Big Tobacco is more into cannabis than it might say publicly. When contrasting words with actions, it is the latter that speaks so much louder as the big players seek to move away from unpopular tobacco to alternative smokeless products.
Take Altria, for example. The company behind such notable cigarette brands as Marlboro, Chesterfield and Virginia Slims was lukewarm in its first-half results release when it came to endorsing its involvement in cannabis, where it has held a 45% stake in major Canadian company Cronos since March 2019.
Richmond, Virginia-based Altria said in July it was simply going to “continue to monitor its investment in Cronos, including the impact of the COVID-19 pandemic on Cronos’ business and market valuation.” It said exactly the same thing in more recent quarterly results released October 28. Cronos, which trades on the Nasdaq under the ticker CRON, has declined from highs of more than $20 in February and March 2019 to $5.28 as of October 28, 2021.
But what Big Tobacco companies might say in public is quite different from what their real intentions are in cannabis investment, especially as the U.S. looks to eventually legalize at the federal level. They are actively searching for an alternative to tobacco, and cannabis is certainly one of those options.
“They have to manage their PR around it, particularly as long as the U.S. federal prohibition of cannabis remains,” Rahul Sarugaser, managing director of equity research medical technologies at Raymond James in Toronto, told The News Station. “They appear to speak out of both sides of their mouth — they are making big investments in cannabis, but publicly they are circumspect, speaking more quietly.”
PharmaCann Deal Shows Real Hand
Indeed, they are making big investments.
Altria’s vague comments about Cronos came after Cronos secured a deal to buy 10.5% of U.S. cannabis operator PharmaCann for approximately $110.4 million in June, contingent on federal legalization in the U.S.
PharmaCann has since gone on to agree to acquire Colorado-based cannabis group LivWell Holdings, which would result in a merged company operating 60 dispensaries and 11 cultivation and production facilities across 11 states.
Cronos’ PharmaCann move was clearly made in conjunction with Altria backing, given that a special committee was set up to evaluate the deal, as well as other potential opportunities in the U.S.
Out of the seven directors on Cronos’ board, three are Altria executives: chief operating officer Jody Begley, general counsel Murray Garnick and senior vice president of corporate strategy Heather Newman.
Altria also has an agreement with Cronos to be its exclusive partner in any international investment the Canadian company makes in cannabis.
Altria declined to return calls for further comment.
Other Tobacco Companies Stepping Up
Other Big Tobacco companies have made smaller but similar splashes in the cannabis world, investing in Canadian marijuana companies.
BAT said its focus will be on research and product development of next-generation adult cannabis products with an initial focus on cannabidiol (CBD). The tobacco company had already stepped into the CBD arena with its Vuse line of vape products.
In April, U.K.-based tobacco giant Imperial Brands amended its strategic partnership with Canadian cannabis group Auxly by extending the maturity date of its loan agreement with the Toronto-based company.
Auxly remains Imperial Brands’ exclusive global partner for any future development, manufacture, commercialization, sale and distribution of cannabis products, Auxly said at the time.
It’s clear Big Tobacco isn’t going anywhere when it comes to cannabis, Sarugaser at Raymond James stressed. The old business model of relying completely on tobacco products is long gone for such companies and they have to adapt and look for new revenue-producing areas amid obvious increased awareness of the dangers of tobacco.
Despite a pause caused by increased smoking during the pandemic, tobacco sales have been on a significant decline for the past few decades. According to the World Health Organization, tobacco use dropped by about 60 million people from 2000 to 2018.
“Three of the five largest [tobacco companies] have broadened into this sector and the other two are not far behind,” Sarugaser said. “For Big Tobacco, tobacco sales’ days are numbered and they need to find other forms of inhalable products business, and that is cannabis.”
PMI Now Joining the Fray
PMI, which trades on the NYSE under the ticker PM and is headquartered in New York, recently agreed to acquire London Stock Exchange-traded Vectura PLC, a producer of inhaled drug-delivery solutions. It has also closed the acquisition of Danish group Fertin Pharma A/S, a developer and manufacturer of innovative pharmaceutical and well-being products.
Both purchases are consistent with PMI’s strategy of generating more than 50% of its total net revenue from smoke-free products and at least $1 billion in net revenue from products beyond nicotine.
Fertin Pharma’s products can be leveraged for the development of self-care wellness products, including areas such as sleep, energy, calm and focus, PMI has said, suggesting it may be looking at cannabis related products too.
“Fertin’s programs in the non-psychoactive cannabinoid space, e.g. CBD, are nascent,” Corey Henry, director of U.S. communications at PMI, told The News Station. “The acquisition provides options for PMI to explore the potential methods of delivery in this space, while we continue to carefully evaluate the related science.”
Fertin’s sister company NordicCan designs delivery solutions for use with cannabis products. Both Fertin and NordicCan have a number of patented products covering oral and intra-oral delivery technologies.
“We continue to watch the medical cannabis space and assess the related science as the category develops and regulators begin to consider new policies, particularly for medicinal use,” Henry added.
Biotech Research May Hold Key
What such companies really might be looking for, as BAT has shown with its stake in Organigram, is investment in the science of cannabis rather than a pure plant retail play.
“Big Tobacco are not farmers and they don’t have to subscribe to the dogma of the plant,” Sarugaser said. “Cannabis is interesting, but cannabinoids are more interesting.”
Altria, through its equity stake in Cronos, has an investment in Boston-based biotechnology company Ginkgo Bioworks, which has partnered with Cronos since September 2018 in a $122 million venture designed to synthesize the manufacture of cannabinoids.
Cronos said in August the two companies had met their targets for the production of cannabigerolic acid to support Cronos’ planned launch of cannabigerol (CBG) manufacturing later this year. CBG is naturally present in the cannabis plant in typically very small quantities, but is touted as a possible treatment in eye disease and may even be capable of stopping cancer cell growth.
Hoopla and Lobbying
Other companies in established industries have also shown interest in cannabis. Alcohol giant Constellation Brands, for example, announced in October 2017 it had acquired 9.9% of Canadian cannabis company Canopy Growth for approximately $173 million. It has since raised its stake in Canopy to 38.6% with the option to increase it to about 55.8%.
The announcement by Altria to invest a record-breaking $2.4 billion Canadian ($1.8 billion U.S.) in Cronos in March 2019 was met with a lot of hoopla, as it was and remains the largest investment by a Big Tobacco company in the cannabis industry.
Despite what it might say in public as it steps gingerly around a product still federally illegal in the U.S., Altria appears committed to its focus on cannabis through the investment in Cronos and in its active lobbying regarding future legalization.
“All signs point to Altria being supportive of Cronos,” Sarugaser said. “They are actively lobbying and they see U.S. federal legalization as an inevitability and have a long-term view.”