While the lifting of US federal prohibition on cannabis as a recreational or even medicinal drug may seem a long way away, the wider-scale legalization of a cannabis- and hemp-derived extract cannabidiol (CBD) could be around the corner.
Back in April, federal advisors voted to recommend approval of the first prescription CBD medicine, known as Epidiolex—developed by GW Pharmaceuticals plc (OTC: GWPRF). The advisory committee to the Food and Drug Administration’s vote unanimously recommended approval. The drug used in the study was purified to 99% purity.
The recommendation preceded more federal legislation that progressed later in June, which would move to legalize hemp rich in CBD to be used in several CBD oil products. The U.S. Senate Agriculture Committee overwhelmingly endorsed the Farm Bill, known also as the Agriculture Improvement Act of 2018, by a vote of 20 to 1.
These signals have led several major players in the cannabis industry to rethink parts of their strategy to focus more on CBD and its potential, including Aphria Inc. (TSX: APH) (OTC: APHQF), Aurora Cannabis Inc. (OTC: ACBFF) (TSX: ACB), Radient Technologies Inc. (TSX.V: RTI) (OTC: RDDTF), and CROP Infrastructure Corp. (OTC: CRXPF) (CSE: CROP).
While the adult-recreational and medicinal marijuana markets are certainly growing rapidly, the potential mainstream acceptance and wider legalization of CBD certainly poses to bring some interesting business opportunities.
THE BENEFITS OF WIDER LEGALIZATION
While technically and biologically a cannabis plant like its cousin marijuana, hemp doesn’t produce the intoxicating effects of marijuana’s primary sought-after cannabinoid, tetrahydrocannabinol or ‘THC’.
Instead, hemp has been historically used in industrial products. However, hemp’s potential through CBD brings a wide range of benefits and could lead to a much larger basket of goods to market.
CBD is now being used in products that claim to bring all types of benefits, including: pain relief, anti-anxiety, sleep aid, skin care, and even eyelash thickening. In fact, the CBD market is expected to hit $2.1 billion-a-year by 2020.
Given that CBD produces no intoxication or ‘high’, it’s a bit puzzling that the the federal government still considers it a Schedule I drug, and therefore illegal to have. However, CBD is legal at the state level in multiple states. Once the drug is legalized federally, the potential for new products hitting mainstream stores opens wider.
By gaining the endorsement of the U.S. Senate Agriculture Committee, the Farm Bill moves the legalizing of CBD that comes from industrial hemp one step closer to reality. Growing industrial hemp is currently legal on a federal level, but only for research or under a state pilot program in states that have legalized it.
WHO’S CURRENTLY EXTRACTING CBD’S VALUE?
Aphria Inc. (TSX: APH) (OTC: APHQF)
Earlier this year in June, Aphria announced it had approved a $55 million capital project to build a state-of-the-art Extraction Centre of Excellence in Ontario. Scheduled to release its first concentrates by March 2019, the Aphria facility will be equipped to conduct a wide range of cannabis extractions, to produce world-class cannabis concentrates, including fractionated distillates. More recently, Aphria announced its first major shipment of to Australia’s Medlab Clinical Limited, consisting of high-CBD cannabis oil, as well as high-THC cannabis oils.
Aurora Cannabis Inc. (OTC: ACBFF) (TSX: ACB)
Cannabis giant Aurora recently received its Health Canada dealer’s license to facilitate its domestic and international transport for global distribution. The license further allows Aurora to produce, assemble, and sell cannabis oils and future niche derivative products from its Alberta-based Aurora Mountain facility. Aurora has also made significant moves in the extraction and hemp-based CBD space, by acquiring CanniMed Therapeutics in January 2018, and through a deal recently made with Hempco Food and Fiber Inc., which could utilize Aurora’s previously discarded biomass.
Radient Technologies Inc. (TSX.V: RTI) (OTC: RDDTF)
Within the Canadian Cannabis Act, which is set to come into force in October 2018, Radient Technologies was encouraged by the new Cannabis Regulations and Industrial Hemp Regulations. Inside the regulations were the outlining of rules for industrial-scale cannabis and hemp value chains, of which Radient intends to capitalize upon, based on its role in the extraction process, and its high production capacity for isolated cannabinoids, including for CBD. The extraction experts hold a patented technology platform that serves high-end clients, including its strategic partners at Aurora Cannabis, who own a controlling stake in HempCo Food & Fibr, which is one of the largest industrial hemp producers in the world.
GW Pharmaceuticals plc (OTC: GWPRF)
By developing the CBD-based drug Epidiolex, GW Pharmaceuticals may have done a big favour for the rest of the cannabis sector, especially those dealing in hemp-based CBD. The drug is in Phase III clinical development for the treatment of refractory childhood epilepsies, as well as for the treatment of Dravet syndrome, Lennox-Gastaut syndrome, tuberous sclerosis complex, and infantile spasms. Federal approvals that are surrounding Epidiolex have the potential to unlock federal acceptance of CBD for the rest of the leading cannabis players dabbling in CBD products.
CROP Infrastructure Corp. (OTC: CRXPF) (CSE: CROP)
Primarily engaged in the business of investing, constructing, owning and leasing greenhouse projects and providing other turnkey solutions to the cannabis industry, CROP Infrastructure made a major move into the hemp-derived CBD market. On the company’s Nevada Hemp farm, CROP added 750 acres of production land for the 2019 season, bringing the total space to 1,065 acres, with 240 acres under pivot. Key to the announcement was the detailing of four housing units and a building on site that are to be converted into an extraction facility to process hemp biomass for CBD isolate on site.
HEMP-DERIVED CBD PROFIT BY THE NUMBERS
Using the latest Nevada hemp announcement from CROP Infrastructure Corp. (OTC: CRXPF) (CSE: CROP), one can start to see the potential for CBD by the numbers.
The previously announced 240 acres of CBD Hemp was planted and is currently 1.5 feet tall and growing under pivot. All harvesting equipment has been secured for the resulting hemp biomass. It is estimated that the 240 acre pivots will yield 240,000 pounds of hemp flower.
Typically, the grower can yield two harvests per year, bringing the potential on just the original 240-acre harvests to 480,000 pounds of hemp flower—or 217,724kg.
Many of today’s popular US hemp strains can reach levels of 15-20% CBD, and CROP’s genetic analysis already pegged its hemp’s CBD content at greater than 15%.
Today’s market price for hemp is between $20-$50 per pound of dried flower, depending on CBD content and quality. However, real money is in high-purity CBD isolate. Therefore, the concentration to turn 15% flower into a +99.0% CBD isolate is 100/15, or 6.67 to 1— +~10% for any recovery loss or 7.337.
If one takes the 217,724kg that could be derived from the 240 acres in rotation already, that biomass could be concentrated down to 29,674kg of CBD isolate.
Now, here’s where the value resides. What exactly is the wholesale price of CBD isolate?
According two recent releases of a pair of CROP’s CBD competitors, that price is somewhere between US$5,000 and US$6,500 per kilogram of CBD isolate.
Keep in mind also that CROP just boosted their footprint to over 1000 acres, and has a current market cap of only US$21 million.
As per CROP’s news release, the cost of production is not expected to exceed $700,000 with many of the costs already incurred, and the first harvest is expected in early Q4 this year. The operation isn’t going to cost them an arm and a leg. The key is in fully developing out the state-of-the-art extraction facility that Director and CEO Michael York states is the next phase of development.
Moving forward, the goal is to secure the upgrading of value of the 15% CBD hemp, to that of the +99.0% CBD isolate—or in the case of the 480,000lbs per year on the 240 acres currently being grown, moving the value well beyond $22 million per year.
By these numbers, the value of extraction cannot be understated.
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