Big Tobacco Now Joins the Cannabis Fray

This is the year of “cannabis firsts.” Since its start, Aurora Cannabis acquired CanniMed Therapeutics for $852 million in the biggest pot deal in history, followed by Aurora’s still pending offer to buy Ontario-based MedReleaf for $2.5 billion. Cronos Group and Canopy Growth Corporation, two listed Canadian pot stocks, joined trusted exchanges in the United States.

This year brings more firsts: Vermont became the first ever state to legalize recreation marijuana through its legislative process, as opposed to a ballot initiative. Tliray, another Canadian-based weed stock, is the first to have an initial public offering on a U.S. exchange. Canada also became the very first industrialized country on earth to legalize marijuana for adult use.

Now, Big Tobacco is about to add yet another first:

Established Markets Are Shrinking For Tobacco Companies:

Tobacco stocks have been a mite miserable of late. Several developed countries are currently waging war against the industry because of the negative health effects caused by tobacco. In April, these concerns especially came to a boil, as Philip Morris International, a worldwide tobacco giant, imploded after announcing the operating results from its first quarter.

Even with annual EPS growth of around two percent and sales growth of eight percent, excluding exchange fluctuations, the quantity of cigarette shipment for Philip Morris dropped a whopping 9.3 billion, just over five percent, from the year before. The company’s iQOS heated tobacco alternative seemed to peak in Japan, which was a kind of test for the product.

Although traditionally tobacco stocks have strong pricing power because of the addictiveness of nicotine, demand for tobacco products has been falling for some time. Philip Morris and its competitors have just two choices left: Accept the trend and raise prices even more, or innovate. However, it is important to note that not all innovation must come from within.

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Big Tobacco Makes Its First Bid For The Weed Market:

Last month, a subsidiary of Imperial Brands, a tobacco giant based in the United Kingdom, the one behind Winston and Kool smoking brands, announced a joint venture with seed investment company Casa Verde, Snoop Dogg’s venture capital firm, to invest in Oxford Cannabinoid Technologies, or OCT, a British medical cannabis research firm. The $10 million funding is its biggest to date.

Interesting, it is also one of the largest investments for Casa Verde, given that Snoop Dogg’s cannabis-based venture capital firm has a tendency to offer between $1 million and $3 million to seed firms in the ancillary marijuana space. Imperial Brands’ stake never became public, but OCT has the support of British actor Patrick Stewart.

Famous for his role in Star Trek: The Next Generation and the X-Men movie franchise, Stewart has long been advocating for medical pot research in the United Kingdom. He also plans to serve on OCT’s advisory board. OCT will focus primarily on both researching and developing cannabinoids that can treat specific health issues.

Perhaps coincidentally, Imperial Brands made this announcement a mere three days after the U.S. Food and Drug Administration gave GW Pharmaceuticals’ main drug, Epidiolex, clinical approval. Epidiolex is a cannabidiol-based oral medication for Dravet syndrome and Lennox-Gastaut syndrome, two rare kinds of childhood-onset epilepsy.

After achieving its main goal of statistically reducing seizure frequently in multiple late-stage studies relative to both baseline and the placebo,GW Pharmaceuticals had a rather easy to path to making history by being the first to bring an approved cannabis-derived drug to pharmacies. Since cannabinoids show medical benefit in select illnesses, most believe others, like OCT, may have similar success.

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Off To A Slow, But Definite Start:

Admittedly, Imperial Brands’ funding of OCT, the amount of which remains secretive, is years away from paying off. As a developing cannabinoid research company, it will take much time for any compounds to even reach the clinical stage and then, if successful, another few years to get the drug to market. However, this marks the entry of Big Tobacco into the medical marijuana industry.

Cigarette sales have been declining for most of the industry’s giants, and tobacco alternatives are not causing enough of an impact to offset that loss. During its first quarter, Altria also reported a decline in sales. Its volume fell by 4.2 percent, with both its discount and its premium quantities decreasing. Meanwhile, British American Tobacco predicts a further 3.5 percent decline this year.

With Canada’s pot industry expected to generate $5 billion once it gets going, Big Tobacco may have little option but to look for investment opportunities and partnerships to stay relevant to investors. Additionally, the road to partnerships and investment is well trod by the spirits industry. Corona Beer’s Constellation Brands invested $190 million for a 10 percent stake in Canopy Growth Corporation.

This investment, from October last year, as well as a recent $153 million injection into Canopy Growth’s $455 million convertible debt offering, gives Constellation Brands a chance to profit through its stake and an opportunity to develop cannabis-infused beverages alongside a pot industry giant. The stage is now set. The only question left is which tobacco company will be next?

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Comments (1)

  1. Avatar for Garrett Garrett July 27, 2018 / 10:11 pm / Reply

    This is one of the best articles about weed that i have ever read. I was so interested to find out what Tobacco company was making the move. Makes perfect sense that it is a British company.

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