Biosynthesis: The Next Cannabis Market Disruptor?

Biosynthesis – the mass production of specific cannabinoids in a lab setting – might be setting up to be the next big disruptor for the cannabis industry.

In cannabis, the process, also known as cellular agriculture, is increasingly being used to produce THC, CBD and other cannabinoids – with results that can boast greater than 99% purity – in less time and at a lower cost than plant-based production.

If commercialized on a large scale, biosynthesis could “be a major disruptor,” especially in the health and wellness market focused on CBD, said Brett Hundley, managing director of equity research at Richmond, Virginia-based Seaport Global, and making companies that engage in this type of production attractive investment targets.

Biosynthesis so far and what’s next?

The market for cannabinoids is poised to increase from an estimated $10 billion to $200 billion in the next five to 10 years, according to some analyst estimates – though questions remain about whether demand can be met by traditional plant-based methods for some of the extracts.

That potential is helping fuel a wave of investment in the biosynthesis sector.

Among recent, high-profile deals:

  • Cronos Group inked a $122 million tie-up with Boston-based Gingko Bioworks to research and develop a range of synthetic cannabinoids.
  • Surterra Wellness and Intrexon signed a $100 million licensing deal to produce cannabinoids from Intrexon’s proprietary yeast fermentation platform.
  • Amyris and privately held biotech company Lavvan entered into a $300 million agreement to produce synthetic cannabinoids with a target of bringing the first such products to market in 2020.

“It is the Canadian (license holders) and the non-MSO U.S. enterprises who are seeing the writing on the wall with regards to the (biosynthesis) opportunity on the ingredient and health/wellness side,” Hundley said.

As large consumer packaged goods (CPG) companies – such as Nestle, Coca-Cola and General Mills – consider incorporating CBD and other cannabinoids into their products, they will look for product purity, consistency and scale, something ideally suited to the biosynthesis model.

“They will need to keep their products on the shelf to keep customers happy, and that is a struggle when it comes from just the plant,” Hundley said.

CPG firms will also be eager to secure predictable supply agreements with cannabis biosynthesis players – meaning companies that can provide enough of the ingredients on a consistent basis have significant growth potential.

That’s why firms such as Amyris, a California-based group focused on wellness products, is talking with every major CPG group as it researches and develops synthetic cannabinoids, Hundley said.

“(CPG companies) don’t want to own cannabis, they just want to source it as an ingredient,” he said.

Investment risks and rewards

The potential for the cannabis plant’s multiple types of cannabinoids to treat major diseases is another aspect of cannabis biosynthesis that is of interest.

But very little is actually known about many of the cannabinoids beyond CBD and THC in terms of proven science and medical benefit, which creates a level of risk around investing in the technology and research.

It is a risk worth taking, though, because the potential upside is so large, argued Jay Holmes, executive director of strategy at Surterra Wellness and architect of the licensing deal with Intrexon.

Many of the various cannabinoids his company will explore through the deal, such as CBN and THC-V, either have anecdotal or stronger evidence of beneficial effects, he said.

And, because many of these molecules are found only in trace amounts in the plant naturally, biosynthesis is the lone viable way to produce at the requisite scale.

You can call it a bet, but I frankly think it’s more of a bet not to invest in this type of research and innovation,” Holmes told Investor Intelligence.

“We cannot sit here and say concretely that any specific compound will be a commercial success, but we have the capability and research resources to explore many lesser known but efficacious cannabinoids.”

If the huge investment in naturally derived CBD is anything to go by, it does not seem a stretch for investors to opt for more research and development of that cannabinoid and others manufactured on a much larger scale synthetically.

At the same time, the challenges currently facing the CBD market – including scrutiny from the U.S. Food and Drug Administration – will likely apply to biosynthetics, at least at the start.

The technology leadership in biosynthesis is something relatively few cannabis companies have aspired to so far.

But it may well be an inevitability as businesses in the industry find new ways to interact with consumers – and even push back the frontiers of the pharmaceutical and nutraceutical qualities of the plant.

“Some of the rare cannabinoids are the ones that we are most excited about,” Anna Shlimak, head of investor relations and communications at Cronos Group, told Investor Intelligence.

“There is much work to be done, and the onus is on players like Cronos to get that work done, to get the data and to help regulators provide safe and consistent products to consumers.”