The marijuana industry has matured by leaps and bounds over the past couple of years. Once considered a taboo industry, cannabis has been legitimized following the passage of the Cannabis Act in Canada. Aside from simply ushering in billions of dollars in added annual sales, this legalization in Canada signals that the legal pot industry is here to stay.
Advancements have been seen in the United States, too. In December, President Trump signed the Farm Bill into law, legalizing hemp and hemp-based cannabidiol (CBD). CBD is the nonpsychoactive cannabinoid best known for its medical benefits. We also witnessed a handful of states give the green light to cannabis in 2018, bringing the total number of states to have legalized weed in some capacity to 33.
And yet marijuana remains a federally illicit substance, per the federal government. Because it is a Schedule I drug, businesses that deal with cannabis are often unable to get access to basic banking services. Additionally, profitable U.S. pot companies are exposed to Section 280E of the U.S. tax code, disallowing them from taking normal corporate income tax deductions, save for cost of goods sold. This can lead to an effective tax rate of between 70% and 90%.
But this by no means fully encompasses the challenges that the marijuana industry is facing, as was evidenced by Acreage Holdings (ACRGF) a little over a week ago.
Acreage Holdings is one of the hottest new names to go public via a reverse takeover -- i.e., when a private company "acquires" a publicly traded shell company to become a public company and avoid the long-winded process of an initial public offering. Part of the intrigue is that Acreage has some "famous" board members, including former Speaker of the House John Boehner, former Massachusetts governor Bill Weld, and former Canadian prime minister Brian Mulroney.
The other exciting aspect is that Acreage already has one of the broadest reaches of any U.S.-focused marijuana company. It has dispensary operations in 14 states (but operating licenses for 18 states) but also deals with cultivation and/or processing facilities, management services operations, and other financial agreements within the industry. Its multichannel approach is a big reason why it carries such a robust valuation of $2.5 billion.
CBS puts the kibosh on Super Bowl cannabis ads
But none of these factors could save Acreage Holdings from being denied what would have been the ultimate prize: approval to run a 60-second advertisement during the Super Bowl. As reported by the company via a tweet, CBS (PARA -0.81%), the network broadcasting the Super Bowl, which'll fetch around 100 million viewers, turned down Acreage's medical marijuana ad by noting that it was "not consistent with the network's advertising policies."
Interestingly enough, the ad itself (link will take you to the ad on YouTube) didn't market any of Acreage Holdings' products or attempt to sell cannabis whatsoever. Rather, it presented testimonials from people who'd tried conventional medicines and had little success, only to find relief with medical cannabis. This included a testimonial from a long-term opioid user, which is a hot-button topic given that more than 49,000 people died in the U.S. last year from opioid-related overdoses. Acreage's ad ended with the message "The time is now" and encouragement to call your local U.S. representative to advocate for change to the nation's existing cannabis laws.
According to an October 2018 poll from Gallup, an all-time high two out of three American adults now want to see marijuana legalized nationally, with an April 2018 Quinnipiac University survey finding that 93% of respondents support allowing a physician to prescribe medical cannabis. In other words, most Americans probably wouldn't have had any issue with Acreage Holdings' attempt to incite discussion and promote reform.
Then again, the move wasn't entirely unexpected, with marijuana still illegal federally and therefore in limbo on a national level. That and CBS has rejected commercials in years past that were considered too political or sexual for the intended audiences. Also, medical marijuana is banned in the National Football League, so rejecting the commercial stays consistent with the NFL's message.
Is America on the precipice of change?
With our neighbor to the north legalizing recreational weed and two-thirds of all U.S. states giving the green light to medical marijuana, it would appear on the surface that the U.S. is on the verge of real reform. Unfortunately, looks can be deceiving.
One of the biggest problems the industry is facing, as is (partly) evidenced by CBS' refusal to air Acreage's ad, is that our elected officials still consider marijuana a taboo topic. On Capitol Hill, opponents to medical legalization regularly call for Food and Drug Administration- (FDA) approved clinical studies to establish a benefit-and-risk profile for cannabis. These lawmakers won't budge on their stance until these studies are run.
Yet last year we witnessed GW Pharmaceuticals (GWPH) garner the first-ever cannabis-derived drug approval from the FDA. GW Pharmaceuticals' Epidiolex, which is targeted at two rare forms of childhood-onset epilepsy, handily reduced seizure frequency from baseline relative to a placebo in multiple late-stage trials. It was also given the least restrictive classification (Schedule V) by the U.S. Drug Enforcement Agency. Essentially, GW Pharmaceuticals single-handedly showed that the current Schedule I definition of cannabis isn't correct. It does -- or should I say its cannabinoids do -- have recognized medical benefits.
Lawmakers are likely also leery about any sort of reform from a tax revenue perspective. Even with cannabis illegal at the federal level, the Internal Revenue Service has no issue collecting corporate income tax on pot companies and, as noted, applying Section 280E of the U.S. tax code. Rescheduling or removing marijuana from the controlled substances list would actually result in the federal government losing out on an estimated $5 billion in tax revenue over the next decade, since 280E would no longer be applicable. And yes, that includes the expectation that sales would pick up if marijuana were a legalized substance.
In other words, the medical marijuana debate, while it might seem like a cut-and-dried issue, is anything but. Acreage Holdings' attempt to advertise during the Super Bowl represents another baby step forward for the industry, but there's still a long way to go in the United States before reform is on the table.
Check out the latest earnings call transcripts for companies we cover.