Current Trends in Vaping. Vape-Gate had a clear negative impact on cannabis vapor sales in September, though overall category sales were broadly immune, as a migration from vape resulted in substitution with flower and edibles. Declines have abated in October, which is encouraging. As well, trusted brands seem to be benefiting from consumer scrutiny of the category, resulting in share gains.
Global Cannabis. With eight companies participating across two global cannabis panels, we got perspective on the cannabis opportunity around the world. In Canada, a slow category ramp (in particular in terms of physical distribution) has weighed on category development. In addition, price competition from the illicit market has hampered consumers’ transition into the legal channel. To address this, several LPs are introducing value-priced offerings. In Europe, management teams were broadly constructive around the medical cannabis opportunity, though it has developed more slowly than hoped. Meanwhile, market development continues to progress in Latin America, which looks to be an attractive, low-cost source of global supply, over time.
U.S. Cannabis. With five MSOs and six U.S.-focused cannabis brands, our two U.S.-focused panels featured a robust debate around the relative benefits of vertical integration. For the MSOs, vertical integration allows for better gross margins, and the potential for national brand building, by leveraging their extensive distribution network. Meanwhile, from a brand perspective, the more focused approach allows for more nuanced innovation, and targeted geographic efforts in building brand equity.
Key Opinion Leaders on Cannabinoids. The KOL panel consisted of three well-known professors from active academic research labs who specialize in the underlying mechanism of actions of cannabinoids in human physiology. The KOLs shed light and their current thoughts on the interplay between the endocannabinoid receptors CB1 & CB2, and potentially novel, little-understood cannabinoid receptors beyond those. Healthy discussions also included the quality of clinical data in trials featuring cannabinoid-based therapies, with a spotlight put in the failed trials of Sativex, as well as the worth of conducting highly targeted cannabinoid therapeutics in specific indications versus general, lifestyle improvement seeking approaches.
Clinical Research in Cannabinoids. The Clinical Research in Cannabinoids panel consisted of five panelists representing international LP and biotechs, each vying for their own place in medical cannabis therapeutics. The companies differed in their regulatory strategies but uniformly concurred that the FDA has become noticeably more “relaxed” and generally less skeptical about medical cannabis trials. However, healthy debates ensued over the merits of “evidence based” data, versus exclusively data driven results; the value of ex-U.S. derived clinical data; and the areas of clinical research in cannabinoids that provide the most promise in the years to come.
Keynote – James Cole. Cannabis legalization is inevitable but it will take several years for Washington to catch up with the states. That was the key takeaway when former Deputy Attorney General Jim Cole spoke at Cowen’s cannabis conference. Cole wrote the memo that bears his name because states needed guidance as they were legalizing cannabis. He now argues that legislation is needed as administrative actions are not permanent enough to provide the certainty the industry needs. Cannabis industry needs to more fully develop plans to combat use by minors and drugged driving or risk a political backlash.
CBD. Our two CBD panels were comprised of nine companies exposed to CBD across the supply chain. Since the passage of the 2018 Farm Bill, CBD continues to gain momentum, which has been evidenced by increases in consumer incidence. While there is little doubt around the growth prospects and overall optimism from a consumer perspective, the category has been somewhat hampered by a regulatory overhang from the FDA, which has resulted in a slow and measured rollout by food, drug and mass retailers who typically only carry non-ingestible form factors. More clarity around permissibility from the FDA has the potential to allow larger big box retailers to enter the category and also carry ingestible form factors (tinctures, gummies, capsules, beverages, etc), which continue to resonate with consumers.
Biosynthesis. The Biosynthesis panel consisted of scientific executives from several leading companies focused on the manufacturing of synthetically-derived cannabinoids (both chemically and biosynthetically), including Demetrix, InMed, Lavvan, Purisys, Teewinot and Willow. Biosynthetic approaches offer an attractive alternative to traditional extraction from plants and could potentially circumvent the problem of impurities, energy consumption, variability, stereo-isomerism, and environmental issues. The view that cannabinoids can be synthesized using yeast or bacterial fermentation, enzymatic conversion and chemical synthesis opens up a whole new strategy for cost effective production.
QA/QC. QA/QC in the cannabis market is still in the early stages and far less developed relative to the use of similar tools and services in other regulated industries, such as pharmaceuticals. However, our panelists believe that the quality of QA/QC is improving due to increasingly standardized and improving regulation – companies are playing an important role in advancing these standards. Facilities that offer high quality testing are growing and should be rampant in the future that will eventually raise cannabis QA/QC standards to mirror more mature and regulated industries. We see some Tools providers like PerkinElmer offering bespoke instrumentation and support for cannabis QA/QC testing. While it early to confidently quantify the market opportunity, there are at least 200 labs who are potential/existing customers of testing instruments and it is only expected to grow in the future as more states legalize cannabis.
Payments. The payments and banking landscape for cannabis in the US remains fluid – with lack of access to traditional banking offerings (bank accounts, etc.) and electronic payments. Panel participants expressed optimism that the potential passage of the SAFE ACT (possibly in 2020) could help open more banking services to the industry. However a change in network rules (V and MA rules) is unlikely so long as cannabis remains a controlled substance at the federal level. Panel participants see a greater near-term opportunity for community based banks to service the industry relative to large mega-banks.
Cannabis Investing. Our panel of cannabis investors offered a broad perspective on the geographic opportunities in cannabis, as well as relative value throughout the supply chain. Our panelists were generally more constructive around opportunities outside of Canada, with a bias towards plant-touching businesses. Given the turmoil in the marketplace today, evaluating current and potential risks, like vaping, was quite topical.
Extraction. Our extraction panel consisted of five companies, with a mix of geographic exposure to the U.S. and Canada. While tolling extraction services have the potential to be very profitable, price deflation should continue to persist, which has resulted in most extraction companies looking to move up the supply chain by offering finished products / white labeling services, which are more profitable, and can help create sticky relationships with customers.
Sustainability. The Sustainability panel consisted of three cannabis related companies helping drive a sustainable related outcome for society including Cellibre, Hempstone, and Hemp Plastic Company. As availability of low cost industrial hemp grows, we see industries that today leverage petroleum or other starch based solutions (corn, etc.) leveraging hemp to produce plastics, building products, and other biobased materials. In addition, we see increasing use of industrial biology to produce cannabinoids and other potential end markets such as bio-based chemicals and pharmaceuticals evolving, which has a sustainable outcome relative to energy and land intense farming.
Any portion of this report prepared by a member of Cowen Washington Research Group is intended as commentary on political, economic or market conditions and is not intended as a research report as defined by applicable regulation.Back to News