Intellectual property takes on growing role in cannabis industry deals

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(This story has been updated to clarify the approved use for Epidiolex.)

Intellectual property is playing an increasingly important role in cannabis industry acquisitions and other deals as businesses look to get a leg up on rivals by purchasing or investing in companies holding valuable patents, trade secrets, copyrights and trademarks, experts said.

This comes as marijuana and hemp companies seek to increase their value through IP by differentiating themselves from their competitors and making their businesses more attractive for acquisitions and other transactions, according to experts.

The importance of IP was highlighted in two recent deals:

  • Ireland-based Jazz Pharmaceuticals announced in February it was buying GW Pharmaceuticals, one of the largest medical cannabis businesses in the world, in a $7.2 billion deal.
  • A subsidiary of cigarette maker British American Tobacco (BAT) announced this month it was taking a nearly 20% stake in Canadian cannabis producer Organigram in a deal valued at 220 million Canadian dollars ($175 million).

BAT and Organigram plan to develop the core intellectual property to be used in the creation of cannabinoid-based products and delivery systems.

The intellectual property will be effectively shared, and the companies are free to capitalize on that IP independently of one another.

“We believe that product innovation backed by core fundamental R&D is necessary to establish a long-term competitive advantage in the cannabis industry,” Paolo De Luca, Organigram’s chief strategic officer, said in a news release on March 11, when the deal was announced.

Epidiolex a key attraction

In the case of GW Pharma, Jazz was attracted to the British company’s cannabis-based epilepsy medicine, Epidiolex.

The Jazz-GW Pharma announcement is a “good example,” of the importance of IP and patents creating value, said Duke Fu, the interim chief operating officer of Las Vegas-based cannabis investment company Australis Capital, a U.S. spinoff of Canadian marijuana producer Aurora Cannabis.

“Looking at the cannabis industry,” Fu added, “it has become more challenging to be seen and heard.”

IP is an important option for doing so.

GW Pharma’s CBD drug Epidiolex is used to treat seizures caused by severe epilepsy.

“Intellectual property, be it a patent, a trade secret or brand, is only valuable to the extent it provides a competitive moat around a business that leads to defensible market share, higher pricing and/or margins,” said Mike Regan, founder and analyst of Denver-based MJResearchCo.

“GW Pharma’s IP was an FDA-approved prescription drug, so that is valuable – re-creating it would take years and millions of dollars,” Regan explained, referring to the U.S. Food and Drug Administration.

Speaking to analysts on Feb. 3, the day the deal was announced, GW Pharma CEO and co-founder Justin Gover said: “There’s still more to come, I think, even within Epidiolex itself. This is an IP estate that is going to continue to build, and we think is going to be a strong and compelling one.”

IP a focus in Australis investment

 Australis’ Fu said IP was an important part of the joint venture agreement that his company announced in March with British Columbia, Canada-based 3 Rivers Biotech.

3 Rivers is an agricultural technology company specializing in commercial-scale micropropagation for marijuana, hemp and traditional crops such as vegetables and fruit.

3 Rivers will own 85% of the joint venture – which is focused on marketing plant-tissue culture offerings – and Australis will hold the remaining 15% stake.

“The 3 Rivers IP is well protected, much of which resides with the founders and principals, so it is not something that is easily transferrable,” Hu said.

That’s exactly right, 3 Rivers CEO Robert Allen told MJBizDaily.

“3 Rivers has developed a considerable amount of IP that is locked in as the ‘owners’ of the know-how are principals in the company, so hiring them away is not a realistic option,” Allen said.

“The IP at 3 Rivers consists both of (provisional) patents and ‘secret sauce’ know-how.”

Greater emphasis on IP

Many cannabis companies are placing an “increased emphasis on intellectual property,” said patent attorney Pauline Pelletier, a director at Washington DC-based Sterne, Kessler, Goldstein & Fox.

“In general, many companies in the cannabis industry are investing in patent protection with the expectation that this will enhance company value, whether for purposes of competition or valuation (or both),” Pelletier added.

The importance of IP for cannabis companies is similar to that in pharmaceutical, tobacco, cosmetic and food and beverage firms, which “have been in this boat for a long time.”

Without identifying specific companies, Pelletier pointed out, “We have already seen patents play a significant role in high-profile mergers and acquisitions in the cannabis industry. We expect that trend to continue, and likely intensify.”

The importance of IP for cannabis companies can’t be overstated, according to California marijuana attorney Christopher Gonzalez, a partner in the Los Angeles office of Leech Tishman.

Intellectual property is “super important, immensely important” and can “make or break a company” in terms of whether it can be sold for (a) premium, Gonzalez said.

Patents and other IP can be a way to show that a marijuana company is “superior to its competitors,” Gonzalez added.

Currently, he is working to patent a microdosing marijuana edible.

“Without going into too much detail, we are in the process of looking of getting a patent for the method of ingestion.”

The firm also might later explore seeking a patent on the chemistry of the product, he said.

Cannabis industry patent options

About six months ago, Gonzalez and two other Leechman Tishman attorneys co-wrote a story for the company’s website titled “Patents in the Cannabis Industry.”

The story identified four major categories in which a cannabis grower or processor might be able to file a patent for a cannabis product or business:

  • Cannabis compositions or drug formulations.
  • Methods of preparation.
  • Characterization of the cannabis compounds in terms of how they engage with human endocannabinoid receptors.
  • Medical marijuana products and processes – specifically, methods of treating diseases with cannabinoids.

Matt Karnes, founder of New York-based Greenway Advisors, said it is crucial that cannabis firms get legal advice to protect their patents, because they can be extremely valuable.

“Like in any other industry, patents and R&D (research and development) efforts are generally accretive – cannabis is no exception.”

As new technologies evolve, patent protection is becoming increasingly important in the area of plant cloning, he noted.

MJResearchCo.’s Regan agreed.

“IP can be a differentiator between commodities, such as raw flower or THC/CBD extract, and branded solutions to customer needs, which can charge premium prices and enjoy higher margins,” Regan said.