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Cannabis Attracts Big Tobacco, Alcohol, and Pharma. Which Big Industries Will Join Next?

Kris Krane - Forbes
Dec 19, 2018

The era of big business entering cannabis officially began in 2018

Altria Group Inc., the world’s largest tobacco company and owner of Philip Morris and Marlboro cigarettes, recently made a $1.8 billion investment in Canadian cannabis producer Cronos for 45% of the company.

The big news in cannabis over the past couple of weeks has been the announcement that Altria, the world’s largest tobacco company and owner of Philip Morris and Marlboro cigarettes, made a $1.8 billion investment in Canadian cannabis producer Cronos for 45% of the company. The deal comes with warrants for Altria to provide an additional $1.05 billion for a 55% stake in Cronos.

Then, just yesterday, Tilray announced an expanded strategic partnership with Novartis, the pharmaceutical giant, to work on medical cannabis products in legal markets.

These developments of course come on the heels of the other major news from earlier this year, when alcohol giant Constellation Brands bought a 38% stake in the largest Canadian cannabis company, Canopy Growth, for $4 billion. This deal, which was preceded by a smaller investment in October 2017 by Constellation into Canopy, similarly came with warrants that will allow Constellation, the maker of Corona beer and Svedka vodka, to buy a majority interest in Canopy.

The ramifications of this are clear and stark. By the end of 2019, there is a realistic chance that two of the largest cannabis companies in the world will be owned by two of the largest alcohol and tobacco companies in the world. The era of big business entering cannabis officially began in 2018 .

The year also saw other major companies dip a toe in the cannabis market. Molson (a subsidiary of Coors) announced a partnership with Hydropothecary to create a line of non-alcoholic cannabis infused beer.

Coca-Cola is rumored to be exploring a partnership with Aurora that would allow them to make CBD-infused beverages, something that may be closer to a reality with CBD-hemp production and extraction becoming legal as part of the recently passed Farm Bill.

We also saw a major increase in merger-and-acquisition activity among American cannabis operators in the past year, which may also portend the entry of major industry players in cannabis as multi-state operators position themselves as attractive acquisition targets for big moneyed players from outside the industry. Just this year we saw the announced mergers of industry heavyweights MedMen and Pharmacann, iAnthus and MPX, and my own company 4Front with Cannex. This happened during a flurry of smaller and mom-and-pop operators being acquired by the larger multi-state companies.

Looking towards the future, this consolidation makes sense. On an operational level, companies are able to build economies of scale with more licenses in more states, and are largely rewarded by investors and the public markets for doing so. But these companies are also well positioned to be acquired by much larger companies from other sectors once federal cannabis prohibition ends and these companies feel comfortable entering the multi-billion dollar American cannabis market. When companies with billions of dollars to spend on acquisitions decide they want in on the U.S. cannabis market, some of them may not want to do the grinding hard work of rolling up dozens of smaller operators across multiple states. Instead, many will likely look for larger companies with developed brands, capabilities and existing distribution networks.

So who are these companies waiting in the wings to jump into the American cannabis market? We’ve already seen alcohol and tobacco get involved in Canada, and there’s no doubt they’re keeping similar tabs on the United States. Altria may have been the first tobacco company to buy a stake in a cannabis license, but you can be certain its competitors will ensure that they are not the last. Similarly, Constellation and Molson will certainly be joined by other alcohol manufacturers in partnering with and acquiring American cannabis businesses once there is an adequate change in federal law. Some will be large deals like Constellation’s with Canopy, while others may see craft brewers and micro-distillers teaming up with craft cannabis producers to create a truly high-end user experience for fans of both products.

But alcohol and tobacco are hardly the only industries set to expand into the growing cannabis economy. Other industries like pharma, agriculture, and non-alcoholic beverages can all benefit from an end to cannabis prohibition.

Big Pharma

The pharma industry is the most profitable industry in the United States today, and its members no doubt have interest in the healing properties contained in cannabis, as evidence by Novartis’ recent partnership with Tilray.

Cannabis has been part of the U.S. pharmacopeia dating back to the founding of the country, and only became shunned by the medical community after cannabis became outlawed federally in 1937 over the objections of the American Medical Association. But since 1996, Americans have been able to treat conditions from glaucoma to multiple sclerosis to insomnia with cannabis.

While pharma companies can’t patent whole smoked cannabis as pharmaceutical drugs, they can and will create drugs based on the cannabinoids and terpenes found in this healing plant. GW Pharmaceuticals, a British-based company focused on the development of cannabinoid based medications had a breakthrough this year when the FDA approved Epidiolex, a CBD-based drug derived from the cannabis plant, as a prescription medication in the United States. The company’s first product, Sativex, has already been available in pharmacies across Europe and Canada for nearly a decade.

No doubt major pharma companies like Pfizer and Bayer are watching the cannabis industry closely and exploring the possibility of following GW’s lead in developing a new generation of life-altering, cannabinoid-based medications.

Agriculture

Of course, cannabis is an agricultural crop, which means it must have the attention of large-scale commercial agriculture companies. When federal prohibition ends, and once interstate commerce and cross-border imports have fully opened up, most cannabis cultivation will likely move to massive scale fields with large drops in wholesale pricing. Most experts agree that cannabis production will commoditize, and as this happens agriculture giants will be best positioned to bring their efficiencies at scale to this industry, as well as their technology for optimizing genetics, propagation, and other techniques not currently available in the cannabis industry. We’ve already seen Scotts Miracle-Gro embrace the cannabis industry. It seems to be only a matter of time before companies like Monsanto enter the fray.

Food & Beverage Companies

We’ve seen a recent trend towards cannabis-infused drinks and compound formulations for infusion into other products. Coca Cola looking at CBD-infused beverages is likely only the beginning. It would seem a natural fit for companies like Coca Cola or Pepsi to eventually partner with companies like Dixie Elixers or Keef Cola to create entire skews of cannabis-infused beverages. Similarly, chocolate makers like Hershey and Nestle must be intrigued by the success of Kiva Chocolates, Incredibles, and other successful cannabis confectioners.

Technology & Ancillary Service Providers

On the technology side, companies like MJ Freeway, Biotrack and Greenbits would make great acquisition targets for large-scale, point-of-sale companies from other industries. Delivery companies like Eaze and Meadow would make natural partners or acquisition targets for Uber Eats or DoorDash. Companies that aggregate cannabis industry data like BDS Analytics and New Frontier would make great partners for major business data aggregators like Bloomberg and Neilson.

While 2018 marked the first stage of some pioneering companies in traditional industries entering the cannabis market, the coming years will involve more partnerships, mergers, and acquisitions between cannabis operators and major companies from other industries. Of course, federal cannabis prohibition remains a major impediment to traditional companies’ full-scale embrace of cannabis in the United States, but when prohibition does end, there is going to be a large influx of traditional companies getting into cannabis. This article only scratches the surface; the market will surely come with plenty of surprises.