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Could Big Tobacco Become Big Marijuana?

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Throughout history there have been items considered taboo because of the impact they have on society or the human body. In the United States, alcohol was the big story of the 1900s and marijuana looks set to become the big story of the 2000s. While you can debate the moral and medical value of this plant's leaves, there is no debating that this country is at the cusp of legalizing a once taboo item. Who will benefit?

The Rise and Fall of the Mob
There will always be organized crime, where people get together and do bad things in a big way. However, in the states, prohibition was probably the high point for organized crime. The mob, as it is often called, was able to take advantage of people's desires to drink alcohol to earn handsome profits. Once prohibition was ended, the mob's power declined over time. While it is still a material issue today, the mob isn't nearly what it once was. While this is a vast simplification of decades of American history, it provides a mile high view.

South American gangs have ridden the demand for illegal drugs in a similar way. Marijuana is a material part of the drug trade and fuels a great deal of the real drug war that rages to our south in Mexico. The gangs are large and powerful. Taking away one of their most lucrative products, however, could help to weaken them. But, then what—the answer lies again with alcohol.

Filling the Void
From the demise of prohibition has arisen a large and powerful industry. To be fair, the alcohol industry existed before prohibition, but once the massive U.S. market opened again, a very big business opportunity opened up. Individuals and companies stepped in to fill the void. The same is likely to happen with marijuana, over time.

But marijuana is a drug, not simply a substance at which some people look askance. That means that it is likely to be heavily regulated. This won't stop an organized industry from rising up (there is already a fascinating, from a business point of view, industry in existence around marijuana growing and distribution), it just means that the industry will have to be very specialized. There are two industries today that could fill the void if and when marijuana is legalized.

The most obvious choice to take on the sale of marijuana is the drug industry. It makes complete sense, since companies like Dow-30 giants Pfizer (NYSE: PFE) and Merck (NYSE: MRK), among many others, are already used to dealing with controlled substances, heavy regulation, and legal checks and balances. Indeed, these two large industry players could easily, and quite logically, begin to deal in marijuana, particularly based on their broad sales and distribution teams.

Moreover, the drug industry has been dealing with patent losses that have taken billions off of their top lines, including such massive losses as Pfizer's Lipitor, once a multi-billion dollar drug. Merck, meanwhile, saw the patent expiration of billion dollar drugs like Singulair. These hits have been hard on the pharmaceuticals industry and left many companies scrambling for new sources of revenue. Marijuana sales could more than handily fill holes lefts by patent expirations.

Adding to the intrigue of this idea is the giant research arms the drug companies possess. Professional and well-funded research effort could turn what are now odd-ball marijuana varieties created growers (going under names such as Sweet Island Skunk and Sweet Dutch) and turn them into legitimate, documents varieties of a drug type.

Big Tobacco
The problem that the drug industry would have, however, is that marijuana would, at its core, be a commodity item. While this could lead the real benefit to fall to generic drug companies like Israel's Teva Pharmaceuticals (NYSE: TEVA), that may not be as realistic an outcome. For starters, even generics focused companies have been migrating to branded drugs. Secondly, and perhaps more importantly, marijuana is a plant. It needs to be farmed, not created in a lab. The one industry that has a history of dealing with a commodity plant is the tobacco industry.

Moreover, thanks to Altria's (NYSE: MO) Phillip Morris and its push to get tobacco regulated by the U.S. Food and Drug Administration, Big Tobacco is now completely accustomed to dealing with the government regulation that would likely surround the growing, harvesting, and sale of marijuana and marijuana based products. In addition, the companies in this industry have massive distribution networks that could easily be adapted to handle a new product going to new customers. And, like the drug companies, tobacco companies, particularly in a mature market like the United States, are looking for ways to deal with the slow decline of their main product, cigarettes.

While Altria may not be a first mover, it isn't beyond imagination to see a smaller player testing the waters. Or, perhaps, new entrants that eventually get swallowed by the big guys once the stigma of marijuana fades.

No Easy Answers
There are no easy answers with regard to marijuana. It is a drug, for all of the positives provided by its proponents there are equally negative attributes highlighted by its detractors. The fight to legalize this drug should be long and hard. However, the balance appears to have shifted toward legalization, and in that there could be a legal investment opportunity.


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