The role that established pharmaceutical and tobacco companies will play in the (soon-to-be) legal marijuana market is one that crops up in nearly every conversation about the industry. It just seems so natural that Philip Morris (NYSE:PM) or Pfizer (NYSE:PFE) — with earnings in the billions, extensive experience navigating the regulatory labyrinth, and established distribution channels — would jump at the opportunity to enter the marijuana market. Estimates vary, but there are tens (if not hundreds) of billions of dollars up for grabs.
However, Philip Morris, the company behind the Marlboro brand, has expressed little interest (at least publicly) in entering the marijuana industry. When asked about the possibility, a spokesmen from the company told CBS News that, “Tobacco companies are in the business of manufacturing and marketing tobacco products.”
As if in agreement, a spokesman from Reynolds American (NYSE:RAI), the company behind Camel and Pall Mall, said that, “Reynolds American has no plans to produce or market marijuana products in either of those states,” meaning Colorado and Washington, which have state-level legislation recognizing some fair recreational use of the drug. “It’s not part of our strategy,” the spokesperson added. Pfizer, presumably, is in the businesses of researching and developing new medicines, not capitalizing on a commodity.
But speculators would be damned if they took spokespeople at face value. Of course participating in the marijuana industry is not part of the strategy of a national or multinational corporation, the drug is illegal at the federal level. They are too big and already too intertwined in bureaucratic red tape to get away with operating in what may best be described as a gray market. They lack agility and the ability to fly beneath the radar, so to speak, which are qualities that every participant in the marijuana industry to date has had to exhibit.
On October of 2010, United States Attorney General Eric Holder issued a statement regarding the Department of Justice’s position on the enforcement of the Controlled Substances Act. The address was given in response to California Proposition 19, a ballot initiative due to be voted on in November of that year that, if passed, would have legalized various (read: recreational) uses of marijuana at the discretion and regulation of local governments. Holder said the following.
“Regardless of the passage of this or similar legislation, the Department of Justice will remain firmly committed to enforcing the CSA in all states. Prosecution of those who manufacture, distribute, or possess any illegal drugs, including marijuana and the disruption of drug trafficking organizations is a core priority of the Department. Accordingly, we will vigorously enforce the CSA against those individuals and organizations that possess, manufacture, or distribute marijuana for recreational use, even if such activities are permitted under state law.”
The message was loud and clear — and echoed the tone set in 2005 when the U.S. Supreme Court heard Gonzales v. Raich, a case in which a California producer of marijuana for medical use sued the government for interfering with (read: shut down by the Drug Enforcement Agency) their right to operate a solely intrastate business that adhered to state laws but violated federal laws. The case addressed the inevitable issue. What happens when the federal government decides to exercise its authority over a conflicting state law? The short answer is: the fed wins, and Holder wanted everybody to know that. The rules, though, are changing. The U.S. Department of Justice recently relaxed its marijuana enforcement posture and created what some have called an environment of “de-facto legalization.”
On August 29, 2013, Deputy Attorney General James Cole issued a memorandum regarding marijuana enforcement under the CSA. Of particular interest to advocates of legalized marijuana, the memorandum establishes, according to a DoJ statement (emphasis added). “For states such as Colorado and Washington that have enacted laws to authorize the production, distribution, and possession of marijuana, the Department expects these states to establish strict regulatory schemes that protect the eight federal interests identified in the Department’s guidance. These schemes must be tough in practice, not just on paper and include strong, state-based enforcement efforts, backed by adequate funding.
“Based on assurances that those states will impose an appropriately strict regulatory system, the Department has informed the governors of both states that it is deferring its right to challenge their legalization laws at this time. But if any of the stated harms do materialize — either despite a strict regulatory scheme or because of the lack of one — federal prosecutors will act aggressively to bring individual prosecutions focused on federal enforcement priorities and the Department may challenge the regulatory scheme themselves in these states.”
The decision, as Republican New Jersey Governor Chris Christie said, amounts to de facto legalization of recreational marijuana. Washington state and Colorado have already legalized recreational use to some degree, and 20 states (including the District of Columbia) recognize some medicinal use of the drug. Prior to the DoJ announcement, the specter of federal prosecution was one of the largest risk factors hanging over the head of the industry. Now, while the specter is certainly still there, it is much less daunting.
Some players within the existing marijuana industry have indicated that the announcement was something of an inflection point, and the end of August marked the beginning of a new era for the industry. The legal gray zone became a little less gray, and industry participants are eager to capitalize on the opportunity to expand. ”Our data and survey of the market in the post Department of Justice position change era has indicated a tremendous desire to build quickly and garner market share,” said GrowLife (OTCBB:PHOT) CEO Sterling Scott in a recent press release.
But with big pharma and big tobacco still pushed to the sidelines by the dubious legal environment — and a certain amount of disinterest in the industry — it is the smaller, established businesses that are growing into the developing market.
Broadly speaking, this growth will mostly be experienced by relatively small, privately-held companies. As it stands, there is no national marijuana brand (although Diego Pellicer is working hard on it), and few publicly traded companies in the industry. There are a few names with equity on the OTC markets that stick out — GrowLife is one of them, Medical Marijuana (OTC:MJNA) is another, if more dubious, player — but the industry is really dominated by small business.
If anything, it is a cottage industry, and it is likely to remain that way for the foreseeable future. Despite the resources that big business could bring to bear on the industry, there are too many roadblocks. The cottage industry appears as if it is the superior competitor in the market: a company must be small enough to duck the federal radar, and remain true to core values of the community of growers, suppliers, and consumers that have build the industry from the ground up.
Scott, the CEO of GrowLife, seems to recognize this. His company recently announced a program called GIFT (GrowLife Infrastructure Funding & Technology) that is aimed at providing budding businesses in the marijuana industry with the means to access the infrastructure — picks and shovels — needed to participate in the gold rush. The program is indicative of the way that those who are already entrenched in the industry are the ones who will make it prosper, and that those looking in from the outside — companies like Philip Morris, Reynolds American, or Pfizer — will have a difficult time putting down roots.