The longer a federal ban on pot is in place, the harder it will be for the U.S. to compete with Canadian marijuana companies
The longer a federal ban on pot is in place, the harder it will be for the U.S. to compete with Canadian marijuana companies is that rare industry where Canada has an edge over its more powerful neighbor. The longer a U.S. federal ban on the drug is in place, the harder it will be to catch up.
U.S. pot companies are now being taken out by cash-rich Canadian rivals. Last year, the Canadians bought 57 businesses south of the border, more than double the number in 2017. Deeper pockets are also helping them to dominate CBD products—derived from cannabis but without a high—that are of interest to some of the world’s biggest consumer companies, including Coca-Cola . Last week Canada’s Tilray, which now has a market value of over $7 billion, bought hemp food company Manitoba Harvest.
That leaves U.S. weed companies on the back foot. Access to capital is a major issue. Stock exchanges like the NYSE and Nasdaq won’t list the shares of any business that grows cannabis in the U.S., where the drug remains outlawed at the federal level. But they do allow operators from Canada, where pot has been legal since last year, to tap the deep U.S. capital markets. Canadian companies like Cronos Group and Canopy Growth have also benefited from major investment by U.S. tobacco and beer giantsAltria and Constellation, who want a piece of the rapidly growing cannabis business.
If Silicon Valley is the world’s tech hub, Toronto is emerging as its cannabis cluster. The city’s main stock exchange hosted eight cannabis companies by the end of January, its junior exchange a further 41. A network of dedicated professional services including investment banks and legal firms now have the expertise to handle a frenzy of marijuana IPOs and deals.
The U.S. pot scene is more dispersed and burdened by higher costs. Companies can’t legally transport cannabis between states, so growers with plants in multiple locations have to duplicate their operations, in some cases making them highly inefficient. And because U.S. federal law prevents companies that sell controlled substances like pot from deducting costs such as rent or wages in their tax filings, some marijuana companies pay an effective tax rate of 85%, according to cannabis law firm Hoban Law Group.
The valuable global market for medical cannabis is also off-limits until it is legal for U.S. cannabis companies to export. The Canadians aren’t hanging around: “They are locking up international contracts for years that the U.S. is missing out on”, says Debra Borchardt, author of the Green Market Report. Tilray, for example, is busy inking contracts with pharma distributors in countries like Germany, Portugal and New Zealand.
Even if the federal ban on pot lifted tomorrow, it would take time for the U.S. to develop national standards and supply chains to rival Canada. And many of the best targets may be gone, or fetch even higher valuations by the time U.S. cannabis businesses can get access to more cash. Catching up with Canada’s big drug push will be expensive.
Wall Street Journal – By Carol Ryan, Feb. 27, 2019