Aphria, Tilray Deal Is a Bet on Euro Pot: Cannabis Weekly

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At first glance, Tilray’s deal with Aphria might look like a bid to create a Canadian heavyweight, or a move to gain a better foothold in the U.S.

But as the Italians say, “dietrologia” -- the surface explanation is never the real one. Much of the logic, it turns out, is rooted in Europe.

Tilray has a cultivation facility in Portugal, while Aphria has another in Germany -- plus a prescription business that’s connected to 13,000 German pharmacies and others throughout Europe. This allows for tariff-free cannabis for the European Union, which is a market that the companies are betting will liberalize quickly.

“Putting our companies together creates the largest medical cannabis business in Europe, and prepares us if one day legalization happens in the EU,” Aphria Chief Executive Officer Irwin Simon told me in a discussion about the deal last week.

His Tilray counterpart agrees.

“There’s a good chance that two years from now, five to six countries in Europe will legalize cannabis for adult use,” Tilray CEO Brendan Kennedy said. France is likely to launch a pilot program in the next 60 days, and Tilray has an application to supply marijuana for it, Kennedy said.

From there, as the U.S. has seen, it’s just a matter of time. When medical cannabis is allowed, it gets much harder to argue against legalizing what remains of the illicit market. Simon, who is poised to be CEO of the combined company, said he foresees Germany being the first to legalize recreational cannabis. And legalization in one place could set off a chain reaction among others.

“There’s the question -- if they decriminalize, why aren’t we legalizing?” Simon said. “People will look at the amount of tax dollars they’re losing.”

The European Union currently has a patchwork of local rules, ranging from full prohibition in countries like Sweden to lax rules in others. Some major economies, like Spain and the Netherlands, largely allow possession for recreational use.

In the near term, the U.S. is expected to make up around 70% of the world’s $93.8 billion cannabis market by 2025, according to Euromonitor International -- but that outlook could change fast.

Recent developments in Europe show the ball is already rolling, albeit slowly. Switzerland’s National Council voted to make access for medical cannabis easier. North Macedonia’s Association of Medical Cannabis Growers is appealing to the country’s parliament for permission to export cannabis flower. And a reform group in Malta is seeking decriminalization.

There are compelling reasons to target Europe: The EU has around 446 million inhabitants compared to about 328 million in the U.S. And while cannabis is mostly limited to medical use for now, recreational use is advancing. Switzerland is doing a pilot program to temporarily try out distribution for recreational programs, and the Netherlands recently chose 10 growers to participate in a similar program.

The region is particularly attractive for the hundreds of small Canadian players, who are struggling with an oversupply of raw flower and an uncertain path into the U.S. And the Aphria-Tilray deal could be the first of more Euro-centric transactions.

“Consolidation had to happen,” Simon said. “Because in Canada there’s already 500 of us chasing the same puck.”

NUMBER OF THE WEEK

  • 70%: The amount of tax revenue from cannabis sales that New Jersey will allocate to “impact zones” -- designated as lower income areas -- that have disproportionately been hurt by prosecution of marijuana-related offenses.

QUOTE OF THE WEEK

“As we get more regulatory clarity you will see more mainstream players entering the cannabis space -- whether in beverages, with spirits companies like Diageo and Constellation; in pharmaceuticals, like Pfizer and GSK; consumer packaged goods like Unilever or P&G, or retailers like CVS and Walgreens. Even if you go further back in the value chain, you will find co-manufacturers getting into the space,” said Peter Caldini, Acreage’s new CEO, in an interview about how his experience at Pfizer, Unilever and other major companies translates to the cannabis world.

WHAT YOU NEED TO KNOW

  • New Jersey passed a bill that sets up the tax structure for recreational marijuana.
  • The past month has been hard on investors who shorted marijuana stocks.
  • Thailand has declared marijuana an “economic crop” and will allow it and hemp to be used in food and cosmetics.

EVENTS

MONDAY 12/21

  • Enwave holds its fourth-quarter earnings call after reporting earnings on Dec. 18.

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