$2,500, while largely limiting the number of covered conditions.

Lastly, insurers worry about inadequate checks and balances when prescribing medical cannabis. Generally, a doctor's visit is required for a physician to prescribe marijuana to a patient. But insurers claim that certain groups, such as the Green Doctor Network, don't require documentation or a referral before authorizing a prescription for medical cannabis. In doing so, the patient pool for medical weed could balloon, right along with insurers' costs. 

A growing list of unknowns

Of course, the uncertainties facing Sun Life Financial and Manulife Financial are just one of a laundry list of things left to be sorted out as Canada pushes toward full legalization.

For example, even though Parliament passed the Cannabis Act, it's yet to pass legislation that would give peace officers the authority to determine if a driver is under the influence of marijuana. Given that concerns regarding driving under the influence of cannabis were at or near the top of the list for opponents of the Cannabis Act, the fact that this hasn't been addressed as of yet is somewhat concerning.

There are also unknowns when it comes to the taxation of marijuana in Canada. In October 2017, a proposal was introduced that would tax marijuana at roughly 10% of the per-gram sale price. Prime Minister Trudeau was adamant that the taxation of cannabis remain low to move users away from the black market and into legal channels. Still, the black market has virtually no overhead costs, since it has no buildings to maintain and no federal taxes to pay. In other words, it remains to be seen if legal channels can draw consumers away from the illicit market.

A young man in blue hoodie sweatshirt holding a cannabis plant.

Image source: Getty Images.

We also know very little about how the supply or demand picture will play out in the intermediate term. Initially, it's very possible that growers won't be able to meet demand. Keep in mind that nearly all growers waited until the passage of the Cannabis Act looked to be a sure thing before they began rapidly expanding their capacity. This shortage could give the black market yet another opportunity to lure consumers.

Over the longer run, a dramatic oversupply could become possible. If Canadian growers are unable to find a home for all of their crop, per-gram cannabis prices could fall. Should they fall, it would adversely affect margins, but at the same time be a big positive for consumers and insurance companies.

In sum, there's a lot left to be hashed out in the months and years that lie ahead. At this point, it wouldn't be a surprise if most insurers choose to remain on the sidelines until the expected effects of commoditization on dried cannabis are felt, and per-gram prices fall significantly.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.