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CBD vape product trial launched by BAT, catching industry's eye
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CBD vape product trial launched by BAT, catching industry's eye

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It was just one paragraph in British American Tobacco Plc's 59-page report on its fiscal 2020 performance.

Yet, BAT's mention of launching on Jan. 12 a pilot program in Manchester, England, for a cannabis vaping product — Vuse CBD Zone – has the potential to be a global game-changer for the manufacturer and the tobacco industry.

"It will offer adult smokers and vapers sensorial enjoyment, as Vuse CBD Zone caters to a variety of moods and moments in their busy lifestyles," BAT said in the report.

Vuse CBD Zone may be the most noteworthy, and ambitious, example of BAT's "Beyond Nicotine" portfolio strategy.

The vaping product does not contain Tetrahydrocannabinol (THC), which is the ingredient that causes the “high” or psychoactive effect in cannabis users.

Although most uses of cannabis remains illegal in the U.K., cannabis-based products for certain medical conditions were made lawful in November 2018, according to Lexology.com. "Nevertheless, it is tightly regulated, and a license is required."

The annual report may have been the first introduction to Vuse CBD Zone for the general investor community.

However, a January news release to the U.K. market had more details.

It is available in three flavors — mint, mango and berry — and two CBD strengths of 50 and 100 milligrams.

"We will be using this pilot launch to gain key learnings about consumer and retailer experiences, combined with our extensive expertise and knowledge of vaping, to help inform plans for a potential nationwide roll-out ... later in the year," Fredrik Svensson, general manager at BAT UK & Ireland, said in a statement.

Game changer?

There have been vaporizer products for cannabis developed in recent years, with Esquire magazine even ranking the top 14 options in a Jan. 25 posting.

The focus, however, has been on the vaporizers, and not the cannabis.

BAT is putting the weight of its Vuse electronic cigarette brand — No. 2 in the U.S. and No. 1 in Canada — behind the cannabis initiative.

"This latest innovation will allow us, for the first time, to offer adult consumers a range of high-quality CBD vaping products from our trusted global brand, Vuse," BAT said in the report.

Stefanie Miller, managing director with tobacco and cannabis research firm FiscalNote.com, said she's "not sure whether this will be a successful trial or not" in the U.K.

"But, I can say that all of the major tobacco companies know that they’ve got to innovate their product suites and value chains beyond simply providing combustible cigarettes in order to remain going-concerns over the longer-term," Miller said.

"The idea of applying the delivery mechanism (vape) to a new substance (CBD) seems like the type of move we will need to see to ensure longer-term sustainability."

Miller said that "it would make sense to me that BAT's plan now is to continue to refine their product offerings, so that they are ready to hit the ground running in the U.S. when the regulatory environment here is more liberalized vis a vis cannabis."

Stephen Pope, managing principal with London-based Spotlight Ideas, said vaping CBD is "one reason for optimism is that in an age of ever tightening litigation and regulation, when menthol products may be completely banned —so impacting sales of the Newport brand — one sees BAT seeing great growth in tobacco alternatives."

"Despite strong pricing power, even the tobacco firms cannot lean on their laurels. COVID-19 has forced many a business model to be reappraised."

Reynolds prospectus

There have been speculations for decades about R.J. Reynolds Tobacco Co.'s potential interest in manufacturing and selling marijuana products, namely marijuana cigarettes.

Of course, as an illegal product nationally and at the state level for most of that time, there wasn't any formal confirmation of Reynolds' interest.

In recent years, 33 states have legalized medicinal use of marijuana — though not North Carolina except for children with epilepsy — while 11 of those states have approved recreational use.

Yet, it's clear that Reynolds, as well as Philip Morris USA and other tobacco manufacturers, have the manufacturing and supply chain infrastructure to quickly bring legalized cannabis products into the marketplace.

"When it comes to the U.S. cannabis market, I think the major tobacco companies will have a clear competitive advantage relative to others at monetizing the demand that will be created if and when cannabis is eventually legalized federally for recreational use," Miller said.

Miller said one of the biggest current challenges to the U.S. cannabis market is "that you have to keep the entire supply chain within the state in which you’re operating since it’s federally illegal."

She cited as an example growing cannabis crops in Michigan to supply cannabis manufacturers.

"Once state borders no longer become an issue, tobacco companies have the supply chain advantage on the retail side vis-à-vis their relationships with convenience stores, but also on the agricultural side vis-à-vis their relationships with farmers," Miller said.

"The whole thing provides a unique opportunity for a company like Reynolds to utilize a transferable skill set that’s almost entirely applicable to this new market.

"Not many times as a company you get that opportunity, so I would be extremely surprised if they didn’t try aggressively to be part of it."

Dicey waters

Yet, cannabis is proving to be a dicey investment consideration, at least for Philip Morris USA's parent company Altria Group Inc.

In December 2018, Altria invested $1.8 billion to take a 45% ownership stake in Cronos Group Inc., a Toronto-based provider of medical and recreational marijuana. Altria has the option within four years of spending another $1 billion to acquire an additional 10% of the publicly traded company.

“This investment (in Cronos) positions Altria to participate in the emerging global cannabis sector, which it believes is poised for rapid growth over the next decade,” Altria said in December 2018.

“It also creates a new growth opportunity in an adjacent category that is complementary to Altria’s core tobacco businesses."

Industry analyst Bonnie Herzog, then with Wells Fargo Securities, said the Cronos announcement signaled a long-term strategic move for Altria in the rapidly developing tobacco and cannabis industries.

“We applaud Altria’s decision to pivot fast and to move into a new adjacent category (cannabis) that is complementary to its core tobacco business,” Herzog said.

However, as of Dec. 31, 2020, Altria's ownership stake had dropped to 43.5% and the investment value was at $1.17 billion.

After receiving $496 million in revenue from Cronos in fiscal 2019, it had just $12 million in fiscal 2020, according to Altria's fiscal 2020 report.

Seeking Alpha contributor Jonathan Cooper wrote in May that while Cronos "remains a growing cannabis business in an emerging market, thus far Altria's investment does not appear to be a wise one."

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"Rather than shrewdly purchasing a strong cannabis company at a low price, it appears that Altria bought into hype near the peak of cannabis euphoria."

22nd Century Group

22nd Century Group Inc. is known primarily for its effort to win modified-risk tobacco product approval from the Food and Drug Administration for its very-low-nicotine traditional cigarettes.

The company, which is planning a headquarters move to Buffalo, has its largest tobacco production plant in Mocksville.

The company also has been investing significantly in cannabis research, including acquiring industry companies.

On Feb. 10, the company said it has developed and launched a technology platform that will quickly identify and incorporate commercially valuable traits of hemp/cannabis plants to create new, stable hemp/cannabis lines.

22nd Century recently refocused its hemp/cannabis strategy to target the cannabinoid value chain, in particular, in the areas of plant biotechnology research, gene modification and engineering, modern plant breeding and development and extraction.

The company said its research "is product-oriented ... on industrial hemp plants that contain optimized levels of medically important cannabinoids, including but not limited to CBD, CBC and CBG."

For most of 2020, 22nd Century's share price languished below $1.

However, since Nov. 17, its share price has been consistently above $1 with a 52-week high of $4.28 on Feb. 10.

U.S. political outlook

Miller's latest cannabis market report, issued Jan. 12, focuses primarily on expectations of the Biden administration to decriminalize certain uses of cannabis.

"We expect Biden will use executive action to deschedule cannabis down to something in the Schedule III-V window," Miller wrote.

According to the U.S. Drug Enforcement Administration, Schedule III drugs, substances or chemicals "are defined as drugs with a moderate-to-low potential for physical and psychological dependence." Schedules IV and V are considered at even lower risk.

Miller said there could be advances on federal core cannabis policies in 2021.

The most important is addressing banking and capital access issues via a proposed SAFE Banking Act that was introduced in 2019 and passed the U.S. House that year.

Currently, most cannabis companies operate on a cash-only basis because most financial institutions can’t provide banking services due to federal regulatory restrictions.

According to Marijuana Business Daily, the lack of banking services "has been one of the largest business hurdles faced by cannabis companies for decades."

"A new federal law that would grant banking access for all state-legal marijuana businesses would be monumental."

U.S. Sen. Thom Tillis, R-N.C., has written constituent letters outlining his opposition to federal cannabis legalization measures.

However, Miller said Tillis and a few more Republican senators "are apt to allow states to move forward without federal interference."

"Together, these events reinforce that we continue to expect piecemeal movement on core cannabis policies through Congress in 2021."

Scott Ballin, past chairman of the anti-smoking alliance Coalition of Science or Health, said a key factor is what regulatory oversight will the FDA have over recreational use of cannabis, including smoking and vaping

"The arguments to be made are not so different than the tobacco and nicotine sectors," Ballin said.

"You'll have medicinal and recreational forms, combustible and non-combustible forms, differing strengths, issues of possible health effects, use of the products while driving or in the work place, issues of adolescent use and abuse, flavors that attract kids, issues related to marketing and advertising."

Ballin said you'll likely see anti-tobacco advocates being as fiercely involved in cannabis use, particularly among those under age 21.

State political outlook

Miller said existing federal policy "will likely continue to place an emphasis on states to pass their own set of rules for their cannabis markets."

"By the end of 2021, we estimate that 46.4% of the U.S. population will live in a state that’s fully legalized cannabis for recreational use."

The state spotlight is on Virginia, which would be the first southern state to legalize marijuana for recreational use, and the 16th overall.

There are separate bills approved by the Virginia Senate and House of Delegates this month would legalize possession of up to an ounce of marijuana for individuals ages 21 and over, The Associated Press reported.

Both bills also would begin a process of automatically expunging misdemeanor marijuana-related offenses from criminal records on July 1. Lawmakers have until March 12 to reach a compromise.

There are marijuana recreational use advocates who cite the N.C. Education Lottery as an example of where the state legislature should be heading with cannabis.

Advocates point out the likelihood of North Carolinians crossing the Virginia border to buy recreational marijuana products similar to how North Carolinians for many users to play the Virginia state lottery.

Meanwhile, there has not been a cannabis-related bill submitted so far for the 2021 session of the N.C. legislature.

During the 2019 season, Senate Bill 168 would have expanded the use of medicinal CBD oil in N.C.

SB168 cleared the Senate by a 42-4 vote in April 2019. The bill, however, was subjected to a gut-and-replace language action in June 2019 and the original bill was not revived during 2020.

"It would be very surprising for a Republican-controlled state legislature to pass a recreational marijuana legalization law," said John Dinan, a Wake Forest University political scientist and a national expert on state legislatures.

"In the states where recreational marijuana legalization measures have been adopted, these policies have invariably been adopted through direct democratic processes of citizen-initiated policy-making, which are not available in North Carolina, or by Democratic-controlled state legislatures."

However, another political analyst said don't be surprised if a bill is introduced this year to legalize marijuana use in N.C.

"The idea has had growing popularity in recent years," said Mitch Kokai, senior policy analyst with Libertarian think tank John Locke Foundation.

"But, introduction is just the first step, and I suspect such a bill would face an incredibly steep hurdle. Sponsors would be lucky to get a committee hearing.

"It seems doubtful that such a measure would make it to the floor of either the House or Senate this year, much less pass ether chamber.”

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