Investors See Green in Emerging Cannabis Market
Easing restrictions across North America are making the emerging cannabis industry fertile ground for investment.
One of the most highly debated and divisive industries in North America is growing quickly, thanks to regulatory changes that are broadening the market.
As governments across the U.S. and Canada repeal long-standing cannabis prohibitions and adopt measures allowing recreational consumption, a burgeoning legal industry is taking shape, according to panelists at the Cross-Border Connections conference on March 5 in Detroit, which was organized by ACG chapters from Toronto, Detroit and Western Michigan.
In October 2018, Canada became the largest country in the world to allow nationwide adult recreational use of cannabis. A month later, Michigan became the latest U.S. state to legalize marijuana, giving the rapidly growing cannabis industry access to an unprecedented number of customers and billions of dollars in revenue on both sides of the border, according to panel moderator Bob Hendricks, a business attorney with Cannalex Law.
The cannabis market in Canada is expected to generate more than $7 billion in total sales in 2019, according to Hendricks, whose firm helps Michigan’s cannabis industry comply with the state’s medical marijuana laws. He predicts Michigan’s commercial recreational operations will grow to nearly $5 billion when the state begins issuing licenses next year.
Regulatory changes like those in Michigan have created a startup wave in North America. According to PitchBook, there were fewer than 450 U.S. and Canadian companies in the cannabis vertical in 2017. Today, there are more than 1,700.
Investment has also risen exponentially. Corporate and strategic M&A has grown from around $500 million in 2017 to more than $12.8 billion in 2018, PitchBook data showed. Private equity-backed investment dollars grew from less than $50 million to more than $500 million in the same time period.
But scaling a cannabis business can be challenging. While Canada’s nationwide legalization enabled companies to expand easily across the country, cannabis businesses in the U.S. will likely suffer from isolation until legalized by the federal government.
Dogged Determination
Doug Maines, an attorney at Honigmen LLC, has watched Michigan’s rapid transition to legalization. Before going into private practice, he spent four years in Lansing as counsel to two speakers of the Michigan House of Representatives, where he was at the forefront of the state’s evolving medical marijuana laws.
“Did I think it would happen? Yes. Did I think it would happen as quickly as it did? No,” he said. “It’s aging in dog years.”
While legalization is certainly exciting, there are tremendous barriers to entry for newcomers, according to Michael Elias, president and CEO of Michigan Pure Med, a Detroit-based pharmaceutical medical cannabis company. Though recreational use is now allowed in the state, there is still a complicated licensing process for cannabis companies looking to enter the market.
According to Michigan law, local municipalities must determine whether or not to allow cannabis businesses—such as dispensaries, growing operations or distribution centers—to operate. They’re also required to restrict the number of such businesses in their area. Currently, only about 5 percent of municipalities have opted in, Elias said. This arrangement has created an inconsistent patchwork of markets across the state, some of which allow cannabis companies, while others do not.
Michigan Pure Med holds more licenses issued by the State of Michigan than any other operator, but the company still faces challenges, Elias said. “It’s a very restrictive environment but it takes a lot of boots on the ground, a lot of hard work and a lot of lost [hair] follicles to get in a position that we’re in.”
“IT’S A VERY RESTRICTIVE ENVIRONMENT BUT IT TAKES A LOT OF BOOTS ON THE GROUND, A LOT OF HARD WORK AND A LOT OF LOST [HAIR] FOLLICLES TO GET IN A POSITION THAT WE’RE IN.”
MICHAEL ELIAS
President and CEO, Michigan Pure Med
Despite roadblocks, the opportunities in the space are undeniable. According to numbers from the Marijuana Policy Project, a lobbying group, there are nearly 300,000 patients in Michigan receiving medical marijuana—the second-highest number in the country, behind California.
The state has nearly 7 million residents eligible to purchase recreational marijuana, and accounting for tourists could raise those figures even higher.
Michigan is already a significant tourist destination, drawing nearly 120 million visitors in 2016, according to a study from Michigan Tourism Advocacy. Colorado, which draws 87 million visitors, generated $1.5 billion from its cannabis industry. Sixty percent of that came from tourism, according to Elias. “It’s a sleeping giant.”
A Budding Industry
Regardless of regulatory and compliance risks, cannabis companies are in a race to scale up, said Ben Sobczak, an attorney with Dickinson Wright.
Given their isolation and the difficulty of navigating idiosyncratic laws, it makes sense for cannabis startups to partner with a company that has knowledge of state and local regulations, Sobczak said. The cannabis industry is “a perfect environment to flourish with these types of transactions, mergers, acquisitions, private funding, licensing deals, etc.,” he added.
GIVEN THEIR ISOLATION AND THE DIFFICULTY OF NAVIGATING IDIOSYNCRATIC LAWS, IT MAKES SENSE FOR CANNABIS STARTUPS TO PARTNER WITH A COMPANY THAT HAS KNOWLEDGE OF STATE AND LOCAL REGULATIONS.
Given the nationwide repeal of prohibition on cannabis use, Canadian companies may have an easier time growing their operations. “Canadians generally have a lot more opportunity to raise and spend money,” Sobczak said.
The largest deal in 2018 was Constellation Brands’ $3.9 billion investment in Canopy Growth, a cannabis company located in Ontario.
And as prohibition winds down in the U.S., Sobczak said the obvious next step is for Canadian companies to flex their muscle south of the border and expand. Citing a report by business analytics firm Meridian, he said that of five publicly announced mergers and acquisitions in Michigan so far this year, half had a Canadian partner.
Igniting Cannabis R&D
In addition to growing and selling cannabis, legalization has sparked new research and development initiatives about the effects of the plant, which has about 150-160 active ingredients, Hendricks said. “The idea of trying to distill the mechanisms of how pain is mitigated and what it does to receptors in the brain and the immune system is unbelievable.”
With continued legalization, research institutions are now able to study marijuana for use in future disease treatments. Currently underway is research at the University of Florida, which was awarded a $3.2 million grant in 2017 by the National Institute on Drug Abuse to study the health effects of marijuana on people with HIV.
Even with an influx of funding, the study of cannabis will likely be a complicated endeavor. “Although we’ve known for years that the ingredients in Tylenol relieve pain, we’ve only just figured out how it works in the body–and we’re talking about one active ingredient,” Hendricks said.
For broader legalization to happen in the U.S., society will have to see the benefits of cannabis—whether science-based evidence of its medicinal qualities, lower arrest rates, or tax receipts from cannabis businesses. Those outcomes would make the argument for legalized cannabis at a national level that much stronger, Maines said. “That’s a matter of when, not if.”
Benjamin Glick is ACG Global’s marketing and communications associate.
