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Tobacco Giants Invest Heavily in New Cannabis Consumer Products

The world’s two largest tobacco companies have made significant investments in Canadian cannabis multinationals that are likely to lead to a new generation of consumer products.  They will also use their expertise in operating within strict regulatory frameworks to strengthen the pro-cannabis reform lobby in the United States.  

 

British American Tobacco (BAT) and Philip Morris parent company Altria, now both have serious skin in the cannabis game with:

  • BAT buying a 19,9% stake in Canada-based cannabis producer Organigram for US$175,8 million on 10 March 2021; and
  • Altria filing two patent applications for cannabis vaporizer devices with the United States Patent and Trademark Office filings in February 2021;

 

 

 

The strategy of the tobacco giants is clear:

  • Tobacco consumption world-wide is falling while legal cannabis consumption is rising;
  • The wave of cannabis reform across the world is giving rise to complicated legal frameworks in different jurisdictions;
  • Big tobacco has the expertise to operate within strict, ‘socially-responsible’ frameworks and has the muscle to lobby governments to enact ‘friendly’ policies;
  • Big tobacco also has the cash to pump into research and development of new cannabis consumer products while cannabis companies have the expertise in product development;
  • The big target is the United States, particularly the vape market: it offers tobacco giants the opportunity to influence cannabis legislation at a federal level while at the same time developing new cannabis consumer products that will be compliant with that legislation.

 

 

Expect a new generation of cannabis products now that Big Tobacco is ramping up cannabis R&D in 2021

 

BAT buys into Organigram, will ramp up R&D

The BAT deal will give it access to research and development technologies, product innovation and expertise with an initial focus on natural remedy cannabidiol (CBD).

“This move takes us into a new space and we are not ruling out any product innovation,” David O’Reilly, director of Scientific Research at BAT, told Reuters on 11 March 2021.

Organigram Chief Executive Greg Engel said the companies will jointly develop new products for cannabis delivery, both oral and vapour based, and will be able to commercialise any products developed under their own brands.

Both BAT and Organigram will contribute scientists, researchers, and product developers, BAT said. It will become Organigram’s largest shareholder and can appoint two directors to its board.

 

Malboro Owner Altria defending its Cronos stake

Altria, the Parent Company of Philip Morris, spent $1.8 billion in December 2018 for a 45% stake in the Cronos Group, one of the first major multinational cannabis firms based in Canada.  

 

 

The Malboro Man: Millennial-style

 

Since then, Altria has moved on multiple fronts to protect its investment. In February 2021 it signalled its intent to dominate the cannabis vape market by fling patents in the United States. The Altria cannabis devices have temperature controls meant to allow consumers to vaporize THC or CBD. The two best-known cannabinoids in marijuana—both of which have specific medical applications, according to recent research—also have different release points. 

 

Tobacco wants a slice of the billion-dollar CBD action

“We view this move as a strong positive. Cannabis overall provides a natural fit for tobacco and a big incremental growth opportunity,” Jefferies analyst Owen Bennett wrote in an note.

BAT has expertise in operating in a regulated environment and experience of growing a crop similar to hemp CBD, Bennett said, adding that the timing of the deal before Organigram’s possible entry into the United States is also a big positive. 

 

 

Race on to dominate the US vape and CBD markets

 

Bennett estimates U.S. CBD market sales of over US$16 billion by 2025.

BAT’s investment comes two days after the Lucky Strike maker laid out environmental, social and governance (ESG) targets, including switching more people to less harmful products.

The group aims to achieve at least 5 billion British pounds in revenue from sales of e-cigarettes, tobacco heating and oral nicotine products in 2025.

BAT posted on its website (www.bat.com) that it would set up with Organigram, a R&D Centre of Excellence that would handle the IP elements each party would bring to the table.

To operationalise the ‘Product Development Collaboration Agreement’ (PDC) a “Centre of Excellence” will be established to focus on developing the next generation of cannabis products with an initial focus on CBD.  The Centre of Excellence will be located at Organigram’s indoor facility in New Brunswick, Canada, which holds the Health Canada licenses required to conduct R&D activities with cannabis products.  Both BAT and Organigram will contribute scientists, researchers, and product developers to the Centre of Excellence which will be governed and supervised by a steering committee consisting of an equal number of senior members from each of BAT and Organigram.  Both partners share a commitment to continue to maintain the highest regulatory and ethical standards.

As part of the transaction, BAT and Organigram will grant each other a licence to certain intellectual property to enable the development of new and potentially disruptive, novel products.  Both parties will have the ability to independently commercialise any products developed as a result of the collaboration under their own brands.”

Dr David O’Reilly, Director Scientific Research at BAT, comments: “Today’s announcement underscores our commitment to accelerating our transformation and building A Better Tomorrow. Our multi-category, consumer-centric approach, which is key to our transformation, aims to provide choice and meet the evolving needs of adult consumers.  This choice provides reduced risk alternatives* to combustible cigarettes, as well as going beyond tobacco and nicotine into new and exciting areas of product innovation.

“We believe this collaboration has significant potential to enhance our activities, allowing us to combine our world-class expertise while enabling scientists from both BAT and Organigram to work closely together and share information real-time.  We know that in R&D this is how you make real breakthroughs and accelerate progress.

“We have been impressed by the strong management team and culture at Organigram. This collaboration aligns with our long-term strategy, and will enable us to work with Organigram at an R&D level, as well contributing to their wider operations.”

Bat.com also carried the following commentary by company representatives:

Dr David O’Reilly, Director Scientific Research at BAT:

Our multi-category, consumer-centric approach, which is key to our transformation, aims to provide choice and meet the evolving needs of adult consumers.  This choice provides reduced risk alternatives* to combustible cigarettes, as well as going beyond tobacco and nicotine into new and exciting areas of product innovation.

“We believe this collaboration has significant potential to enhance our activities, allowing us to combine our world-class expertise while enabling scientists from both BAT and Organigram to work closely together and share information real-time.  We know that in R&D this is how you make real breakthroughs and accelerate progress.

“We have been impressed by the strong management team and culture at Organigram. This collaboration aligns with our long-term strategy, and will enable us to work with Organigram at an R&D level, as well contributing to their wider operations.”

Greg Engel, Chief Executive Officer of Organigram:

This is a tremendous milestone in the evolution of Organigram.  It is instrumental in advancing our commitment to offering consumers innovative cannabis products and to furthering our long-term international strategy.  We have been extremely selective about aligning with a strategic partner and, in BAT, we’ve found a leading consumer goods business with innovative product platforms, an impressive dedication to research and development, deep consumer insights, regulatory expertise and a commitment to responsible stewardship and consumer safety.”

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