As the economic crisis brought upon by COVID-19 lays waist to industries like retail, tourism, and restaurants, the cannabis industry is facing a different kind of crisis.
Despite record legal cannabis sales in major markets (which can be attributed to the pandemic) cannabis producers have had to grapple with an uncomfortable truth: there is too much weed. This fact remains true for both Canadian and U.S. companies, even though cannabis remains federally illegal in the latter.
Predictably, the oversupply of cannabis and hemp has created downward pressure on prices, a problem for companies in the business of selling cannabis-based products.
“We’re seeing lower grade flower commoditized, the price of distillate commoditized, and it puts even more strain on processors that are not the most efficient,” said Paul Pedersen, co-founder and CEO of Nextleaf Solutions (OTCQB: OILFF). “Because as the price of the commodity you’re selling comes down, you’ve got to be able to lean on price and efficiency.”
This is why, as Pedersen describes it, the future of the cannabis industry is not a question of who can grow the most, sell the most, or even make the best product. It’s about who can develop, and license, the most efficient methods of processing cannabis from flower to oil.
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In October 2018, Canopy Growth Corp CGC 3.66% paid $330 million to acquire Ebbu, a Colorado-based research company. In the accompanying release, Canopy touted Ebbu’s intellectual property as the reason for the deal, specifically its IP around incorporating cannabinoids into beverages.
Ultimately, Canopy hasn’t been able to turn that IP into issued patents. But Pedersen said the fact that the largest cannabis company by market cap would spend that amount of money on acquiring intellectual property reflects the opportunity at hand.
“That transaction really represents what the smart money realizes. That where the opportunity here isn’t growing plants indoors, it’s companies that can develop intellectual property and patents that are defensible commercially and have value in 20 years.”
Pedersen pointed to the technology, biotech, and life sciences industries, where intellectual property can be a big driver of M&A activity. The fact that cannabis is a controlled substance makes IP as important for cannabis companies as it does for pharmaceuticals.
“It’s no different in many ways than any pharmaceutical. It can be grown at scale in a plant, but because it’s been illicit and it’s something that people can smoke recreationally, people don’t think about IP.”
Published: July 15, 2020
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