Capital Markets for Infused Products & Extracts Companies
Companies whose primary operations are in the infused products and extracts sector make up the largest sector of the cannabis industry, currently representing about 15% of publicly traded cannabis companies.
The publicly traded infused products and extracts company with the highest market cap is Golden Leaf Holdings Ltd. (CSE: GLH), which had a market cap of C$52.66 million (approx. US$38.18 million) as of market close on December 16, 2015.
Cannabis processors and infused product manufacturers use a variety of methods to extract cannabinoids from raw flower. These are usually processes where the raw cannabis flower is placed in a solvent which then extracts the cannabinoids from the plant material. These solvents include using alcohols (typically isopropyl or ethyl), water, butter, cooking oils (coconut, olive, canola, etc.), ether, carbon dioxide, and hydrocarbons (typically butane or propane). While all of these methods are feasible for cannabinoid extractions, cannabis processors typically utilize butter, cooking oils, hydrocarbons, or carbon dioxide (the latter two of which have been used in the food and fragrance industries).
Butter or Cooking Oil Extraction
The butter and cooking oil method of extraction was most utilized method prior to the industrialization of the cannabis industry that brought more advanced methods such as hydrocarbon and supercritical carbon dioxide extractions to the market. This method involves submerging and heating cannabis flower in butter or oils as to allow the lipophilic compounds in the plant to dissolve out into the fats in the butter or oil. Butter and oils typically create larger amounts of finished product that contains lower concentrations of cannabinoids due to the large amount of solvent used. This method of extraction only makes up a small segment of the cannabis industry, and is typically utilized by smaller manufacturers.
Hydrocarbon extraction involves the introduction of hydrocarbons to raw cannabis flower (typically in an isolated and/or pressurized environment) in order to dissolve the cannabinoids into the hydrocarbon solvent. The resulting mixture must then be “purged”, whereby the hydrocarbons are removed through a vacuum or heating process in order to refine the mixture into a more purified cannabinoid concentrate. Hydrocarbon extractions yield far less weight than butter or oil concentrates but at much higher cannabinoid concentrations. Many hydrocarbon extracts contain cannabinoid levels of 70% or more by weight. One main difference to butter or oil extractions is that, if hydrocarbon concentrates are going to be utilized in consumables, the extract must be heated as to activate the cannabinoids within through decarboxylation. The heating element in butter or oil extractions takes care of this step. Smoking or vaping also decarboxylates the cannabinoids, so hydrocarbon extractions sold for those purposes do not need to be activated.
Carbon Dioxide Extraction
Carbon dioxide extraction methods are the most advanced in the industry and are becoming favored amongst cannabis processors and extractors. In these applications, carbon dioxide is introduced to cannabis flower, typically at very high (supercritical) pressures in order to pull the cannabinoids out of the plant material. These methods are very similar to hydrocarbon extractions. However, carbon dioxide extractions are more favored in that they do not involve combustible or toxic solvents, resulting in a safer concentrate. Carbon dioxide extractions typically need to be refined in order to remove some of the plant waxes that typically remain after the initial process. Carbon dioxide extractions are similar to hydrocarbon extractions in their resulting cannabinoid concentration levels and their need to be activated through decarboxylation if meant for consumables.
Types of Infused Products
Cannabis consumption methods have begun to trend away from the traditional method of smoking towards consumption through various types of infused products. Many of these infused products take advantage of cannabinoids’ lipophilic nature to bind the activated chemicals into oils or other fats for application or ingestion.
Concentrates are created by extracting the constituent cannabinoids from the cannabis plant in order to separate out the active ingredients from the non-active plant matter. When cannabis is consumed as a raw flower, the combustion of the plant burns the plant matter while vaporizing the cannabinoids inside in order to get the desired effects. Concentrates create a more powerful consumable by first extracting the cannabinoids, allowing the user to inhale a purer vapor that eliminates much of the health risks that come with traditional smoking.
Foods and Beverages
Cannabis infused edibles and beverages are quickly becoming more popular methods of consumption. Not only are they easier to use and less conspicuous in public places, but they provide access to cannabinoids to those that are not keen on smoking or who are not able to smoke (those with lung problems, for example). Edibles come in all types, including gummies, pastries, confectionaries, barbeque sauces, etc. Many different types of beverages, including coffee, tea, sodas, juices, and even energy drinks are also being infused with cannabis. In order to take advantage of the rise of popularity in edibles, many cookbooks have been published to guide consumers on how to make their own cannabis infused treats and foods.
Tinctures are liquid cannabis extracts, typically utilizing alcohol solvents, that allow a quick delivery of cannabinoids. A user can apply a few drops of a tincture under their touch, where it is quickly absorbed by the body (as opposed to other beverages that are absorbed through the gastrointestinal tract after ingestion). While tinctures are more rapidly absorbed than edibles or beverages, they still need to be processed by the liver, leading to more difficult dosage control.
Several companies have released oils that are enclosed in capsules for easy ingestion. Instead of eating an entire brownie or drinking a soda, consumers can simply take a pill containing cannabinoids as they would any other vitamin or supplement. Many of the oils contained in these capsules are alcohol extracts in which the alcohol has been evaporated to leave behind a more viscous mixture that will remain in the capsule.
Transdermal applications are a segment of the infused product industry that has combined cannabinoids with various products from the health and beauty industries. Topical delivery methods include lotions and oils that are infused with cannabinoids that can be placed on the body for absorption through the skin. These applications take advantage of the lipid contents of many beauty products to create products that maintain their original functions (i.e. skin miniaturization for lotions) while adding the benefits of cannabinoids, all while avoiding the high associated with THC. These products are becoming more popular with consumers looking to take advantage of cannabinoids’ anti-inflammatory and pain reducing effects.
Infused Product Pricing
The competitive nature of the retail marijuana industry has led to pricing dynamics that have moved in order to offer the best value with regard to the active ingredients contained (dollars per milligram of THC/CBD) and how that effects the body. The Marijuana Enforcement Division (MED) of Colorado completed a study whereby they investigated the prices of infused products compared to raw flower. In Colorado, raw flower contained an average THC content of approximately 17%. Coupling this average concentration with prices at various weights enabled the MED to compare prices based on the amount of high that the user would receive.
When cannabis flower is smoked, the lungs rapidly absorb cannabinoids from the smoke or vapor, leading to an immediate surge of cannabinoids in the bloodstream. This sudden rush triggers the body to begin filtering cannabinoids from the blood, albeit at a faster rate than the cannabinoids can cross the blood-brain barrier to induce their effects.
When cannabinoids are consumed, the uptake into the bloodstream is much slower, as is the body’s response. This allows approximately three times (3x) the amount of cannabinoids to cross the blood-brain barrier to induce their effects, making edibles about 3x more effective in their applications of cannabinoids.
The following table details the relative price (in cents per milligram of THC) for various cannabis products at Colorado retail dispensaries:
The important figures, labeled “Price Ratio: (per 1g of Ghost OG)”, are in the bottom-right of the table. These represent the relative price ratios between the edible and concentrate products in their row compared to raw cannabis flower (in this case, the strain Ghost OG). As you can see, the ratios of prices for edibles compared to raw flower center around 3.00, the same as the ratio of edibles to raw flower in terms of efficiency in delivering their effects. Concentrates are close to 1.00 as their effects are very similar to raw cannabis, while vape cartridges are higher due to higher costs in production.
All U.S. States that have legalized medical marijuana impose a range of requirements on the entities wishing to become licensed operators including obtaining a license from state governmental authorities. Infused product companies’ business models differ depending the residency requirements of the applicable jurisdiction. Most U.S. States that have legalized marijuana for medical or recreational use require licensed operators to hold a license issued by the applicable state authorities. In some states, for a licensed operator to be eligible to be granted a license, the owners of the licensed operator must be residents of such U.S. state. As such, listed companies or other widely held enterprises are ineligible to obtain a license in those states where a licensed operator must be a U.S. state resident. The State of Colorado imposes a residency requirement for licensed operators and their individual owners. Other states (such as Nevada, Illinois and Arizona) do not impose a residency requirement.
In U.S. States with residency requirements, companies generally work with companies or other entities that have a valid license issued by the applicable U.S. state authorities to provide an array of services as a part of its "franchise-like" model, or will work with eligible persons applying for such license. These companies develop a business model where it is undertaking a combination of the following functions with the expectation of realizing the following respective revenue streams from such activities.
- Acquire and develop recipes, know-how and other intellectual property for the preparation of marijuana-infused products and marijuana concentrates, for use by royalty producers entering into royalty agreements;
- Develop recognizable brands for marijuana-infused products and marijuana concentrates for use by royalty producers entering into royalty agreements;
- rovide consulting services with respect to extraction processes, techniques, training, and know-how relating to marijuana concentrates;
- Provide financial and strategic support to licensed operators in securing supply of marijuana.
In the U.S. States without residency requirements, companies either choose to apply for a license or acquire entities with a license and produce products itself, or work with other licensed operators using the same model for U.S. States with a residency requirement. the licensed operators include growers of marijuana, marijuana-infused product manufacturers, and retail dispensaries.
Due to U.S. federal regulations, companies need to evaluate each U.S. state in which the they choose to operate as a separate market and with a distinct business plan. Given market fragmentation due to the various U.S. state regulatory regimes, these infused extract products are currently manufactured in micro-factories for distribution only in the U.S. state where the micro-factory is situated.
The Vital Importance of Brands
While brands help differentiate products in the market place and aid consumers in categorizing their purchases, their real purpose is to increase sales and, subsequently, profits. This is primarily achieved through brand loyalty that leads to enhanced customer awareness and retention. Customers who are loyal to a brand believe their brand offers better service and quality than its competitors. These preferences are largely independent of pricing, meaning these customers are more likely to purchase products from their favorite brands even if they are priced at a premium.
The attractiveness of a brand to its consumer base and the ability to control market share with premium pricing creates tremendous value. Millward Brown, a market-research company, estimates that brands account for more than 30% of the stock market value of the S&P 500 index. In other words, the brand equity of the 500 largest companies (based on market cap) that trade on the NYSE and NASDAQ exchanges amounts to nearly $5.9 trillion.
The Diageo Family of Brands
The power of brands is evident in industries similar to that of cannabis. For example, the alcohol industry thrives off of brand recognition. When entering into a liquor store, people do not research the best tasting product and weigh that against its cost to make their choice. People go straight for the brands they know are quality, even if there is a superior, albeit lesser-known, choice available. Brands like Jack Daniels, Maker’s Mark, Stolichnaya, and Captain Morgan have dominated their respective product categories because of their extensive brand recognition. The wine industry tells a similar story. Certain vineyards have developed a reputation for producing high-quality vintages that command a premium price in the marketplace. These are often sought-after and well-regarded offerings that buyers are proud to display and consume.
The pharmaceutical industry is another prime example. Consumers repeatedly purchase name-brand drugs such as Bayer aspirin, Tylenol acetaminophen, and Benadryl diphenhydramine even though the generic drugs are equivalent in effect and much cheaper. These brands have developed themselves into household names that engender thoughts of consistency in quality for which consumers are happy to pay.
When cannabis culture remained largely underground, the branding of the industry revolved around common signs such as the colors of Jamaica and the stereotypes surrounding the infamous “stoner” characters Cheech and Chong. As the marijuana industry has become more mainstream in the past few years with legislation favoring legalization and decriminalization, there has come a need for a change in perception. Cannabis has moved from its hippie and stoner origins towards a viable and institutional industry with the need for professional brands that patients and consumers trust.
Similarly to the strategies of other large branding conglomerates such as Diageo, Constellation, and PepsiCo, companies in the cannabis industry have started developing a broad portfolio of brands to differentiate revenue sources, enhance brand awareness and penetration, and capture significant market share. These brands, whether grown organically or through acquisition, are developed and marketed to add value to these companies’ overall families of brands and further the companies’ strategic positions in the marijuana industry.
Leafs by Snoop, Snoop Dogg’s Cannabis Brand
In addition to building portfolios of differentiated brands, the industry is witnessing a trend towards celebrity endorsements and licensing agreements which offer the companies rights to manufacture and distribute celebrity branded marijuana related consumer products, including but not limited to vaporizers, apparel, and marijuana and hemp oil-infused products, such as chocolates, gummy bears, hard candies, and health/energy drinkable products, with in the United States and Canada. By utilizing celebrity brands, infused product and extracts companies are able to leverage the brand’s association with cannabis and its national reach to begin to create a nationally recognized cannabis brand. With the industry’s restrictions on interstate commerce, it has created an environment where there is no simple solution to building a national brand. Companies that can partner with a personality or brand that already has a national reach, such as Nutritional High with Jimi Hendrix, Fast Financial with Tommy Chong, or Privateer with the Marley Family, will be best positioned to establish itself as a nationally recognized company and leverage that recognition to be able to capture market share in new regulated cannabis markets.
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