Who Could One Day Become “Big Cannabis?"

Jacob Harper |

Marijuana currently exists in a kind of strange legal purgatory. It’s legal to prescribe for medical use in 14 states and DC, and outright legal for recreational use in two, Washington and Colorado. Yet the psychotropic drug remains a Schedule I Controlled Substance under federal guidelines. This has prevented any company from establishing major farms or distribution centers. The “legal” pot supplying the dispensaries and pot depots in these states has to come from somewhere. But where?

President Obama has said he won’t direct the DEA to target individual users and growers at all, though they are violating federal law. In a 2011 memo, though, the U.S. Department of Justice reiterated that businesses engaged in marijuana commerce will not get the same blind-eye treatment. As such, no major company has yet stepped up to assert themselves as a market leader for fear of having their cash and product seized, and possibly facing jail time. Even banks that deal with marijuana companies, as of now, could be subject to federal money laundering charges.

That could change as the possibility of marijuana becoming legal nationally increases. According to a Pew Center Research Poll in conducted in Mar. 2013, 52 percent of Americans favor outright legalization. According to another Pew poll in April 2013, 72 percent of Americans feel enforcing marijuana laws costs more than its worth.   

Which raises the question: what’s the exact worth of pot as a business? The marijuana market in Colorado alone is expected to top $600 million, even as it exists in a legal limbo. The entire medical market in the US is at least worth $1.6 billion. This says nothing of the still black market value of the drug, which some estimates place upwards of $100 billion.

If marijuana were to become legal – and over three quarters of American believe it will be within the next ten years – this will leave a multi-billion dollar industry open, where currently no company operates over the microcap level due to fear of governmental interference. The question is who would assert themselves as America’s nascent Big Cannabis?

Existing pot companies simply don't have the clout to ascend quickly enough. Large-cap pharamaceutical companies and drug makers don't necessarily make sense either, as they don't really deal in commodities.

The obvious answer is Big Tobacco. They have the machinery and distribution system to deliver smokable products on a massive scale already in place. They already have experience harvesting and processing plant materials. Switching from tobacco cigarettes to marijuana ones would be, from a production standpoint, a matter of changing the filling.

In December 2012, CBS news asked the two major tobacco companies is they had plans to move into the states where marijuana has been decriminalized. Bryan Hatchell, a spokesman for Reynolds American Inc. (RAI) said flatly, "Reynolds American has no plans to produce or market marijuana products in either of those states. It's not part of our strategy.”

A Phillip Morris International (MO) spokesman was more oblique, saying “We have a practice of not commenting or speculating on future business.” Neither response is surprising, though Phillip Morris’ response is interesting in not denying they’d engage in illegal activity, merely asserting, "tobacco companies are in the business of manufacturing and marketing tobacco products."

For marijuana on the federal level is still prohibited, and neither company would want to risk asset forfeiture by establishing pot businesses in the current legal limbo. But if marijuana was legal, and tobacco companies didn’t have that risk hanging over their heads, the switchover makes perfect sense.

Tobacco will probably never realize the profits they did in their heyday, as tobacco smoking rates in America continue to plummet. Tobacco’s expansion into emerging markets is also only a temporary fix, as those countries as well will see dips in usage as the countries become better educated about the dangers of tobacco use.

The latest product development to come out of the tobacco sector, the e-cigarette, is a temporary fix for tobacco companies, as the FDA is sure to catch on and apply the same regulations and restrictions to e-cigarettes that they have to cigarettes. But the e-cigarette does show Big Tobacco isn’t  when it comes to replacing the revenue lost with the decline of cigarettes, Big Tobacco isn't afraid to come up with creative solutions.

It only makes sense that with marijuana legalization looming, they continue to do so.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


Symbol Name Price Change % Volume
DPAT Dental Patient Care Amer 0.02 0.00 0.00 0
MO Altria Group Inc. 64.95 1.25 1.96 10,832,285


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