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Cannabis Companies Gamble on Patents to Lure Possible Suitors

Aug. 1, 2019, 8:46 AM

Axim Biotechnologies Inc. can see the future from its Manhattan offices 20 stories above Rockefeller Plaza. And it involves gum.

Axim, which researches, develops, and produces cannabinoid-based pharmaceuticals and other products, holds a U.S. patent on a method of infusing cannabis compounds into chewing gum. The company, which has several cannabis-related patents, could be an attractive takeover target for a big chewing gum manufacturer, CEO John Huemoeller II said.

Huemoeller has reason to be optimistic. The U.S. cannabis industry is growing—and consolidating—as more states legalize the substance. As with mergers and acquisitions in more mature industries, such as pharmaceuticals, companies’ patent holdings are part of what make them attractive takeover targets.

“Your patent portfolio is going to be very important when it comes that time to have that conversation about being acquired,” Pauline Pelletier, a director at Sterne Kessler Goldstein & Fox PLLC in Washington, said.

Dealmakers often prize patents because they can protect inventions and ideas that distinguish a company from its competitors. Patent portfolios are helping fuel cannabis mergers and acquisitions, attorneys and industry analysts said.

“There’s no second place in patents,” JiNan Glasgow George, a patent attorney and chief executive of market research and analysis firm Magic Number, said. “If you can’t build it, you have to acquire it,” she said.

Companies rushing to file cannabis-related patent applications are betting the U.S. government eventually will legalize the substance, which would make the patents valuable assets. As long as marijuana is federally illegal, patent holders may find it tough to block others from infringing.

“Part of the challenge is you may have limited IP rights at this time, and we don’t know exactly when that’s going to change,” Eric Berlin, a partner and cannabis industry attorney at Dentons in Chicago, said.

Rolling the Dice

If the U.S. government legalizes marijuana, cannabis-related patents will become more of a driver for mergers and acquisitions, attorneys and cannabis industry analysts said.

“We’re in the first inning of a long ball game, and as things get further down the road, then patents become even more valuable,” Huemoeller said.

Thirty-three states and the District of Columbia have approved medical uses of marijuana. Eleven states and the District allow adult recreational use, according to New Frontier Data, a cannabis market research firm. So far, there’s no sign that Congress is going to pass a law to legalize marijuana.

The U.S. Patent and Trademark Office, which issued its first cannabis-related patent in 1942, only looks at whether an invention is new and useful, not whether it relates to an illegal substance. U.S. patents have a lifespan of 20 years.

Patent Rush

Companies are filing patent applications to protect inventions that involve cannabis-laced products ranging from face creams to medicines and chocolates to soft drinks.
Others are pursuing patents on methods of cultivation or extracting oils from cannabis buds.

The number of cannabis-related U.S. patent filings from 2016 through 2018 totaled 767—more than 1.5 times the applications filed from 2013 through 2015, according to Magic Number. Global M&As involving cannabis doubled to 323 from 2017-18, according to Viridian Capital Advisors.

Merger activity is helping fuel patent filings, Peter Holzworth, director of cannabis client services at Zuber Lawler & Del Duca LLP, said.

“I’m seeing more patents filed than enforced,” he said. “That can come a little bit later.”

Because patents can only be enforced in federal courts, patent owners may find themselves wrestling, for now, with how to protect their patents without implicating themselves in federally illegal activities.

One company, United Cannabis Corp., is testing the strength of its patent in court despite marijuana’s illegal status. It sued the Pure Hemp Collective in the U.S. District Court for the District of Colorado, for allegedly infringing a patent covering liquid cannabinoid formulations.

United Cannabis won a round in April when the court preliminarily ruled that its patent isn’t directed to a naturally occurring phenomenon—which would be grounds for invalidation. Proceedings in the case are ongoing.

Deal Growth

So far, most of the patent-driven M&A in the cannabis sector has involved large cannabis companies buying smaller research firms, Pelletier said.

The “poster child” for this trend, she said, is Canada’s Canopy Growth Corp.'s acquisition of Ebbu Inc., a Colorado-based hemp research company with 9 U.S. patent applications. Canopy, in the last 10 months, has amassed more than five dozen global patents and applications by buying Ebbu, Storz & Bickel GmbH & Co. KG, a German vaporizer maker; and KeyLeaf, a plant-based bioprocessing company in Saskatoon, Saskatchewan, and Batavia, Ill., Bloomberg Law data show. Canada legalized marijuana in 2018.

“Cannabis can’t cross the border, but ideas can,” said Canopy spokesman Jordan Sinclair, who called intellectual property a “crucially important consideration” when eyeing acquisition targets.

Investment is also starting in other sectors. Liquor giant Constellation Brands, known for Corona beer, last year increased its stake in Canopy by $4 billion. Multinational conglomerates may branch out into cannabis product lines, chasing consumer demand. Legal marijuana sales are likely to hit $13.5 billion in 2019, outpacing those of other popular products such as energy drinks, with an estimated $12.2 billion in 2019 sales, according to Bloomberg Intelligence analyst Kenneth Shea.

Right now, companies’ desire for new markets or geographic territory is driving most acquisitions, Berlin said. “While IP certainly plays a role, it has not been the dominant factor,” he said.

Pharma Interest

Some pharmaceutical companies are amassing cannabis-related patents. GW Pharmaceuticals PLC is the top filer of U.S. cannabis patents with 175 patents and applications, according to Magic Number data.

Pharmaceutical companies are among those beginning to show interest in cannabis-related businesses. Canadian-based Tilray Inc., a cannabis research, cultivation, processing, and distribution company, in December struck a partnership with Swiss drug giant Novartis AG’s Sandoz unit to develop and distribute medical marijuana in legal jurisdictions.

“You could view these partnerships as an overture to pharma formally entering the cannabis space—as a way to test the waters,” Pelletier said.

More traditional, incumbent industries may be hesitant to make cannabis-related investments as long as the federal regulatory landscape is challenging, she said.

Still, intellectual property lawyers are advising companies to keep the cannabis patents coming. As consolidation continues and involves other sectors, companies without IP will be left “out of the gate for an exit strategy,” Zuber Lawler & Del Duca LLP’s Holzworth said.

That’s not to say everyone will be interested. Wrigley “is not considering investments in cannabis-related businesses at this time,” a spokeswoman said.

Axim, though, will likely have other options. It’s already in talks with Canadian manufacturers who may view its gum-related patent as the key to millions of sales.

“You can’t really light up a vape or joint on an airplane, but you can take a chewing gum and be happy in two minutes,” Huemoeller said.

To contact the reporter on this story: Malathi Nayak in Washington at mnayak@bloomberglaw.com

To contact the editors responsible for this story: Melissa B. Robinson at mrobinson@bloomberglaw.com; Keith Perine at kperine@bloomberglaw.com