Monthly Archives: December 2018

Public banking plan for California’s marijuana industry takes big hit

Bundles of $20 bills are placed on a table as Jerred Kiloh, owner of the Higher Path medical marijuana dispensary, prepares a trip to Los Angeles City Hall on June 27, 2017, to pay his monthly tax payment in cash in Los Angeles. A report released Thursday, Dec. 27, 2018, by state Treasurer John Chiang, concluded that California would likely lose money and face insurmountable federal hurdles if it tried to create a state-backed bank for the marijuana industry. The finding puts an end for now to hopes of creating a public bank as California’s recreational marijuana market concludes its first year.

The push to create a public banking system for cannabis commerce in California fizzled Thursday after a state task force concluded that such a facility would be so legally risky and expensive it would be essentially unworkable.

The 151-page feasibility report, commissioned by the 18-member Cannabis Banking Working Group, said it would take at least six years to create a cannabis bank and would require state laws to be changed, and that it ultimately couldn’t be done anyway without approval from the federal government, which considers marijuana an illegal drug.

State Treasurer John Chiang, the chairman of the working group, ordered the cost-benefit analysis in an effort to find a way to ease the burden for marijuana merchants, who have been forced to use cash because most banks won’t open accounts for them while the federal government maintains that marijuana is illegal.

While California and 33 other states have legalized the sale of marijuana, the federal government lists the herb as a Schedule 1 drug, defined as meaning it has no accepted medical use and a high potential for abuse.

The report, released during a public hearing at the State Capitol on Thursday, reinforces “the inconvenient reality that a definitive solution will remain elusive until the federal government takes action,” Chiang said. “They must either remove cannabis from its official list of banned narcotics or approve safe harbor legislation that protects banks serving cannabis businesses from prosecution.”

Instead of creating a bank, which the report said would pose “unacceptable” risks, the analysts recommended the state work with the cannabis industry to improve access to existing banking services.

The lack of banking for marijuana retailers complicates the state’s efforts to collect taxes from the industry. Every month, thousands of business owners head to the tax collector’s office with piles of cash in shopping bags and suitcases.

Industry leaders estimate that 70 percent of marijuana merchants in the state are using cash to pay employees, suppliers and California’s new 15 percent cannabis tax. As revenue increases, larger stacks of money will have to be lugged to the tax collector, making business owners vulnerable to theft, robbery and extortion.

“It is not only unfair, but a public safety risk to require a legal industry to haul duffel bags of cash to pay taxes, employees and utility bills,” Chiang said. “The reliance on cash has painted a target on the backs of cannabis operators.”

The feasibility study concluded that it would cost $35 million over six years to start a cannabis bank and then require an initial $1 billion in capital investment. The bank would then probably lose money for 12 years before it could begin repaying what was invested, and California would not be able to collect dividends for 25 to 30 years, according to the report.

Even if a bank could be created, the report said, there is a “high probability” that federal regulators would not approve it. If they did, the analysis said, chances are that marijuana would become legal federally before the bank could even get started, causing the entire investment to go to waste.

History hasn’t been good to public banks in the United States.

From 1917 to 2017, 29 public banks were chartered in the United States, and only the Bank of North Dakota and the recently created Territorial Bank of American Samoa have survived, analysts said. Neither of those banks caters to operations that the federal government considers illegal.

The analysts also looked at and rejected the idea of having the state purchase a private bank, create a public credit union or develop a cryptocurrency system for the cannabis industry.

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Legal marijuana industry had banner year in 2018 with $10B worth of investments

With buzz building across the globe, the momentum is sure to continue into 2019, when the combined North American market is expected to exceed $16 billion.

PORTLAND, Ore. — The last year was a 12-month champagne toast for the legal marijuana industry as the global market exploded and cannabis pushed its way further into the financial and cultural mainstream.

Liberal California became the largest legal U.S. marketplace, while conservative Utah and Oklahoma embraced medical marijuana. Canada ushered in broad legalization, and Mexico’s Supreme Court set the stage for that country to follow.

U.S. drug regulators approved the first marijuana-based pharmaceutical to treat kids with a form of epilepsy, and billions of investment dollars poured into cannabis companies. Even main street brands like Coca-Cola said they are considering joining the party.

“I have been working on this for decades, and this was the year that the movement crested,” said U.S. Rep. Earl Blumenauer, an Oregon Democrat working to overturn the federal ban on pot. “It’s clear that this is all coming to a head.”

With buzz building across the globe, the momentum will continue into 2019.

Luxembourg is poised to become the first European country to legalize recreational marijuana, and South Africa is moving in that direction. Thailand legalized medicinal use of marijuana on Tuesday, and other Southeastern Asian countries may follow South Korea’s lead in legalizing cannabidiol, or CBD. It’s a non-psychoactive compound found in marijuana and hemp plants and used for treatment of certain medical problems.

“It’s not just the U.S. now. It’s spreading,” said Ben Curren, CEO of Green Bits, a San Jose, California, company that develops software for marijuana retailers and businesses.

Curren’s firm is one of many that blossomed as the industry grew. He started the company in 2014 with two friends. Now, he has 85 employees, and the company’s software processes $2.5 billion in sales transactions a year for more than 1,000 U.S. retail stores and dispensaries.

Green Bits raised $17 million in April, pulling in money from investment firms including Snoop Dogg’s Casa Verde Capital. Curren hopes to expand internationally by 2020.

“A lot of the problem is keeping up with growth,” he said.

Legal marijuana was a $10.4 billion industry in the U.S. in 2018 with a quarter-million jobs devoted just to the handling of marijuana plants, said Beau Whitney, vice president and senior economist at New Frontier Data, a leading cannabis market research and data analysis firm. There are many other jobs that don’t involve direct work with the plants but they are harder to quantify, Whitney said.

Investors poured $10 billion into cannabis in North America in 2018, twice what was invested in the last three years combined, he said, and the combined North American market is expected to reach more than $16 billion in 2019.

“Investors are getting much savvier when it comes to this space because even just a couple of years ago, you’d throw money at it and hope that something would stick,” he said. “But now investors are much more discerning.”

Increasingly, U.S. lawmakers see that success and want it for their states.

Nearly two-thirds of U.S. states now have legalized some form of medical marijuana.

Voters in November made Michigan the 10th state — and first in the Midwest — to legalize recreational marijuana. Governors in New Yorkand New Jersey are pushing for a similar law in their states next year, and momentum for broad legalization is building in Pennsylvania and Illinois.

“Let’s legalize the adult use of recreational marijuana once and for all,” New York Gov. Andrew Cuomo said last week.

Image: Marijuana


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‘Cannabis Equity’ Runs Into Roadblocks

OAKLAND, Calif. — During the 1980s and ’90s, Alexis Bronson’s illegal cannabis delivery business could barely keep up with demand.

In the spring, Bronson made weekly trips to the redwood forests of Humboldt County to buy marijuana wholesale from renegade growers with farms hidden in the hills of Northern California. Bronson would wrap 5 or 10 pounds of marijuana in a plastic garbage bag, tuck it into the trunk of his rental car, and head south on Highway 101 to his hometown of Oakland.

In the 1980s, Bronson said in an interview with Stateline, he would buy a pound of marijuana for $1,500 to $1,800 and resell it for nearly triple that amount in Oakland.

But the lucrative business came with serious risks. Bronson exercised caution about where and when he delivered his product, avoiding traditional street-corner exchanges. It was the war on drugs era, and police worked swiftly to round up dealers and buyers under the mandate to crack down on drug activity.

Now, as more states legalize recreational marijuana and the federal government moves away from incarcerating nonviolent drug offenders, several cities in California are trying to atone for decades of drug enforcement that fell disproportionately upon minorities.

They’ve created what are known as cannabis equity programs, meant to welcome more minority and low-income entrepreneurs into the now-legal industry.

The programs provide business development, loan assistance and mentorships to eligible owners. Hundreds have applied in the past year. But “pot equity” has struggled with growing waitlists, and some participants allege that the programs aren’t fair to the people they’re meant to be helping.

Cities such as Oakland have created incubator programs that pair an established marijuana company, called a non-equity business, with an equity cannabis business — run by an entrepreneur whose background might otherwise make it hard to get into the pot industry.

The goal of “cannabis equity” is to lower the barriers to entry into the legal cannabis industry for people who were disproportionately impacted by the criminalization of marijuana. The programs base eligibility on a variety of factors, including marijuana convictions, residency in a heavily policed district and income.

Today, several city partnership programs require that established, non-equity businesses provide an equity business with space for several years rent-free. In exchange, the non-equity company receives faster processing for city approvals. Cities such as Sacramento plan to waive up to tens of thousands of dollars in application and permit fees for eligible cannabis businesses.

But pot equity has struggled to get going. Understaffing in San Francisco’s cannabis office has left a growing waitlist of applicants, and the city doesn’t expect to begin approving businesses until sometime in 2019, said Nicole Elliott, director of San Francisco’s Office of Cannabis. She could not be more specific on timing.

Some applicants argue that the waiting period has allowed other businesses to get an unfair head start. In Oakland, some pot equity businesses claim their incubator partners never followed through on the requirement to provide them with business development assistance or a space to operate.

Bronson, an African-American, now owns one of those pot equity businesses.

Early stage cannabis “clone” plants in Alexis Bronson’s Oakland business incubator space. Two previous incubator partners under Oakland, California’s “pot equity” program failed to deliver on their promises, but a third partnership has shown signs of success for Bronson.


Although Bronson was never convicted of a cannabis-related crime, his income and residency made him eligible for Oakland’s program.

But two partner businesses have failed to provide him with promised incubator space, he said. In the meantime, one of Bronson’s state business permits has expired and he continues to take on debt to keep the existing portion of his business afloat.

“It wasn’t right, because they got their head start,” Bronson said of his partner businesses, who received their expedited processing from the city. “Everyone got what they wanted, except for me.”

Lasting Effects

Between 1980 and 2010, the number of inmates in federal prisons for drug offensesincreased from about 4,700 to nearly 98,000, according to the Sentencing Project, a research and advocacy group.

By 2016, that number had dropped to about 82,000 as more offenders were being routed through less-punitive drug courts and a growing number of states were decriminalizing marijuana.

African-Americans were 3.7 times more likely than whites to be arrested for marijuana possession, despite similar rates of usage, according to a report from the American Civil Liberties Union.

In Oakland, African-Americans make up about 30 percent of the population, but 77 percent of the people arrested on marijuana charges, according to 2015 data collected by the city and used to establish the equity program.

Beyond the immediate potential consequences of conviction and imprisonment, a drug arrest can have lasting effects. In a 2017 report, the U.S. Government Accountability Office identified nearly 650 collateral impacts for people convicted of nonviolent drug offenses, including limited opportunities for certain professional licenses, education and government assistance.

To mitigate those effects, the state’s recreational marijuana law allows California to clear or resentence people who were convicted of cannabis-related crimes. In September, Gov. Jerry Brown, a Democrat, signed a bill that requires the state Department of Justice to identify and send such convictions to county district attorneys to proactively clear or resentence.

Desley Brooks, the outgoing Oakland city councilwoman who helped create its equity program, said few entrepreneurs from low-income and minority communities would have a shot at entering the recreational cannabis industry without the program.

“So many African-Americans sat — and continue to sit — in jail for cannabis offenses as a result of the war on drugs,” Brooks said in an interview. “If we didn’t set up a structure to address that, I would have been doing an injustice to many people who were harmed by the system.”

Programs’ Problems

Creating a program to atone for decades of unjust policing — on top of building the framework for a newly legal cannabis industry — is no easy task.

Oakland is setting up a $3 million fund to provide additional capital assistance to pot equity businesses, Brooks said, but it remains unclear when the fund will become available.

San Francisco applicants have raised the same issue, said Elliott, the director of San Francisco’s Office of Cannabis. The office set up an investment fund to provide financial assistance to cannabis businesses, such as low-interest loans. But the city has yet to allocate money to the fund, Elliott said.

She said San Francisco will likely receive part of the $10 million that the state set aside for local cannabis equity programs in September, which could go toward the city’s cannabis investment fund.

“There are equity applicants that need money now,” Elliott said. “We will advocate aggressively for that state funding.”

As of mid-December, San Francisco had 227 applicants that qualify for the equity program. Of those, about 110 want to join the city’s incubator partnership program and receive waived permit fees.

Elliott said the city will begin approving applicants next year, but she could not say when. Applicants have criticized the lengthy timeline.

San Francisco’s Office of Cannabis, which just added two new staff members to bring the total to five, is tasked with reviewing permit applications and facilitating the equity program. Elliott said adding even more staff would speed things up.

In the meantime, the city has established a partnership with the Bar Association of San Francisco to provide pro bono legal assistance to equity program participants.

Malcolm Mirage, an equity applicant in San Francisco, said the long wait has caused him to burn through capital at an alarming rate. He partnered with MedMen, a household name in the cannabis industry that is publicly traded on the Canadian Securities Exchange.

MedMen agreed to provide business development aid and an incubation space for one of Mirage’s businesses. The company also helped him negotiate leases on two other spaces, and he struck a deal that gave him six months of free rent to obtain his permits and become operational.

Mirage figured that was plenty of time. But those six months came and went, and he’s now paying expensive leases on spaces that sit empty.

“I got out of jail for selling weed and now I’m trying to do this legally,” Mirage told Stateline. “But I’m drowning right now. My businesses are going to be in a tremendous amount of debt if the city can’t get these licenses out in the next six months.”

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Marijuana Marlboro And What Altria’s Purchase Of A Canadian Marijuana Maker Means

The Cannabis market was jolted on December 7th by the announcement that Altria, the maker of Marlboro cigarettes, had purchased a 45% stake in Cronos Holdings for $1.8 billion (US). The deal includes a $1.05 billion option to purchase an additional 10% in the future. While Cronos had acknowledged that discussions were in progress on December 3, the stock still shot up 28% when it was confirmed.

In retrospect, it was obvious that Altria was going to make a move into Cannabis at some point. If you look at cigarettes, the company has faced fewer Americans smoking each year since…basically the sixties. Recently, there has been a significant uptick in vaping led by JUUL Labs, another company Altria is negotiating with for a stake. However, that does not change the long-term trends facing the company’s core business in cigarettes. While Altria can lean on traditional smoking to provide high cash flow and pay dividends for a long period to come, the company has been known to look for ways to diversify its product base. By entering the cannabis market, particularly at this early date, Altria can move to take market share, research products, and position itself in new markets as they open. In short, this is a logical proactive move for the company and it should mesh well with their current experience, R&D and product lines. For investors in Altria, it is exciting to imagine a company with the kind of cash flow that exists today combined with growth in cannabis and a high dividend. An appealing combination and one that Altria could not ignore for long. A move into the cannabis space by Altria was inevitable.

Richmond, USA – May 14, 2018: Altria office sign in Virginia capital city tobacco business closeup by road street, parent company of Philip Morris

So that leads us to the next question of why they chose to partner with Cronos Group. I would argue that it is fair to characterize the Canadian cannabis market as an oligopoly led by only a few strong players. The largest is Canopy Growth, a company that is currently 38% owned by Constellation Brands with options to increases the ownership to 51% in the future so they are spoken for. If you look at the remaining players, Cronos Group was the one who best matched Altria’s style and structure in the tobacco market. Cronos preferred to develop new products and brands while focusing on distribution and R&D rather than focusing on growing supply.


A SIDE NOTE: It is interesting that early in the growth of many markets, investors and companies focus on metrics that will not matter in the future. In the Internet bubble of 1999, every company focused on-site visits or clicks. For years, Amazon only reported on the growth of Kindle. For cannabis, the focus is on how much cannabis a company can produce. Long term, we would expect few companies to produce their own cannabis, much like few cigarette companies produce their own tobacco.

Cronos Group has worked hard to be at the leading edge of medical marijuana, a space that is much closer to moving towards legalization in global markets compared to recreational. Their partnership with Ginkgo Bioworks is specifically focused on developing innovative products that could prove important to the medical side of the business.

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Budweiser maker teams up with cannabis company to explore pot drinks

NEW YORK (AP) – The maker of Budweiser is partnering with medical cannabis company Tilray in a $100 million deal to research cannabis-infused drinks for the Canadian market.

The alliance announced Wednesday is the latest foray by a major beer company into the cannabis business in Canada, which legalized recreational marijuana in October.

Anheuser-Busch InBev and Tilray Inc. said each would invest $50 million in the project to study non-alcoholic drinks containing cannabidiol, or CBD, which some claim has calming and healing affects, and THC, the cannabis compound known for its psychoactive effects.

Belgium-based AB InBev, the owner of more than 500 beer brands including Budweiser and Stella Artois, said it will participate in the project through its subsidiary Labatt Breweries of Canada.

“Labatt is committed to staying ahead of emerging consumer trends,” said Labatt Breweries President Kyle Norrington.

British Columbia-based Tilray has products available in 12 countries and operations in Australia, New Zealand, Canada, Germany, Latin America and Portugal.

Tilray’s shares jumped 15 percent to after-hours training following news of the deal with AB InBev. The company had announced a day earlier that a subsidiary struck a deal with pharmaceutical company Sandoz AG to jointly operate in jurisdictions where cannabis is, or will be, approved for medical purposes.

Shares of AB InBev were little changed.

Canada has emerged as a world leader in the cannabis industry, which is surging as legalization also expands in the United States.

North American consumer spending on legal cannabis is expected to grow from $9.2 billion in 2017 to $47.3 billion in 2027, according to Arcview Market Research, a cannabis-focused investment firm.

Earlier this month, Marlboro maker Altria Group Inc. invested $1.8 billion for a 45 percent stake in Cronos Group, a Canadian medical and recreational marijuana provider.

In August, wine, liquor and beer company Constellation Brands announced a $4 billion investment in Canadian pot producer Canopy Growth Corp.

Coca-Cola, Pepsi and Guinness brewer Diageo have said they are closely watching the market for cannabis as it evolves.

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First Cannabis Clinical Trials All Set In UK

Beckley Canopy Therapeutics, based in Oxford, England has raised ₤7.4 million for the purposes of cannabinoid research and drug development. The new company is a unique partnership established between Canopy Growth Corporation and the Beckley Foundation, a research institute which examines the utilization of psychotropic drugs for the treatment of physical and mental conditions.

Studies focusing on the use of cannabinoids for the treatment of opioid addiction and cancer pain will be conducted in Europe, the UK and the US.

Why Is This Significant?

Here is the first reason: the woman behind it all. Her name is Lady Amanda Feilding, Countess of Wemyss and March. Born into a landed gentry family at Beckley Park (a Tudor hunting lodge with three towers and three moats) she also has a long history of engaging and supporting scientific endeavours that use stigmatized drugs in the treatment of both intractable disease and mental illness via the use of scientific research.

In 1998, Amanda Feilding set up the Beckley Foundation, a charitable trust which initiates, directs and supports neuroscientific and clinical research into the effects of psychoactive substances. She has also co-authored over 50 scientific papers in peer-reviewed journals.

The so-called “hidden hand” behind the rebirth of psychedelic science, Fielding’s contribution to global drug policy reform has been widely acknowledged in international drug policy circles. She was named as one of the bravest men and women in the history of science in 2010 by the British Guardian.

And here is the second reason: The foundation is now partnered with Canopy Cannabis, one of the leading cannabis firms in the world, which is also working closely with Spanish opioid manufacturer Alcaliber.

In other words, this coalition is almost the mirror opposite of the approach taken by the American Sackler family, makers of Oxycontin, who have fought cannabinoids as an alternative or even transition drug in multiple state legalization campaigns. Meanwhile the death rates from overdoses have quadrupled since 1999. In 2016, opioid-related drug overdoses killed about 116 people a day (or about 42,249 for the year). It is estimated that about 11 million people in the U.S. are currently misusing or dependent on opioids.

Amanda Fielding
Image credit: Robert Funke

Beyond The Politics of The Opioid-Cannabinoid War

While opioids clearly have a role particularly in chronic pain treatment, the question now at the global scientific table is this: Are cannabinoids a substitute for longer term chronic pain management? It is a fiercely battled scientific debate that has frequently, particularly in the U.S., crossed over into political drug reform questions.

The unique partnership of Beckley and Canopy is well placed both scientifically and culturally to take on a discussion which has languished for too long in the grass of political debate and reform.

Even better, it is taking place in a country where English is the first language, but outside the U.S. and further, in a country where cannabis has now been legally reclassified as a Schedule II drug.

Do not expect, in other words, the same trials and tribulations that faced noted U.S.-based researcher Sue Sisley, to slow down research, trials or findings.

Why Is A Cultural and Scientific Reset Required?

For the past forty years, since the end of the 1970s, cannabis in particular, has been pushed into a strange scientific territory in part, because of the culture surrounding the drug. This in turn, along with the schedule I classification of cannabis, has led to not only a dearth of research, but a reluctance on the part of prescribing doctors to examine its efficacy.

In the present, this means that doctors are still (beyond insurers who demand medical evidence before approving payment) the biggest hurdles in every medical system where cannabis is becoming legal. See the debate in Canada, the UK and of course, Germany, where patients frequently report asking for a drug their doctors refuse to prescribe.

This is exactly the kind of high-placed, societally influential effort in other words, that might finally break the medical taboo at the most important remaining logjam– at the point of prescription and approval for patients.

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Trudeau expects cannabis supply shortages to be fixed within a year

OTTAWA — Prime Minister Justin Trudeau says the biggest challenge associated with the legalization of cannabis has been the supply shortage — but he expects it to disappear within a year.

In an end-of-year interview with The Canadian Press Friday, Trudeau predicted the problem would be resolved “during the coming months and perhaps the coming year.” He noted the scarcity of cannabis was most pronounced in Ontario and Quebec.

Trudeau said he remains unhappy with Quebec legislation introduced this month that would raise the legal age for cannabis consumption to 21 from 18.

The province’s restrictive approach could prevent it from attaining one of the chief objectives of legalization, in particular curbing organized crime, he said.

“If young people aged 18 to 21 are forced to buy pot from criminals, it will not help us eliminate the black market,” Trudeau said.

Rather, he continued, it will sustain “a black market that is going to sell to 18-to-21-year-olds, but that is also maybe going to sell to youth of 17 or 16.”

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Deadline nears for hemp-farming applications

Those interested in growing or processing industrial hemp in New York have until Dec. 28 to submit applications to the Department of Agriculture and Markets.

Applicants can also apply to process cannabidiol (CBD), which has exploded in popularity this year for its purported health and wellness benefits. CBD is a component of hemp, and oils contain little to none of the psychoactive tetrahydrocannabinol (THC). Industrial hemp contains 0.3 percent THC or less.

Gov. Andrew Cuomo launched the Industrial Hemp Agricultural Research pilot program in 2015, and the hemp industry is expected to blossom under the new federal Farm Bill, which was passed by Congress last week.

President Donald Trump has indicated his support. The bill would remove hemp from the controlled substances list, clearing the way for American farmers to grow and harvest it.

In New York, more than 100 new research partners were added in 2018, expanding the amount of farmland approved for hemp research to 3,500 acres statewide. The Department of Agriculture and Markets continues to accept applications on a rolling basis for future research partners in the areas of grain and fiber.

SUNY Cobleskill conducted research this year to investigate the incidences and impact of certain diseases in hemp plants, while also looking at the effects of different spacing and soils. The college will continue research in 2019 with the help of students studying plant science.

Aidan Woishnis, a Gilbertsville native, worked with two farmers this year while working with a trade association and building a website to educate people on hemp and how they can join the industry.

“There’s an issue that we don’t really have the infrastructure in place to get the hemp to the end product,” Woishins said.

Farmers Woishnis worked with in Gilbertsville and New Woodstock grew a total of about 15 acres of a fiber and grain variety of hemp, but the crops were washed away by rain before they could be harvested in September.

“It definitely gave us a great learning experience,” Woishnis said. The 22-year-old said he wants to be involved in the fiber hemp industry and hopes that his website,, will be a resource for people looking to enter the “green rush.”

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Shoppers Drug Mart granted licence to sell medical marijuana online

Health Canada’s list of authorized cannabis sellers and producers has been updated to reflect that the pharmacy can sell dried and fresh cannabis, as well as plants, seeds and oil.

Health Canada’s list of authorized cannabis sellers and producers has been updated to reflect that the pharmacy can sell dried and fresh cannabis, as well as plants, seeds and oil.

A website has been set up by the company, which says that patients “with a valid medical document will soon be able to purchase a wide selection of medical cannabis products” from Shoppers.

A spokesperson for Shoppers’ parent company Loblaw Companies Ltd. says it’s too soon to say when people will be able to start making orders.

She says the company is still working through a “technical issue” with Health Canada.

The company was granted a medical marijuana producer licence in September, after initially applying in October 2016.

Shoppers has said that it has no interest in producing medical cannabis, but the licence is required in order to sell the product to patients.

Under the current Health Canada regulations for medical pot, the only legal distribution method is by mail order from licensed producers direct to patients.

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Marlboro Company Fuses $1.8 Billion Into Cannabis Company Cronos

Big Tobacco Makes First Official Foray Into Cannabis as Tobacco Sales Continue To Fall

Phillip Morris USA’s parent company, Altria, the guys responsible for producing world-famous cigarettes from the Marlboro brand, have officially become the first tobacco company to invest in cannabis.

The investment injected a whopping $1.8 billion for the Canadian cannabis company, Cronos Group, reports CNN. This makes Altria owner of a 45% stake in the cannabinoid company, but and although that isn’t so surprising, what’s even more shocking is the revelation that they will be discontinuing their cigarette vape brands Green Smoke and MarkTen. Altria will also be dropping their oral nicotine, Verve, and are still on the fence about investments in a leading e-cigarette company Juul.

Cigarette sales have steadily been declining, and former cigarette consumers are now turning to other forms of safer recreational products including e-cigarettes as well as cannabis. This change of heart with cannabis consumers is showing that slowly but surely, cannabis is going to topple cigarettes eventually. From one vice to another (safer) vice, although it only makes sense because cannabis has been proven to be healthy while cigarettes have not – and we’ve known this for a long time now.

“The proceeds from Altria’s investment will enable us to more quickly expand our global infrastructure and distribution footprint, while also increasing investments in R&D and brands that resonate with our consumer,” Mike Gorenstein, Cronos CEO, disclosed in a statement. The move also helps “make sure we’re getting in front of regulators,” Gorenstein told CNBC.

“Altria is the ideal partner for Cronos Group, providing the resources and expertise we need to meaningfully accelerate our strategic growth,” he added.

Risky Moves For Altria?

Although this isn’t the first time an American vice company is engaging in long-term romances with Canadian cannabis firms, it’s pretty easy to see why this could be a risky move.

The first was Constellation Brands, parent company of Corona beers, who pumped up their investments in Canopy Growth for a 9.9% stake in the firm. Then within the same month, Hexo, Canadian cannabis producer announced that they were engaging in a joint venture with Molson Coors to create a line of “non-alcoholic, cannabis-infused beverages for the Canadian market.” This business, known as Truss, revealed to be a successful JV and they are soon going to be releasing their products in the Canadian market by 2019 once the country legalizes cannabis-infused beverages.

This deal is definitely good news for shareholders of Cronos, because it catapults them to rock star Canadian cannabis company status thanks to the massive investment, with the support of one of the most powerful cigarette producers in the entire world. But what does this mean for Altria, who paid a very steep price for what is now still a mid-size Canadian cannabis producers. Moving forward, Cronos could benefit from Altria’s proficiency in navigating extremely regulated markets. Additionally, it could take Altria another several years to benefit from this deal, so while it initially does seem like a risky move for Altria, it could take a while for this to play out to both sides’ benefits but it isn’t impossible.

Altria’s stock fell by 25% this year so far, but after they announced they would be tying the knot with Cronos, their stocks jumped 2% on Friday after early trading, while it sent Cronos shares soaring around 30%.

“Importantly, Altria shares our vision of driving long-term value through innovation, and we look forward to continuing to differentiate in this area,” Gorenstein says. “As one of the largest holding companies in the adult consumer products sector, Altria has decades of experience in regulatory, government affairs, compliance, product development and brand management that we expect to leverage, particularly as new markets for cannabis open around the world.”

At the end of the day, cannabis remains to be perhaps the most volatile and unpredictable industry. Just look at the supply shortages that are threatening Canada’s industry, while other countries around the world continue to entertain the possibility of legalizing cannabis for recreational purposes. It will be interesting to see how this deal will pan out in the next 6 months or so, and which “sin company” ties the knot with cannabis next.

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