20 Jul The biggest American cannabis business is in Canada
Tilray, a marijuana conglomerate, went public yesterday on New York’s NASDAQ, with its stock price rising more than 30% today as investors bet on Canada’s decision to legalize adult use of cannabis. It’s the first cannabis producer to make its initial public offering on a US stock exchange.
The use and possession of marijuana is still a federal crime in the United States, with the plant and the cannabinoid compounds it contains considered by federal regulators to be as dangerous as cocaine or heroin, despite scientific evidence to the contrary. Thirty states have legalized the plant’s use for medical treatment or adult recreational use.
Tilray, which harvested nearly seven metric tons of cannabis last year, is based in Ontario, Canada. It grows and processes “pharmaceutical grade” marijuana, which it sells after drying or uses to make extracts. Its products are available in ten different countries; Tilray sells its extracts in the European Union and also has a licensed production facility in Portugal.
The company grew out of a Seattle-based private equity firm, Privateer Holdings, created in 2010 to profit from the global liberalization of cannabis rules. The company has made investments in marijuana-adjacent brands, including a rating service called Leafly and a distributor that licensed the name and image of reggae icon Bob Marley.
But neither have shown the promise of Tilray, which investors valued at $2.65 billion at time of publishing. In part, its attraction comes from an associated brand called High Park, which exists to take advantage of Canada’s decision to legalize adult use of marijuana beginning in October 2018. High Park has already struck deals with the provinces of Quebec, Manitoba and British Columbia to provide cannabis to residents.
Investment in the US marijuana industry has been limited mostly to risk-embracing venture firms. The patchwork of state and local regulations makes expansion difficult, and the inability of most marijuana businesses to use federally-regulated banks has put physical limits on their cash flow.
Tilray’s CEO Brian Kennedy told me the company made its initial public offering in the US in part because staid mutual fund investors were looking for an SEC-regulated, GAAP complaint way to gain exposure to the sector.
But when and if regulations catch up with US public sentiment, some investors fret that established agribusiness, pharmaceutical, alcohol and tobacco firms will step in and knock smaller, less-capitalized producers out of the market.
Tilray executives say it is establishing the infrastructure to be a large-scale competitor in a post-prohibition world. “The companies that have trusted brands, with a multinational supply chain, will win with regulators, with patients, with consumers and governments around the world,” Kennedy told me.
It costs Tilray just under $3 to grow a gram of cannabis, which it sells for $6.50, on average. In US states like California or Oregon that allow adult use marijuana, a gram retails for $10 to $15, depending on quality. But fluctuations in a still-youthful supply chain can lead to gluts, which had some producers selling for less than $2 a gram earlier this year.
Fear of oversupply may be an early trend to watch with Tilray: Two competing Canadian cannabis companies, Aurora and Canopy Growth Corporation, have been preparing for the October deadline.
For Kennedy, the answer to commodification is branding. Hence the interest in Marley’s name, which takes pride of place among seven other identities the company plans to use to market its cannabis product. “The most prominent brand in the cannabis industry today is Ziplock,” he says. “There are going to be global brands in this industry.”
Clearly, he expects Tilray to be one of them.