On December 16, 2020, Aphria Inc. (TSX: APHA and Nasdaq: APHA) announced a merger with Tilray, Inc. (Nasdaq: TLRY), creating the world’s largest cannabis company. The two Canadian companies combined have an equity value of $3.9 billion.
Following the news of the merger, Tilray’s stock rose more than 21% the same day. Once the reverse-merger is finalized, Aphria shareholders will own 62% of the outstanding Tilray shares. That is a premium of 23% based on share price at market close on the 15th. Based on the past twelve months of reports, the two companies’ revenue totals more than $685 million.
Both of the companies have had international expansion strategies in place well beyond the Canadian market, with an eye focused on the European and United States markets. In Germany, Aphria already has a well-established footprint for distribution and Tilray owns a production facility in Portugal.
About two weeks ago, Aphria closed on their $300 million acquisition of Sweetwater Brewing Company, one of the largest independent craft brewers in the United States. Sweetwater is well known for their 420 Extra Pale Ale, their cannabis-curious lifestyle brands and their music festivals.
Once the Aphria/Tilray merger is finalized, the company will have offices in New York, Seattle, Toronto, Leamington, Vancouver Island, Portugal and in Germany. The new combined company will do business under the Tilray name with shares trading on NASDAQ under ticker symbol “TLRY”.
Aphria’s current chairman and CEO, Irwin Simon, will be the chairman and CEO of the combined company, Tilray. “We are bringing together two world-class companies that share a culture of innovation, brand development and cultivation to enhance our Canadian, U.S., and international scale as we pursue opportunities for accelerated growth with the strength and flexibility of our balance sheet and access to capital,” says Simon. “Our highly complementary businesses create a combined company with a leading branded product portfolio, including the most comprehensive Cannabis 2.0 product offerings for patients and consumers, along with significant synergies across our operations in Canada, Europe and the United States. Our business combination with Tilray aligns with our strategic focus and emphasis on our highest return priorities as we strive to generate value for all stakeholders.”
While the 2020 Presidential election didn’t exactly end up in a clear landslide victory for the Democrats, there is one group that did well: the cannabis industry.
The results clearly show that the expansion of cannabis is a recognizable part of today’s society across the United States. States like New Jersey, for example, partly thanks to New York and Pennsylvania—which already allow the use of medical cannabis—traffic will start to force the state of New York’s hand and that’s a big chunk of the population of the Northeast.
If the question of legalization was on the ballot, it was an issue that overwhelmingly succeeded in delivering a clear mandate. Adult use of cannabis passed handily in Arizona, Montana, South Dakota and as mentioned above, New Jersey, and was approved for medical use in Mississippi and South Dakota.
With only 15 states remaining in the union that still outlaw the use of cannabis in any form, the new reality for the industry is here. All of these outcomes show promise as the industry’s recognition is growing.
Election outcomes and the position of the average American on cannabis
Americans are definitely understanding, appreciating and using cannabis more and more. It is becoming a part of everyday life and this election’s results could be the tipping point that normalizes the adult use of cannabis. It is becoming more widely understood as an effective and acceptable means to help manage stress and anxiety, aid in sleep and general overall wellbeing.
This image of cannabis is aided by the many different forms of consumption that exist now: edibles, transdermal, nano tech, etc. No longer does a consumer have to smoke—which isn’t accepted in many circles—to get the beneficial effects of cannabis.
Knowledge expansion is going to move these products across state lines and eventually, the federal government will have to take notice.
Do Democrats and Republicans view cannabis through the same lens?
Cannabis is and will always be state specific. Republicans in general tend to be a little bit more cautious and there are a lot of pundits who believe that as long as the Republicans control the senate, there isn’t much of a chance for federal legalization.
There is some hope, however, that the industry will get support from the Biden administration. While President-Elect Biden has been on record as being against legalization of cannabis at a federal level, even he will eventually see that the train has left the station and momentum continues to build. In fact, Biden’s tone has changed considerably while he running for president, adding cannabis decriminalization to the Biden-Harris campaign platform.
Ultimately, how cannabis is viewed from each side of the aisle matters less than how it is viewed at the state level.
Cannabis reform under Biden
Biden had an opportunity to legalize cannabis federally in the U.S. during the Obama administration and it didn’t happen. It’s clear that the mandates of the Biden-Harris administration are going to be overwhelmed by current issues, at least in the beginning: COVID-19, the economy and climate change, to name but three.
What will be interesting is if the Biden-Harris administration goes to greater lengths to decriminalize cannabis. For example, cannabis is still a Schedule 1 drug on the books, which puts it in the same class as heroin. Biden couldn’t unilaterally remove cannabis from all scheduling, but his government could reschedule it to reduce the implications of its use.
This could, however, create more problems than it solves:
“It’s generally understood, then, that rescheduling weed would blow up the marijuana industry’s existing model, of state-licensed businesses that are not pharmacies selling cannabis products, that are not Food and Drug Administration-reviewed and approved, to customers who are not medical patients.
Biden rescheduling cannabis “would only continue the state-federal conflict, and force both state regulators and businesses to completely reconfigure themselves, putting many people out of business and costing states significant time and money,” as Morgan Fox, chief spokesperson for the National Cannabis Industry Association, said in an email on Monday.” (Source)
In reality however, there is little chance that Biden will spend any political capital that he has, particularly if the Senate remains in Republican control, dealing with the legalization of adult use cannabis.
What needs to happen for legalization to become a reality
Outside of the law, if Trump suddenly decided to legalize adult use cannabis before leaving the White House, the states would still need to agree on issues such as possession, transportation, shipment and taxation.
It’s clear that further normalization of cannabis use is required—which will likely take a good couple of years—in order for it to become as understood and as simple as wine, liquor or cigarettes.
Beyond that, it’s Congress that dictated that cannabis be illegal at the federal level and it will have to be Congress that makes the decision to change that. Even the Supreme Court has been reluctant to get involved in the question, believing this to be an issue that should be dealt within the House.
What does all of this mean for investment in the cannabis industry?
Cannabis should be part of most long-term investors’ portfolios. Like a group of stocks in a healthy market with the right balance sheets, cannabis is an expanding industry and growth is there.
Whether or not this is specifically the right time to invest, it’s always important to evaluate each stock or each company individually, from the point of view of the merits of the investment and investment objectives, as well as risk tolerance perspectives.
There isn’t any unique or special place to buy into the cannabis industry, unless it is connected to some new real estate or other opportunity that is COVID-19 related. This moment in time isn’t really any different from any other when it comes to the opportunity to own some cannabis stocks. It’s always a good time.
The short term returns of this market shouldn’t be speculated upon. There are just way more factors than the fundamentals of a company that will affect the short-term play. The country is in a transition of power, in addition to much international change taking place that can also contribute to returns in the short term, making speculation unhelpful.
The cannabis market in 2021
The cannabis industry is likely to continue to expand and grow with the select companies acquiring more and more and getting back to their cash flow. Some companies will slowly be going out of business and/or will be acquired by others going into a certain consolidation period of time. Whatever the outcomes in specific tourism dominated markets, the industry as a whole can really go in one direction.
By Brett Schuman, Jennifer Fisher, Brendan Radke, Gina Faldetta 1 Comment
Since the December 20, 2018 enactment of the Agricultural Improvement Act of 2018, better known as the Farm Bill, we have seen a number of new state laws addressing both the legality of hemp and products derived therefrom, most noticeably cannabidiol, better known as CBD. This piece provides a brief overview of some of the more interesting state laws concerning hemp and CBD, as well as recent developments.
Legality of Hemp
Since the passage of the Farm Bill, the vast majority of states have legalized the cultivation and sale of hemp and hemp products. However, certain states maintain laws barring some or even most forms of hemp.
The most stringent of those states is Idaho, where hemp remains illegal. In March 2020, Senate Bill 1345 – legislation that would have allowed for the production and processing of industrial hemp – died in the House State Affairs Committee, due to concerns that legalizing hemp would be the first step toward legalizing “marijuana”; that the bill contained too much regulation and that it was otherwise unworkable. As a result, Idaho is currently the only state without a legal hemp industry. Hemp with any THC, even at or below the 0.3 percent threshold under the Farm Bill, is considered equivalent to “marijuana” in Idaho and is illegal (see below for a discussion of CBD in Idaho).
Indiana, Iowa, Louisiana, and Texas have enacted bans on smokable hemp. Indiana law prohibits hemp products “in a form that allows THC to be introduced into the human body by inhalation of smoke.” Iowa has amended its Hemp Act to ban products introduced to the body “by any method of inhalation.” Louisiana prohibits “any part of hemp for inhalation” except hemp rolling papers, and Texas law prohibits “consumable hemp products for smoking.”
Some of these bans have been challenged in court. In Indiana, a group of hemp sellers requested an injunction against the smokable hemp ban in federal court, on the grounds that the federal Farm Bill likely preempted the Indiana law. In September of 2019, the district court issued the requested injunction, but the U.S. Court of Appeals for the Seventh Circuit overturned that decision in July 2020, stating that the order “swept too broadly.” The Seventh Circuit noted that the 2018 Farm Bill “expressly provides that the states retain the authority to regulate the production of hemp” and remanded the case for further proceedings.
Similarly, in Texas, hemp producers have sued in state court over the smokable hemp ban, questioning its constitutionality and arguing that it would result in a loss of jobs and tax revenue for the state. According to those producers, smokable hemp comprises up to 50 percent of revenue from hemp products. On September 17, 2020, Travis County Judge Lora Livingston issued a temporary injunction blocking enforcement of the law until trial, which currently is set to commence on February 1, 2021. Judge Livingston had previously issued a temporary restraining order to that same effect.
State Laws Regulating CBD
State laws and regulation on hemp-derived CBD are varied, and the legality of a CBD product often comes down to its form and marketing.
As an initial matter, it must be noted that notwithstanding the Farm Bill the FDA currently prohibits hemp-derived CBD from being be sold as dietary supplements, and food (including animal food or feed) to which CBD has been added cannot be introduced into interstate commerce. As discussed below, a substantial minority of states, including California, follow the FDA’s current position on the permissibility of putting hemp-derived CBD in food or dietary supplements.
Certain states include strict limitations on CBD, none more so than (once again) Idaho. Lacking any legal hemp industry, Idaho restricts CBD products to those having no THC whatsoever, rejecting the generally accepted threshold of not more than 0.3 percent THC. Idaho law also requires that hemp CBD be derived only from “(a) mature stalks of the plant, (b) fiber produced from the stalks, (c) oil or cake made from the seeds or the achene of such plant, (d) any other compound, manufacture, salt, derivative, mixture, or preparation of the mature stalks, or (e) the sterilized seed of such plant which is incapable of germination.”
Kansas similarly prohibits CBD with any amount of THC, though the law is murkier than Idaho’s. While Senate Bill 282 allowed possession and retail sale of CBD effective May 24, 2018 by removing CBD oil from the definition of “marijuana,” this was broadly interpreted to apply to THC-free CBD only. Later legislation, Senate Substitute for HC 2167, effective July 2019, allowed the farming of hemp with THC levels aligned with the Farm Bill definition (i.e., 0.3 percent THC or lower), but expressly prohibited the use of industrial hemp in: cigars, cigarettes, chew, dip, or other smokeless forms of consumption; teas; liquids for use in vaporizing devices; or “[a] ny other hemp product intended for human or animal consumption containing any ingredient derived from industrial hemp that is prohibited pursuant to the Kansas Food, Drug and Cosmetic Act or the Kansas Commercial Feeding Stuffs Act,” though this final section provides that “[t] his does not otherwise prohibit the use of any such ingredient, including cannabidiol oil, in hemp products,” the law’s only reference to CBD. The Kansas Bureau of Investigation has reportedly made statements indicating that CBD with any level of THC remains illegal.
Mississippi only recently legalized the cultivation of hemp via Senate Bill 2725, the Mississippi Help Cultivation Act, which was signed into law on June 29, 2020. House Bill 1547, passed on April 16, 2019, imposed content requirements upon CBD products within Mississippi: to be legal in Mississippi, a CBD product must contain “a minimum ratio of twenty-to-one cannabidiol to tetrahydrocannabinol (20:1 cannabidiol:tetrahydrocannabinol), and diluted so as to contain at least fifty (50) milligrams of cannabidiol per milliliter, with not more than two and one-half (2.5) milligrams of tetrahydrocannabinol per milliliter.” Moreover, CBD products produced in Mississippi must be tested at the University of Mississippi’s lab. However, subject to these restrictions, Mississippi allows the sale of CBD products, including edibles, contrary to the restrictions of many of states considered friendlier to hemp.
Perhaps more surprising is Hawaii, which restricts the sale and distribution of CBD, aligning with the FDA’s guidance. In Hawaii it is illegal to add CBD to food, beverages, as well as to sell it as a dietary supplement or market it by asserting health claims. It is also illegal to add CBD to cosmetics, an uncommon restriction across the many states with CBD-specific laws and regulations. Unlike Idaho and Mississippi, which have no medical marijuana programs, Hawaii has long legalized marijuana for medical purposes and in January 2020 decriminalized recreational possession. Hawaii very recently enacted legislation allowing the production and sale of cannabis-infused consumable and topical products by medical cannabis licensees effective January 1, 2021, but this legislation did not address CBD. Given the foregoing, Hawaii’s restrictions on CBD stand out.
Beyond broad CBD restrictions, many more states prohibit the use of CBD within food, beverages, or as dietary supplements. For instance, twenty states – including California, Georgia, Illinois, Massachusetts, Michigan, New Jersey, New York, and Washington – prohibit the sale of CBD in food or beverage. In California, a bill to overhaul California’s hemp laws, Assembly Bill 2028, failed when the legislative session concluded on August 31, 2020 without a vote. AB 2028 would have allowed CBD in food, beverages, and dietary supplements (though, interestingly, it would have banned smokable hemp). As a result, California remains a relatively restrictive state when it comes to hemp-derived CBD, notwithstanding the legality of recreational marijuana.
New York allows the manufacture and sale of CBD, but requires CBD products to be labeled as “dietary supplements.” This mandate conflicts directly with the FDA’s position that CBD products are excluded from the definition of a dietary supplement. Further, despite the state’s categorization of CBD products as dietary supplements, New York prohibits the addition of CBD to food and beverages. These regulations have resulted in a confusing landscape for retailers and manufacturers in the Empire State.
Several states also have labeling requirements specific to CBD products. Batch numbers and ingredients are ubiquitous, but an increasingly common requirement is the inclusion of a scannable code that links to specific information about the product. States imposing this requirement include Florida, Indiana, Texas, and Utah. Indiana is viewed as having one of the more comprehensive labeling requirements for CBD products – or, depending upon your perspective, the most onerous.
At the outset of 2020, the cannabis industry appeared poised for a series of incremental changes: a number of states were considering decriminalization and legalization measures, and support was growing for federal legislation allowing cannabis businesses access to banks and financial services. Then the COVID-19 pandemic hit, which disrupted state legislative sessions (and legislative priorities), obstructed signature gathering for ballot initiatives, and reshuffled federal priorities. However, despite all of these changes, the cannabis industry has seen significant developments across the country. Beyond of course the many challenges and losses brought by the pandemic and its aftermath, in some ways, it may prove a boon for the industry.
Legalization and Decriminalization
Currently around a dozen states have legalized cannabis for recreational use, while just under two dozen states allow use of medicinal cannabis. With support for legalization measures steadily growing in most states, a number of major states seemed poised to pass legislation legalizing recreational cannabis, including large potential markets in the Northeast such as New York, New Jersey, Connecticut and Pennsylvania. And in many other states, advocacy groups were well underway gathering signatures to qualify legalization measures for the November 2020 ballot. When the pandemic hit, however, state legislatures largely suspended their normal operations, and signature gatherers were stymied by stay-at-home orders and social distancing requirements.
Despite these major obstacles, legalization and decriminalization legislation has continued to move forward in a number of states, and still others will have legalization referenda on the ballot for November’s election. Perhaps more important than these initiatives themselves are the diverse states that are moving toward loosening of restrictions around cannabis: rather than being limited to a handful of especially liberal states, cannabis advocates are seeing tangible progress is every geographic area, among states whose political leanings span the spectrum.
While the Northeast corridor had planned to undertake legalization efforts in a coordinated fashion this year, those results were put on hold given the seriousness of initial COVID-19 outbreaks in the greater New York area. However, the New Jersey General Assembly nevertheless passed decriminalization legislation, though the matter has not yet cleared the New Jersey Senate, and the appetite for full-scale legalization remains strong there, with a ballot initiative going directly to voters in advance of the New Jersey Legislature considering the issue. The Commonwealth of Virginia enacted decriminalization legislation also, and a legislative caucus in Virginia has pledged to introduce recreational legalization legislation this summer when Virginia convenes a special legislative session. Voters in Mississippi and South Dakota will be able to vote on ballot initiatives to legalize recreational cannabis, and similar ballot initiatives are underway or likely in Arizona and Nebraska. Advocates in Arkansas and Oklahoma had also hoped to bring initiatives to the ballot, but have encountered practical and legal obstacles to gathering the required signatures in time for this year’s election.
These myriad initiatives reflect a strong shift toward legalization of recreational cannabis across the country, and the ability to continue gathering signatures and momentum despite stay-at-home orders and social distancing underscores the growing popularity of the movement. Whether through the legislature or directly by the ballot, it seems all but certain that the number of states permitting recreational cannabis will grow significantly this year.
COVID-19 Business Closures
As the COVID-19 pandemic took hold in the early months of 2020, most states instituted various forms of stay-at-home orders that required the closure of nonessential businesses. While these policies had—and continue to have—serious impacts on businesses of every type, cannabis companies have largely seen strong economic growth notwithstanding.
One of the most important developments in this space came in the context of state and local governments designating certain businesses as “essential” for purposes of business closure orders. In nearly every state to consider the issue—Massachusetts being the main outlier—state and local governments recognized cannabis companies as essential, which allowed them to operate during the shutdown.
The “essential” designation largely carried between both recreational and medicinal cannabis jurisdictions. And this matters because of what it means for the industry. State and local governments clearly realize the important medicinal role that cannabis plays for patients dependent on it for treatment, and the overlapping customer bases of mixed dispensaries further contributed to keeping cannabis companies open during the pandemic. Even in states where certain dispensaries operate solely in a recreational capacity, those jurisdictions recognized the importance of allowing access to a safe recreational substance, like alcohol, during prolonged stay-at-home orders.
Similarly, likely as a result of those same stay-at-home orders, cannabis companies largely saw significant increases in sales revenue. More customers visited retail establishments, and those customers often purchased more product per visit. This resulted in better-than-expected sales revenue for cannabis companies, and also produced increased tax revenues for state and local governments.
The cannabis industry saw more than just increased sales, however. In the process of issuing emergency rules for the cannabis industry during quarantine, a number of state and local jurisdictions either began to allow cannabis deliveries or expanded its availability, a shift in policy that may stick around well after the pandemic subsides.
One final impact of the pandemic may also help push legalization initiatives forward in the coming years: decreased tax revenue and major budget gaps. Due both to a decrease in economic activity like shopping and dining, as well as the unexpected health care costs associated with responding to the COVID-19 crisis, state and local budgets are expected to see significant shortcomings for years to come. In response, state and local governments are starting to see cannabis as a significant and viable source of tax revenue. For example, various cities in California that had previously been reluctant to permit recreational cannabis are beginning to welcome cannabis companies in hopes of making up for lost tax revenue. Similarly, in New Mexico, where legalization has remained a heated topic of discussion, Gov. Lujan Grisham has explicitly expressed her regret that the state failed to legalize cannabis, recognizing that tax revenues from the industry could have reached upwards of $100 million. Other state and local governments are coming to similar realizations, which should help propel expanded access to legal cannabis in coming years.
Major changes in the cannabis industry in 2020 have not been limited to the states. In the midst of changes and crises across the country, the federal government has been making meaningful progress in two major respects, COVID-19 notwithstanding.
First, cannabis companies are edging closer to having full access to banks, bank accounts and related financial services. The SAFE Banking Act, championed by Rep. Perlmutter, has made it through the House of Representatives and is currently in the Senate Committee on Banking, Housing, and Urban Affairs. However, as Congress continues to toil away at future COVID-19 relief legislation, political signals from Washington, D.C., suggest there is a reasonable likelihood that the protections of the SAFE Banking Act will be included, in some form, in the next round of major COVID-19 legislation out of Congress. The enactment of these banking provisions will provide substantial relief to cannabis companies who have largely been excluded from opening bank accounts and utilizing the services major banks provide. Additionally, allowing access to banks and their services should further facilitate the rapid growth in the cannabis economy we are witnessing elsewhere, and this movement could further legitimize the industry as part of a broader push for federal legalization.
Second, after a four-year delay, the DEA has finally proposed draft rules to expand the DEA’s limited cannabis research program. For decades, all cannabis research to date has relied on limited supplies of cannabis grown at the University of Mississippi. Now the DEA is finally following through on its promise to further develop, refine and expand its research program by allowing additional suppliers and market participants to play a role in cannabis research. While the rules proposed are not without detractors and critiques—and the rules themselves have not been finalized—this marks an important step forward to a better understanding of the effects of THC on consumers, not only because more research is needed to understand a substance consumed by millions annually, but also because the limited supply of cannabis on which researchers currently rely has been shown to differ substantially in appearance, consistency and chemical composition from cannabis that is commercially available in states across the country. With an expanded research regime comes the hope that scientists will be able to develop new and innovative cannabis-derived medications, while also furthering our understanding of how THC affects health and the body.
At every level of government, the year in cannabis so far has proven to be far more eventful than many predicted. And the COVID-19 crisis has not slowed progress. There appears to be continued momentum to further mature how cannabis is treated at every level of government, which signals that significant changes are on the horizon. Industry observers will be closely focused on how the rest of the year proceeds, especially with a presidential election on the horizon.
Editor’s Note: This article was revised to clarify that New Jersey has not yet decriminalized marijuana. A decriminalization bill passed the New Jersey General Assembly, but the New Jersey Senate has not acted as of this writing.
Here’s some news that might sound familiar: recently, Governor Andrew Cuomo insisted that cannabis would soon be legal in New York. Perhaps this seems like déjà vu given that he made the same pronouncement back in 2018, insisting that cannabis would be legal in the Empire State by 2020.
Might this simply be wishful thinking on Governor Cuomo’s part? Perhaps, but if cannabis is, in fact, legalized—whether this year or anytime down the road—it’d be a boon to cannabis entrepreneurs looking to expand into New York and capitalize on the vast resources of its citizenry. Still, by virtue of the inherent challenges and question marks related to legal cannabis in the state, these would-be cannabis titans should keep their excitement in check.
When any jurisdiction considers legalizing cannabis, uncertainty follows. In the case of New York, the questions are many: Will the recreational use of cannabis be legal or just further decriminalized (as was done last year)? And if recreational cannabis is given the green light, what sort of distribution regulations will be in place; where will it be permitted to be sold; will the four-dispensary limit remain in effect; and what’ll the parameters regarding growing in state be? To properly formulate New York business plans with eyes wide open, players in the cannabis biz must be given answers to these and other related queries that are crystal clear.
Does Cannabis Equal Revenue?
No doubt about it, Governor Cuomo was beyond enthusiastic when he publicly promised for a second time that legalization of cannabis is coming later this year, citing the $300M in potential tax revenue the state can glean once that mission is accomplished. Yet this guarantee and income forecast might be best taken with a grain of salt in light of New York’s history when it comes to legal vices. Remember, the state managed to run off track betting into bankruptcy, partially as a result of oppressive taxation and the OTB being staffed with political cronies. No wonder former Mayor Rudy Giuliani called OTB “the only bookie joint to ever go broke.”
Consequently, New Yorkers and cannabis entrepreneurs must adopt a bit of skepticism when it comes to the “pot of gold” at the end of the “legalized cannabis rainbow.” This is especially true given the downturn of the cannabis business in Canada, as reported by the New York Times. According to the news outlet, the cannabis slump up north can be attributed to several factors, including an extremely slow licensing process; limits placed on the number of licenses issued to distributors; marketing restrictions (e.g., how, where, and to whom cannabis companies can market themselves); and infrastructure challenges. Is it realistic to think things would be any different in New York?
MedMen: A Case Study
To avoid the current fate of the legal cannabis business in Canada, adopting a streamlined and open-minded regulatory framework that translates to a robust and healthy cannabis economy within the state will be essential. However, New York’s track record so far—at least as it pertains to medical cannabis—isn’t very promising. The case of MedMen on Long Island is illustrative.
Colorado’s economic success story—both in terms of growth and tax dollars—is a model to emulate.Late in 2018, MedMen, the best-known cannabis retailer in the U.S., attempted to change the location of its Nassau county medical cannabis dispensary from Lake Success to Manhasset, New York. This effort was met with outrage and vocal resistance from civic leaders, who objected to the proposed move, despite the fact that it was within the very same county. The stated reason: MedMen’s sought-after location was in close proximity to an elementary school and within the town’s main commercial district. But certainly, the stigma that attaches to the cannabis world (legal or not) was also squarely on the decision-makers’ collective radar screen, which overshadowed the potential tax revenue that MedMen would’ve brought to Manhasset. No surprise, in light of the perceived obstacles and push back, MedMen scrapped its relocation plans.
The moral of that story is this: players in the cannabis industry must effectively make their cases to New York public officials, and regulators, in turn, must make informed decisions that best serve communities throughout the state and the growth of the cannabis sector, more generally. Colorado’s economic success story—both in terms of growth and tax dollars—is a model to emulate.
Common Sense Regulation Is Key
In his quest to legalize cannabis this year, Governor Cuomo will continue to be confronted with his share of naysayers, like those from the County Health Officials of New York who persist in expressing serious concern about cannabis reform. In the face of such opposition, he must make clear that like cannabis plants, cannabis businesses need room to grow—and the benefit of reasonable, common sense regulation—in order to foster a healthy crop of thriving cannabis-related companies . . . and the tax revenue that comes along with them.
As Europe swooned under record-breaking heat this summer, the cannabis industry also found itself in a rather existential hot seat.
The complete meltdown at CannTrust has yet to reach a conclusion. Yes, a few jobs have been lost. However, a greater question is in the room as criminal investigatory and financial regulatory agencies on both sides of the US-Canada border (plus in Europe) are getting involved.
As events have shown, there is a great, big, green elephant in the room that is now commanding attention. Beyond CannTrust, how widespread were these problematic practices? And who so far has watched, participated, if not profited, and so far, said nothing?
Who, What, Where?
The first name in the room? Canopy Growth.
Why the immediate association? Bruce Linton, according to news reports, was fired as CEO by his board the same day, July 3, 2019, that CannTrust received its first cease and desist notice from Health Canada.
Further, there is a remarkable similarity in not only problematic practices, but timing between the two companies. This may also indicate that Canopy’s board believed that Linton’s behaviour was uncomfortably close to executive misdeeds at CannTrust. Not to mention, this was not the first scandal that Linton had been anywhere close to around acquisition time. See the Mettrum pesticide debacle, that also broke right around the time Canopy purchased the company in late 2016 as well as the purchase of MedCann GmbH in Germany.
Reorg also appears to be underway in Europe as well. As of August, Paul Steckler has been brought in as “Managing Director Europe” and is now based in Frankfurt. Given the company’s history of “co-ceo’ing” Linton out the door, is more change to come?
Video showing dead plants at Canopy’s BC facility surfaced. Worse, according to the chatter online at least, this was the second “crop failure” at the facility in British Columbia. Even more apparently damning? This all occurred during the same time period that the second round of lawsuits against the reconstituted German cultivation bid surfaced.
Canopy in turn issued a statement that this destruction was not caused by company incompetence but rather a delay in licensing procedures from Health Canada. Despite lingering questions of course, about why a company would even start cultivation in an unlicensed space, not once but apparently twice. And further, what was the real impact of the destruction on the company’s bottom line?
Seen within the context of other events, it certainly poses an interesting question, particularly, in hindsight.
Canopy, which made the finals in the first German cultivation bid, was dropped in the second round – and further, apparently right as the news hit about the BC facility. Further, no matter the real reason behind the same, Canopy clearly had an issue with accounting for crops right as Canadian recreational reform was coming online and right as the second German cultivation bid was delayed by further legal action last fall.
Has Nobody Seen This Coming?
In this case, the answer is that many people have seen the writing on the wall for some time. At least in Germany, the response in general has been caution. To put this in true international perspective, these events occurred against a backdrop of the first increase in product over the border with Holland via a first-of-its kind agreement between the German health ministry and Dutch authorities. Followed just before the CannTrust scandal hit, with the announcement that the amount would be raised a second time.
German health authorities, at least, seem doubtful that Canadian companies can provide enough regulated product. Even by import. The Deutsche Börse has put the entire public Canadian and American cannabis sector under special watch since last summer.
By the turn of 2019, Canopy had announced its expansion into the UK (after entering the Danish market itself early last year) and New York state.
Yet less than two weeks later, Canopy announced not new cultivation facilities in Europe, but plans to buy Bionorica, the established German manufacturer of dronabinol – the widely despised (at least by those who have only this option) synthetic that is in fact, prescribed to two thirds of Germany’s roughly 50,000 cannabis patients.
By August 2019, right after the Canopy Acreage deal was approved by shareholders, Canopy announced it had lost just over $1 billion in the last three months.
Or, to put this in perspective, 20% of the total investment from Constellation about one year ago.
What Happened At CannTrust And How Do Events Line Up?
The current scandal is not the first at CannTrust either. In November 2017, CannTrust was warned by Health Canada for changing its process for creating cannabis oil without submitting the required paperwork. By March of last year however, the company was able to successfully list on the Toronto stock exchange.
Peter Aceto arrived at CannTrust as the new CEO on October 1 last year along with new board member John Kaken at the end of the month. Several days later the company also announced that it too, like other major cannabis companies including Canopy, was talking to “beverage companies.” It was around this time that illegal growing at CannTrust apparently commenced. Six weeks later, the company announces its intent to also list on the NYSE. Two days later, both the CEO and chair of the board were notified of the grow and chose not to stop it.
Apparently, their decision was even unchanged after the video and resulting online outrage about the same over the destroyed crops at the Canopy facility in BC surfaced online.
On May 10, just over a week after the Bioronica purchase in Germany, the first inklings of a scandal began to hit CannTrust in Canada. A whisteblower inside the company quit after sending a mass email to all employees about his concerns. Four days later, the company announced the successful completion of their next round of financing, and further that they had raised 25.5 million more than they hoped.
Six weeks later, on June 14, Health Canada received its warning about discrepancies at CannTrust. The question is, why did it take so long?
Where Does This Get Interesting?
The strange thing about the comparisons between CannTrust and Canopy, beyond similarities of specific events and failings, is of course their timing. That also seems to have been apparent at least to board members at Canopy – if not a cause for alarm amongst shareholders themselves. One week after Health Canada received its complaint about CannTrust, shareholders voted to approve the Canopy-Acreage merger, on June 21.
Yet eight days after that, as Health Canada issued an order to cease distribution to CannTrust, the Canopy board fired Bruce Linton.
One week after that, the Danish recipient of CannTrust’s product, also announced that they were halting distribution in Europe. By the end of August, Danish authorities were raising alarms about yet another problem – namely that they do not trust CannTrust’s assurances about delivery of pesticide-free product.
Is this coincidence or something else?
If like Danish authorities did in late August 2019, calling for a systematic overhaul of their own budding cannabis ecosystem (where both Canadian companies operate), the patterns and similarities here may prove more than that. Sit tight for at least a fall of more questions, if not investigations.
Beyond one giant cannabis conspiracy theory, in other words, the problems, behaviour and response of top executives at some of the largest companies in the business appear to be generating widespread calls – from not only regulators, but from whistle blowers and management from within the industry itself – for some serious, regulatory and even internal company overhauls. Internationally.
And further on a fairly existential basis.
EDITOR’S NOTE: CIJ reached out to Canopy Growth’s European HQ for comment by email. None was returned.
Correction: This article has been updated to show that the Danish recipient of Canntrust’s product announced they were halting distribution one week after Bruce Linton’s firing, not one day.
CBD-infused coffee? CBD-infused chewing gum? Many think cannabis and its derivatives are the next big wellness craze that will make the demand for flax, fish oil and turmeric combined seem meager. The food and drink industries are cautiously exploring the cannabis market, trying to determine the optimal timing to introduce their own product lines.
The cannabis plant produces chemicals known as cannabinoids, one of which is cannabidiol, or CBD.When the Agriculture Improvement Act of 2018 (also known as the Farm Bill) passed, the food and drink industries jumped into the hemp-derived CBD world with both feet because the Farm Bill lifted the federal ban on hemp production, which previously classified hemp as a controlled substance akin to heroin. Lifting the ban led to an explosion in the number of CBD products hitting the market around the country. However, repeated and recent actions by the U.S. Food and Drug Administration (FDA) provide clear warning signs that the legal pitfalls surrounding CBD in food and drinks are not yet resolved.
CBD is marketed as a featured ingredient for a wide variety of products ranging from pain relievers, to protein bars beverages and supplements. Both CVS and Walgreens have announced plans to carry CBD products in their stores. However, despite the money pouring into CBD products, federal agencies are not relinquishing their controls.
In the Farm Bill, the FDA retained authority to regulate products containing cannabis or derivative products. The FDA has regulatory authority over foods (including dietary supplements and food additives), drugs (prescription and non-prescription), cosmetics, veterinary products and tobacco products, among other categories. Therefore, vendors of virtually all products containing CBD are regulated by the FDA.
It is important to note that the FDA does not view CBD derived from hemp differently than any other CBD despite the fact that it is non-psychoactive. CBD is an active ingredient in at least one FDA-approved prescription drug—Epidiolex. Therefore, under the logic of the Federal Food, Drug & Cosmetic Act (FDCA), CBD is a drug. If a substance has been “approved” by the FDA as an active ingredient in a drug product, it is per se excluded from being defined as a “dietary supplement” under sections 201(ff)(3)(B)(i) and (ii) of the FDCA and it cannot be included as an ingredient in food.
It is highly unusual that CBD has been able to proliferate in the marketplace given the FDA’s technical legal position on it. FDA regulations on drugs are much more stringent than for food or dietary supplements. Generally, the FDA’s position on CBD in food and beverages is that it is unlawful to engage in interstate commerce with products containing CBD. The given reason is that the Federal Food, Drug, and Cosmetic Act prohibits the introduction of a food product into interstate commerce that contains an active ingredient in an approved drug. While arguments against this position exist, they have not carried the day, yet.
In March 2019, FDA Commissioner Scott Gottlieb announced he would be resigning on April 5, 2019, but he sent clear warning signals to the CBD industry prior to his departure. In early April, the FDA cracked down on websites making “unfounded, egregious” claims about their CBD infused products. The FDA sent warning letters to three companies who made claims about their CBD products including that their CBD products stop cancer cell growth, slow Alzheimer’s progression, and treat heroin withdrawal symptoms. Commissioner Gottlieb issued a statement that he believed that these were egregious, over-the-line claims and deceptive marketing that the FDA would not tolerate.
The FDA also announced in early April that it will hold a public hearing on May 31, 2019, to obtain scientific data and information related to safety concerns, marketing and labeling cannabis and cannabis-derived compounds including CBD. The FDA expressed interest in hearing whether drug companies would still be motivated to develop drugs with CBD and other compounds if their use in food and beverages became more widespread. The FDA also announced plans for an internal working group to review potential pathways for legal marketing of CBD foods and dietary supplements. Of particular concern to the FDA is online retail products available nationwide such as oil drops, capsules, teas, topical lotions and creams.
The May 31 FDA hearing is an opportunity for interested parties to give feedback and help focus where the FDA should be creating clear industry standards and guidance. In the meantime, the industry should continue to expect warning letters from the FDA as well as possible state-level scrutiny. Companies would be wise to proactively review their labels and promotional practices in order to mitigate the risk of forthcoming actions and engage in the FDA’s provided avenues for industry input. Companies must also look to the laws of the states and even to the counties where they are selling their products.
Stand aside Canada! Events are moving in a strategically interesting way in Europe. And for once it is not news of the German bid.
In this case, implementation of the decision in Luxembourg would actually have two immediate effects.What, where, when? Luxembourg’s new center-left coalition of the Greens, Socialists and more traditional Democrats have put recreational cannabis on their ruling mandate and five-year agenda as of November 29, 2018.
In the comments of the same at the press conference held last week, the sentiments were pretty much of one tenor: “It’s way overdue.”
What does that mean, however, for the rest of the conversation across the continent?
Luxembourg: The First Recreational “State” Market In Europe?
While local advocates are quick to say that their ambition will make them the first EU country to completely legalize recreational cannabis, this is mostly true, but not entirely.
As much as it is fashionable these days to diss Holland, the fact of the matter is that the Dutch pioneered just about everything about the modern movement except clear cut regulation. Coffeeshop envy being what it is, however, it is true that the historical marker of the Dutch market was grey areas. That, however, has been in shifting territory for the last four to five years however. Hard as it is to believe that in just 2014 the Cannabis Cup held its last expo in Amsterdam. How the world has changed since then!
There is also this fact: Switzerland (true not an EU country but just next door geographically), is also poised to use this excuse to make its next move to fully leaded THC. The country has seen a sharp uptick in the consumer, OTC CBD market over the last two years. So much so that foreign (read American and Canadian in particular) enterprises are now looking to Switzerland as one of the more interesting “semi-EU” entry strategies at present. Taxes on a highly profitable industry are also in the public discussion. Adding a bit of THC to the mix, in other words, is likely to come fast in other places too.
Will This Move The Needle In Other Places?
The answer to that question is also, undeniably, yes. How fast that will happen in individual countries across Europe is another discussion. See France, which is now the largest member of the EU to have so far successfully ducked the cannabis question except for some basic decrim ideas that the now embattled French President Emmanuel Macron might, finally, put some enthusiasm into backing.
This could also certainly galvanize the UK. One way or the other, to stay or leave the EU itself. Full recreational won’t be in the cards, however, for quite some time.
Sound incredible? See Brexit so far.it will create the first deliberately regulated recreational market in Europe.
Many other EU countries have also been chafing at the slow pace of reform. Even after basic medical use has occurred. See German advocates who long to follow both the U.S. and Canada, and at present are for the most part shut out of the medical cultivation process. They are simply being outbid by the large Canadians.
But how fast such reforms will come even in Luxembourg, not to mention have a knock on effect elsewhere, no matter how momentous, is still an undecided question.
What Is The Biggest Immediate Impact Going To Be?
As is usually the case in Europe, things are rarely as straightforward as one country deciding to do (or not do) something. In this case, implementation of the decision in Luxembourg would actually have two immediate effects.
One, it will create the first deliberately regulated recreational market in Europe. How fast that could actually roll out is up for debate, considering that the country only legalized medical use as of this summer. As Colorado, California and certainly Canada have proven in spades so far, recreational reform always need some kind of medical base to start with. And implementation of both kinds of markets always seems, at least so far, to carry litigation. Especially in young, untested markets. See the German bid, most recently, just across the border.
However here is the second, and far more intriguing reality that really may be key to the entire enchilada. The legality of cannabis in Luxembourg also has everything to do with the German public cannabis market. Namely, the German stock exchange will only allow Germans to clear stock purchases of publicly listed cannabis companies on the Deutsche Börse if they are in line with not only German cannabis law but also that in Luxembourg, where they actually clear. That was a big issue this summer, only rectified when Luxembourg first changed its medical law.
It also meant, as of this fall, that Aurora went public in New York, not Frankfurt.
In the future, however, after Luxembourg goes full recreational Monty, this will no longer be the case. This will already be tested next spring as another company hopes to go public here. And when that happens, although certainly not for the next several years, the entire discussion of recreational reform will fully and finally be in the European room.
There are going to be some states that are less progressive in the pro-cannabis movement, the same way there were states that were slow to move past alcohol prohibition. This is normal for any country moving towards change, better economic standing and safer healthcare.
There are only four states that completely ban recreational and medical cannabis altogether, and those states are Idaho, Kansas, Nebraska, and South Dakota. Although, there is no doubt that more and more states are moving towards a pro-recreational and medical cannabis stance. There are some states in the Northeast that are making strides to legalize cannabis.
Most of the states in the Northeast already have some form of medical cannabis law in the books already, but some are moving towards recreational legalization surprisingly quickly. Massachusetts already has legalized recreational cannabis and is setting up their regulatory framework currently while Vermont, New Jersey and New York, all of which already have medical laws, appear to be just steps away from legalizing it recreationally.
Northeast States Moving Towards Legalization
With Canada’s recent recreational legalization, a number of states just south of the border appear to be eyeing the issue for themselves. While some of these states have somewhat strict regulations in place, they look like promising emerging market opportunities.
Murphy says that he wants legal recreational cannabis to be available because he believes it is a way to improve social justice in New Jersey and to bring the state new tax revenue. The biggest issue is what the legislation will look like and how it can be tied to expanding the states medicinal cannabis program.
Their current medical program, while still small in market size, appears to be gaining steam and growing in terms of patients getting access. Six months ago, The New Jersey Department of Health added a number of qualifying conditions patients can get a cannabis prescription for. The program still has its limits, like a 10% THC potency cap, small selection of types of products and other various restrictions.
It was just last year when Governor Andrew Cuomo said cannabis was a “gateway drug” and he was opposed to legalization. After conducting a study on cannabis legalization, the result was a July Health Department report that determined the positive effects of legalization outweighs the potential negative impacts.
The debate between Andrew Cuomo and Cynthia Nixon in the gubernatorial race has highlighted their views of cannabis as well as other important issues; it’s important that New Yorkers vote in the primary election to have the best opportunity for the future.
MassachusettsOver the next six months, this market will be one to watch closely
Recreational cannabis became legalin the last couple months for Massachusetts, while the state legalized medical cannabis some time ago. Their medical program is relatively advanced compared to New York or New Jersey. Online registration, a large number of qualifying conditions, and a less restrictive business environment seemed to encourage a much larger number of patients and businesses supporting them.
Regulators in Massachusetts are currently consideringthe option of allowing delivery operations for the recreational market. The roll out for the recreational industry might seem somewhat slow, but regulators are tackling a wide range of issues and making considerable progress towards the highly anticipated recreational market opening. Just last week, regulators issued licenses to two cannabis-testing laboratories, and, according to the Boston Globe, the debut could be just weeks away.
While the industry and regulators get ready for the recreational debut, a recent crackdown on pesticide usehighlighted some of the growing pains that come with it. Over the next six months, this market will be one to watch closely as dispensaries begin selling recreational cannabis and the industry develops.
The recent Canadian legalization of recreational cannabis will no doubt put pressure on states sharing a border with them to consider adjusting their laws.
Legalizing recreational cannabis will likely increase tourism to Vermont, the way other states saw an influx in tourism when they legalized. Unfortunately, Vermont has only decriminalized recreational cannabis. You can possess, grow and consume cannabis, but you can’t buy or sell it, which obviously restricts the ability of any business to enter the market.
However, their legal medical program is relatively laissez-faire compared to other states in the region. They allow for cultivation at home or through a caregiver and there are a number of small businesses working under the legal medical program.
Recreational cannabis isn’t legal in Maryland yet, but medical cannabis has been legal since 2014. It’s illegal for patients and caregivers to grow their own. Attempts have been made to make recreational cannabis in 2016, but the bill didn’t move forward.
Maryland’s industry was off to a rocky start, when the application process for businesses wanting to enter the market slowed to a crawl. This month, the state just approved four new medical dispensaries and one new processor for the market. The latest round of approvals brings the total to 69 dispensaries serving patients, while back in 2016, the state pre-approved 102 dispensaries originally.
Delaware Expect to see another attempt at legalizing via the legislature in early 2019.
The Delaware Department of Health will continue to accept applications for medical cannabis cards, which is required for patients seeking to obtain their medicine from a compassion center. Patients are not allowed to grow their own cannabis. The state’s program has been operational for quite a while, and a small number of companies have established footprints in the state, like the Israeli brand Tikun Olam.
In 2016, Pennsylvania legalized medical cannabis. In contrast to some of the other states discussed earlier, PA is off to a more streamlined start. The second phase of their medical program allowed for more businesses to enter the market, a wider range of qualifying conditions and a larger number of patients registering. The industry is maturing here fast and could make for an exciting opportunity with recreational legalization potentially on the horizon.
Pennsylvania Medical Solutions, LLC (PAMS), won a license to grow medical cannabis in Pennsylvania, but some think the Pennsylvania Department of Health (PA DOH) should reconsider awarding that license. PAMS is a subsidiary of Vireo Health, which has medical cannabis licenses in New York and Minnesota, as well as quite the blemish on their business record. In December 2015, two former employees were accused of breaking state and federal laws by transporting cannabis oil from Minnesota to New York. Because of that history, some are questioning why exactly they were awarded the PA medical cannabis license.
In that school of thought is Chris Goldstein, a Philadelphia-based cannabis advocate and author of an article on Philly.com, which calls PAMS’ license into question. According to Goldstein, Vireo Health could lose their licenses in New York and Minnesota, and those former employees involved might even face federal prosecution. “On the surface it would seem that Vireo broke every rule in the book,” says Goldstein. “Not only could the company lose its permits in both of those states, but employees could face federal prosecution for interstate transport and distribution.” But does that previous wrongdoing by two former employees have any bearing on their application in PA? In Maryland, it did. According to The Baltimore Sun, concerns surrounding MaryMed’s parent company, Vireo Health, is the main reason why their permit to grow medical cannabis was revoked.
In response to some of those concerns about their PA license, Andrew Mangini, spokesman for Vireo Health, issued the following statement, which appeared in Goldstein’s article: “While we’re aware of allegations against two former employees of an affiliate, those individuals have never had a role in our application or in the management of PAMS,” says Mangini. “It’s also important to note that our Minnesota affiliate and our parent company Vireo Health have not been accused of any wrongdoing in connection with those allegations.”
Below is a timeline of events leading up to the PA DOH defending their decision to give PAMS a license:
December 2015: Two former employees of Minnesota Medical Solutions, a subsidiary of Vireo Health, transported a half-million dollars worth of cannabis oil from Minnesota to New York, violating state and federal laws.
February 9th, 2017: The two former employees were formally charged with crimes in Minnesota for illegally transporting cannabis across state lines.
February 20th-March 20th, 2017: PAMS submitted a license application to the PA DOH between these dates, listing their business state as Minnesota on the application.
May 2017: Maryland DOH suspended the licenses of MaryMed LLC, a subsidiary of Vireo Health, over concerns that the company did not provide information related to the Minnesota and New York licenses on their application, according to the Washington Post.
June 20th, 2017: PA DOH releases a list of license winners; PAMS was listed among winners for a cultivation license in Scranton.
June 26th, 2017: PA DOH officials defend their decision to award PAMS a license, according to a Philly.com article. That same day, The Baltimore Sun reported the Maryland Medical Cannabis Commission revoked MaryMed, LLC their license, citing concerns about Vireo Health.
April Hutcheson, spokeswoman for the PA DOH, told Philly.com in June, “Remember, the permits are given to business entities, not people.” The point she is making refers to the charges being filed against former employees, not any of the businesses who hold medical cannabis licenses.
Steve Schain, Esq., an attorney with Hoban Law Group in Pennsylvania, has seen no objective evidence of anything wrongful in either PAMS’ application or the DOH’s processing of it. “Marijuana related businesses often have distinct, affiliated components and the Department of Health faces two critical issues,” says Schain.
“First, whether grow applicant PA Medical Solutions, LLC (PAMS) had a duty to disclose alleged wrongdoing on its application, failed to fulfill this duty and, if so, whether PAMS’ application should be amended, re-scored or disqualified. Second, as part of its ongoing license reporting requirements, whether grow licensee PAMS has any duty to disclose the alleged wrongdoing. The answer to much of this hinges on whether criminal or administrative charges were leveled against just Vireo Health’s former employees or also included the entity and whether these individuals or enterprise fell within Pennsylvania Medical Marijuana Organization Permit Application definition of an “Applicant” (“individual or business applying for the permit”) or applicant’s “Principals, Financial Backers, Operators or Employees” of PAMS. Either way, it does not presently appear that the [PA] DOH missed anything.”
This does raise the question of whether or not Vireo Health is under investigation, which is yet to be determined. According to Goldstein in his Philly.com article, the Minnesota DOH declined to comment on Vireo Health and the New York DOH says the department’s investigation is ongoing. “The selection of a Vireo Health affiliate to grow and process medical cannabis in Pennsylvania has cast a serious shadow over the integrity of the program even before it has started,” says Goldstein.
In Maryland, the DOH revoked their license as a direct result of those former employees in Minnesota committing crimes, according to The Baltimore Sun. Commissioner Eric Sterling said there is “a reasonable likelihood of diversion of medical cannabis by the applicant.” So should Pennsylvania do the same? Do those crimes by former employees have any bearing on their application? This story raises a number of questions regarding applications for state licenses that are largely left unanswered. One thing we know for certain: each state handles applications very differently.
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