Health Canada Standard Processing License Provides Advantage for Cannabis Extraction and Vertical Integration

New regulations in Canada’s legal cannabis market include shifts in the licensing landscape that have brought about new licenses, like the Health Canada Standard Processing License.

Canada’s cannabis legislation under the Cannabis Act is ushering in a new era of growth in an already booming market, opening up a broad range of cannabis product categories from natural health products, fortified foods and beverages to cosmetics, household and pet products.

The new legislation also brings a host of changes to the licensing system under Health Canada’s Access to Cannabis for Medical Purposes Regulations (ACMPR) and Narcotic Control Regulations. But what will remain is the many advantages of the licensed processors in the cannabis marketplace.

Under the previous framework, the two most important licenses for cannabis companies were the producer’s license and dealer’s license. Becoming a licensed dealer bestows many advantages on cannabis companies over licensed producers (LPs). LPs can grow cannabis, but when it comes to cannabis products outside of dried flower, they are limited to formulations with only carrier oils; they cannot use additives involved in the manufacture of edibles, pharmaceuticals, nutraceuticals or natural health products.

The Cannabis Regulations under the Cannabis Act that came into effect October 17, 2018, requires that licensed producers will transition to cultivation license classifications and licensed dealers will migrate into the new regulatory framework as licensed standard processors while still retaining clear advantages over their peers in the industry.

With a standard processing license, a cannabis company can expand the scope of their business model by pursuing a number of cannabis-related activities that are not sanctioned under the cultivator’s license; including manufacturing, extraction, formulation and distribution of cannabinoids, packaging, laboratory testing, university-level research and development (R&D), as well as importing and exporting.

Cannabis companies with standard processing licenses will have the ability to grow their market reach in the pharmaceutical industry as well as the rapidly growing natural health product and nutraceutical industries — revenue generating avenues which are closed to cannabis cultivators. This market advantage is especially strong in the increasingly important realms of cannabis R&D, testing and analytics, the extracts market and the emerging international cannabis markets.

In these ways, the standard processing license allows cannabis companies to become fully vertical, bringing production and processing in-house. This improves quality control, lowers production costs, and ultimately enhances a company’s profitability. By vertically-integrating its operations, a company is able to more quickly address the rapidly evolving cannabinoid extract markets to develop and launch new consumer products, diversifying its product portfolio. Thus, being granted a standard processing license in Canada is an especially important milestone.

Integrating cannabis R&D and analytical testing silos

R&D capabilities will be a key differentiator in the cannabis industry and securing a standard processing license is an important step in this direction. Licensed companies are able to perform exploratory trials to refine products, develop innovative formulas and test new products for a wider market. Licensed standard processors can also perform all the activities outlined above as services under contract to other cannabis companies — which represents a huge revenue generating opportunity in the global cannabis market.

The demand for analytical testing services in the cannabis industry is on a steep upward trend. The global market for cannabis product testing alone, according to Coherent Market Insights, is expected to grow at an annual rate of 13.2 percent to reach $1.5 billion by 2026. Licensed cultivators around the world are seeking to better understand the pharmacology and therapeutic potential of varying cannabis strains and products. Companies that can perform these services are looking at an excellent avenue for generating further revenue in the global cannabis market.

“The efforts of today’s licensed dealers [now licensed standard processors] are helping to solve some of the core scientific and medicinal issues the industry is facing from regulators, medical professionals and the general public,” writes Samuel Bouabane, Cannabis Strategic Licensing Manager at Cannabis Compliance Inc. “Through clinical trials, product formulation, packaging and stability studies, licensed dealers are able to address product shelf life concerns, determine standard dosages, and help shed light on the overall safety and therapeutic efficacy of cannabis.”

Cannabis Compliance Inc. is helping a number of cannabis companies in their application process, including Naturally Splendid Enterprises (TSXV:NSP), which has developed a growing portfolio of hemp-based cannabis products including bulk, branded, and white-label targeting the fortified foods, pet products, cosmetics and nutraceutical markets. In addition to its network of 2,000 retail distribution points in North America, the company has been actively building an international presence in the US, Europe and Australia.

Through strategic acquisitions and partnerships, the company has achieved a significant level of vertical integration that includes industrial hemp processing, R&D, product development as well as packaging and distribution. Naturally Splendid intends to deepen that vertical integration by including cannabinoid extraction and formulation to its business model. Hence its submission of a dealer’s license application to Health Canada in July 2018. The company is now working with Cannabis Compliance Inc. to transition that application to a standard processing license.

Health Canada standard processing license and the CBD extract market

The cannabis extracts market, particularly for cannabidiol (CBD), is one of the fastest growing segments of the global cannabis market. CBD is believed to reduce chronic pain and inflammation. Research is underway to discover the effectiveness in treating a broad range of illnesses including epilepsy, anxiety and post-traumatic stress disorder. Extracts are products derived from cannabis buds that contain higher concentrations of active cannabinoids than the unprocessed flower.

Today’s consumers want the benefits cannabis can bring to their health and wellbeing while avoiding the negative health impacts of smoking cannabis. Extracts also provide more discreet consumption and allow medical practitioners to better control proper dosing for patients. The total market for CBD extracts is expected to grow to $2.1 billion by 2020.

In Canada, cannabis oil sales in the first three months of 2018 outpaced those of dried flower by 56 percent. In terms of year-over-year (YOY) growth, cannabis extracts sales increased 82 percent over the same period in 2017 compared to 13 percent in YOY performance for dried flower.

Industry shaking changes to hemp-based CBD regulations

Hemp has been especially popular with extract producers because the plant’s miniscule amount of THC has made it ideal for use in a tightly regulated CBD oil market and the lower costs associated with growing hemp versus cannabis. Hemp-based CBD products are in high demand in international markets where THC levels are highly controlled. Global sales for consumer hemp products reached $688 million globally in 2016, and the market for hemp-derived CBD products is expected to have a 22-percent compound annual growth rate over the next five years.

In Canada, hemp-based CBD companies are set to benefit further from an August 2018 amendment to regulations under the Controlled Drugs and Substance Act pertaining to the extraction of CBD from industrial hemp. Under the amendment, companies with a dealer’s license (standard processing license after October 17, 2018) can now use the whole hemp plant for commercial purposes. The Cannabis Act also allows for whole hemp plant use and legalizes the extraction of CBD from hemp. The August 10 amendment to the previous regulations gives companies a head start on research and product development, creating a faster path to commercialization for new hemp-based CBD products.

Takeaway

The Cannabis Act has brought significant changes to Canada’s legal cannabis market. What won’t change is the business development and revenue generation benefits of the dealer’s license under the previous framework. With the standard processing license, cannabis companies will still have a smooth path toward full vertical integration across the most lucrative of the market segments, from R&D and analytical testing to CBD extracts and other value-added products.

This INNspired article is sponsored by Naturally Splendid (TSXV:NSP). This article was written according to INN editorial standards to educate investors.