As the Canadian cannabis market opens its doors to novelty infused items, cannabis extraction companies are set to exponentially increase their business in the country.
LEGALIZATION 2.0 COVERAGE
One year after Canada completed the federal legalization of recreational marijuana, the nation will now open its market to novelty products infused with the drug. This includes edibles such as cookies and gummies, as well as cannabis beverages, which will be introduced to the market in an attempt by legal producers to tap into a replacement product for alcohol.
As such, on the eve of the launch of this second phase of the marijuana market in Canada, the Investing News Network brings investors a collection of stories and interviews on the impact this opening will have.
Canada’s cannabis sector has been the focus for some investors as its growth continues, but one component has been of particular recent interest: extracts.
Cannabis extracts are at the foundation of a variety of cannabidiol (CBD) and tetrahydrocannabinol (THC) products that allow consumers to ingest cannabis rather than inhale it.
Marijuana businesses in Canada have begun to bulk up their extraction operations in anticipation of the second round of cannabis legalization — the so-called Cannabis 2.0 — that allows companies to produce and sell edible cannabis products.
The introduction of novelty products like chocolates, gummies, vaporizers and beverages has put the spotlight firmly on the extraction process and the companies that have made a name for themselves within the space.
Industry experts have noted that increases in intellectual property when it comes to extraction will be one of the metrics that will set some companies apart from others.
Here, the Investing News Network (INN) looks at the highly technical process and some of the top stocks in the Canadian cannabis extraction arena.
The ins and outs of cannabis extraction
While novel means of drawing out CBD and THC are currently being developed, a few methods have been established as industry standards.
There’s alcohol extraction, also known as ethanol extraction, which involves cycling a hot alcohol solvent over cannabis flower, stripping it of its terpenes and cannabinoids. This process can sometimes muddy the extract with excess chlorophyll and plant waxes, which is solved by using a cold or room temperature alcohol solvent.
For products like oral cannabis tinctures and vape oils, companies tend to use the hydrocarbon extraction method, which can pull out a wider variety of terpenes than using the alcohol-based method.
A butane or propane solvent — both have low boiling points — is used similarly to alcohol extraction and washed over the cannabis plant to extract the oils. After using a vacuum evaporation process that removes the butane solvent, butane hash oil is left over.
Another extraction method is supercritical CO2 extraction. Though the technology has been around for decades to process products like vanilla and tea, this form of extraction is a relative newcomer in the cannabis industry.
In short, it uses pressure and temperature control equipment to turn CO2 gas into a “supercritical fluid,” which is created when a substance is at a temperature and pressure above its critical point, where distinct liquid and gas characteristics don’t exist.
When a supercritical fluid is passed over cannabis, plant waxes and oils can be easily drawn from the plant. Since this method requires advanced equipment, it has the highest upfront costs of the three processes.
The latest Canadian cannabis extraction information
The extraction sector is expected to boost Canada’s overall cannabis industry, operating in tandem with licensed producers (LPs).
Since cannabis extracts and distillates are at the base of food and beverage products, analysts and industry experts have been bullish on companies that have gained notoriety as holding leading extraction capabilities.
“As we know, this industry has seen a lot of capital flow into growing plants and building cultivation capacity, but what we haven’t seen in Canada (is) the same level of investment, not even close on the manufacturing side,” Paul Pedersen, co-founder and CEO of NextLeaf Solutions (CSE:OILS,OTCQB:OILFF), said during a panel at the recent MJBizConINTL event in Toronto.
Beau Whitney, an economist with cannabis research firm New Frontier Data, told the Financial Post, “Cannabis extraction is a huge growth opportunity in Canada.”
He added the demand for oil has surged recently in the US and that development could be mirrored in the Canadian market.
A report from Deloitte put the value of Canada’s edibles market alone at C$1.6 billion a year, and Grand View Research projects the global cannabis extract market could reach US$23.7 billion by 2025, offering investors an attractive path into cannabis.
Top Canadian cannabis extraction stocks for investors
The bulk of Canada’s cannabis landscape was originally full of LPs looking to cash in on cannabis cultivation.
Now that there’s more cannabis plant in the market, some firms have made extraction their main focus — and have seen success because of it.
Valens touts the use of five different extraction methods, including the ones mentioned earlier, with an annual capacity of 425,000 kilograms of dried cannabis and hemp biomass at its facility in Kelowna, BC.
In September, the firm signed on as the first third-party cannabis processor to supply Canadian pharmacy chain Shoppers Drug Mart, a Loblaw Companies (TSX:L) division, with cannabis oil-based items including gel caps and tinctures for its online medical cannabis site.
The company has also moved into the cannabis-infused beverage space — a sector Deloitte thinks could be worth C$529 million a year in Canada.
Valens teamed up with the cannabis division of Iconic Brewing to provide the alcohol maker with extraction, formulation services and its emulsion proprietary technology SōRSE, which turns cannabis oil into a water-soluble solution.
Valens is joined by MediPharm Labs (TSX:LABS,OTCQX:MEDIF) in the extraction arena. The Ontario-based producer put up some impressive numbers for its 2019 Q2, reporting revenues of C$31.5 million, a 43 percent increase over Q1, with gross profit of C$11.3 million and adjusted earnings before interest, tax, depreciation and amortization of C$7.7 million.
September was a busy month for MediPharm, as well. The firm signed an agreement with a subsidiary of TerrAscend (CSE:TER,OTCQX:TRSSF) to supply the fellow cannabis company with approximately C$27 million in high-quality cannabis distillate until 2022, bringing in a potential C$192 million.
MediPharm’s list of recent deals in the space also includes cannabis heavyweight Cronos Group (NASDAQ:CRON,TSX:CRON). MediPharm will fill and package vaporizer devices with formulated cannabis concentrate for Cronos’ adult-use brand COVE.
There’s also the Quebec-based Neptune Wellness Solutions (NASDAQ:NEPT,TSX:NEPT). The company is working towards 1.5 million kilograms of extraction capacity through the use of a new facility. It currently works out of a 50,000 square foot facility in its home province.
In October, Neptune completed its Phase 2 expansion, which promises an annual run rate of 200,000 kilograms of cannabis extraction by the end of November.
Former Canopy Growth (NYSE:CGC,TSX:WEED) CEO Bruce Linton said extraction in Canada is something investors should consider, especially as companies make moves to increase their extract output to support edible production.
Linton said he tracks the extraction developments of @Neptune_corp and @MediPharmLabs — developments that will become increasingly important as Canada moves into cannabis edible legalization this week. #cannabisnews#marijuananews
— Cannabis News | INN (@INN_Cannabis) October 15, 2019
Though the extraction space in Canada has grown, in Linton’s estimation, there’s still a “shortfall of skill” in the country. He added that, while large cannabis companies are vertically integrated and currently have extraction facilities as the sector matures, the process of drawing out cannabis oils and terpenes will be outsourced to third parties.
The current extraction landscape in Canada is still young but it will continue to grow in importance as edible products are folded into the daily lives of consumers, meaning investors may want to take note of companies that are currently doubling down on their extraction capacity.
Want more details? Check out these articles for more INNdepth coverage.
- A CBD Investment Guide
- Cannabis Players Push CBD-infused Products into Cosmetics Sector
- Cannabis Extraction Execs Share Metrics for the Sector
Want an overview of investing in cannabis stocks? Check Investing in the Cannabis Industry
Don’t forget to follow us @INN_Cannabis for real-time news updates!
Securities Disclosure: I, Danielle Edwards, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Valens GroWorks, MediPharm Labs and NextLeaf Solutions are clients of the Investing News Network. This article is not paid-for content.