Cannabis Extraction Market Growth Creates a Strong Investment Opportunity

Cannabis extracts: The basics

So, what is a cannabis extract? It is a type of cannabis concentrate that can be used in a wide variety of cannabis products, such as high-margin premium products like oils and edibles, which helps create a strong market for these concentrates. Although there is a a great demand for all cannabinoid products, the next great race is the arrival of rare cannabinoid production.

The global cannabis market is still growing rapidly, including the market for cannabis extracts. However, it is difficult to access this expanding market. Restrictive licensing requirements, the necessary specialized equipment and varying legal statuses around the world make entering the cannabis extract market more difficult than many other industries.

Companies that are already establishing themselves in the cannabis extract market are set to shape the future of the industry. Hempsana (CSE:HMPS), for example, specializes in cannabis extracts and is already forming relationships with distributors throughout Canada. Additionally, Hempsana is already EU-GMP and GPP-compliant, which allows the company to access markets beyond its country of origin.

Why cannabis extract licenses are key to assessing a company’s growth

As mentioned above, market access is heavily restricted by the strict licensing requirements put in place for producing cannabis extracts. A new company must adhere to these requirements if they wish to enter this fast-growing market. Additionally, companies that wish to grow beyond their country of origin must consider the licensing requirements in other countries.

It’s no secret the extract market continues to play an important role in the cannabis sector, providing the essential cannabis byproduct needed to produce some of the most popular products on the market. Initial data shows the most popular cannabis products include beverages, capsules, edibles and concentrates — all of which use cannabis distillate that’s derived from the extraction process.

But the extensive list of licensing requirements, combined with the long processing times, presents a significant hurdle for any company looking to enter this space. This is why early movers in the industry find themselves in such an advantageous position. It’s also why some of the biggest licensed producers are turning to mergers and acquisitions (M&A) to expedite time to market. For example, Ascend Wellness Holdings (CSE:AAWH.U) acquired the majority of MedMen Enterprises’ (CSE:MMEN) New York licenses. Tilray (NASDAQ:TLRY), one of the biggest Canadian licensed producers, followed suit when it recently acquired a majority position in MedMen to gain a foothold in the US.

This means that existing companies that have the necessary extract licenses in place should be poised to grow alongside the cannabis market. One quick look at the M&A-based strategy being used by some of the biggest industry players shows just how valuable these licenses will be when larger markets come online. Being licensed ahead of time will ensure these companies meet the necessary regulatory requirements and have the infrastructure needed to accelerate their time to market.

Extraction licensing requirements by country

Cannabis extraction licensing requirements differ based on country, individual states and larger governmental bodies like the European Union.

Canada

Cannabis was legalized in Canada in 2018 under the Cannabis Act. Canada categorizes cannabis extracts as cannabis products — a category encompassing everything other than the plant itself. This means that a company that wishes to produce cannabis extracts at a large scale requires a standard processing license. Carrying this license enables a company to possess, distribute and process cannabis extracts.

In order to obtain a cannabis extract license, a prospective company must submit a comprehensive application to Health Canada, who will carefully review it. Section 6 of the application for cannabis cultivation document showcases the intense requirements for being granted a license. The company must also abide by good production practices (GPP) as dictated by Health Canada.

Among these requirements include a complete breakdown of the future facility, a notice to local authorities, documented physical security and documented GPP. Companies that wish to produce cannabis extracts must also prove that they are using proper safety measures and storage practices for any potentially hazardous substances.

European Union

Any company wishing to do business in the European Union should ensure that their facility is fully EU-GMP-compliant. This set of practices dictates the production, handling, storage and packaging of cannabis. Even though this standard is specific to the EU, it has quickly been adopted around the world and is considered required to operate globally.

Navigating the licensing requirements for the European Union is extremely complex as each country has its own legal requirements for producing and processing cannabis. At present, there is no common regulatory pathway for companies in the United States and Canada to export products to the European Union. Instead, companies must work with the laws of each individual country.

The definition of “medical cannabis” is not even fully agreed upon throughout the European Union. However, some countries, such as Poland, Portugal and the Netherlands, have defined the term for themselves and have legalized medical cannabis. Companies that wish to do business in these countries can follow their individual regulations for producing or importing cannabis projects. Cannabis legalization is beginning to spread throughout the European Union, creating immense opportunity.

Companies that wish to do business in the European Union will need to dive into the regulations of the individual country that they wish to operate within. This creates an extremely restrictive and complex process, but companies that navigate these requirements will be poised to do well in the market within each country.

United States

Cannabis is currently illegal at the federal level in the US, but is legal at the state level in 18 states throughout the country as of January 2022. Every state has put different regulations in place for cannabis cultivation and processing. Unfortunately, due to federal law, cannabis cannot be transported across state lines. This means that every company must obtain licensing and establish their infrastructure in each state that they wish to operate within.

US cannabis concentrate sales increased by 40 percent in 2020 compared to the previous year. This trend indicates the growing need for quality cannabis processors. However, companies must still meet the licensing requirements of each individual state if they wish to capitalize on this growing market.

Major players in the cannabis extraction market

Companies that have already established themselves in the cannabis extract market are poised to capitalize on new markets that open up as the global push for legal cannabis continues. There are already several major players in the cannabis extract industry that represent a strong investment opportunity.

MediPharm Labs (OTCQX:MEDIF) has been in operation since 2015 and focuses on cannabis extracts. They have a 70,000 square foot facility that allows them to produce approximately 300,000 kilograms per year. MediPharm Labs has a strong presence throughout Canada, and in 2019 the company expanded to Australia.

Hempsana positions itself as a fully licensed cannabis extraction company; it currently operates a EU-GMP compliant facility that will grant it access to countries throughout the EU, Asia, the US, Canada and South America. In addition to selling cannabis extracts to distributors, the company also offers a white label service to assist other companies that wish to sell branded extracts, as well as extraction as a service, which creates an additional revenue stream in the highly sought after extraction market. On top of that, Hempsana’s rare cannabinoid production capability positions it as the biggest provider of cannabigerol (CBG) in the Canadian market.

The Valens Company (TSX:VLNS), previously known as Valens GroWorks, is considered one of the biggest cannabis extraction companies in the world. The company makes use of different technologies to produce a variety of extracts that can be sold to distributors around the world.

The takeaway

Restrictive licensing makes entering the cannabis extraction industry extremely difficult for new players. It also requires significant startup capital and navigating months to years of bureaucratic requirements to even compete. Conversely, companies that are already operating will be ready to offer their products to new territories as they open up. The recent wave of M&A activity in the cannabis sector shows how valuable these licenses are. Operating extractors provide investors looking to capitalize on the global push for the legalization of cannabis with a strong investment opportunity.

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