Cannabis investing has changed dramatically in the past 10 years, from what was once largely a small-scale cultivation market into a bustling industry with fingers in several pies. Retail dispensaries and consumer packaged goods have received a lot of attention, but there’s a bubbling revolution in cannabis biotechnology at play – an area that could potentially be the most meaningful long-term opportunity for smart investors.
Understanding the Cannabis Biotech Landscape
Cannabis biotechnology refers to companies working in the field of advanced cultivation methods, pharmaceutical-grade cannabinoid products, synthetic cannabinoids, new delivery methodologies and/or proprietary genetics. Unlike traditional cannabis companies that cultivate and sell the plant’s flowering segment, biotech firms are designing an alternative future for how cannabinoids will be harvested, processed and consumed.
This differentiation is key for investors. At a time when cannabis companies with grower-centric models likely face commoditization pressures and market saturation in developed markets, biotech businesses are creating IP moats based on patented technologies, proprietary processes, and scientific know-how that can be monetized via premium valuations and long-lasting competitive moats.
The world-wide cannabinoid market is anticipated to grow rapidly beyond its current scope, with a focus on medical use propelling much of this growth. Biotech firms with one foot in cannabis and the other in pharma will be at a nexus as science increasingly sheds light on the medical value of multiple cannabinoids beyond THC and CBD, having an opportunity to capture huge upside potential.
Key Subsectors Within Cannabis Biotech
Synthetic Cannabinoid Development
Biosynthesis/Chemical Synthesis–The Plants of the Future Of all of these approaches, one of the most tantalizing is for the production of non-plant-derived cannabinoids either by biosynthesis or synthesis chemistry—our favorite term: synthetic cannabinoids. These methods present a number of benefits versus the traditional cultivation of plants, including consistent quality, ability to scale and produce rare cannabinoids that have limited concentration in the plant.
Companies in that space are utilizing genetically modified yeast, bacteria or other organisms to churn out cannabinoids through fermentation — much the way insulin and others biopharmaceuticals have long been made. This is what enables pharmaceutical-grade purity and consistency, which will be a requirement for FDA approval.
For investors, synthetic cannabinoid firms are a bet on the pharmaceutical future of cannabis, rather than the recreational. These companies are often creating proprietary cannabinoid formulations for specialized medical conditions, following FDA-approval pathways and establishing patent portfolios that will generate licensing fees over many years.
Advanced Genetics and Breeding
Another important subcomponent is the companies developing patented cannabis genetics using sophisticated breeding methods such as marker-assisted selection, tissue culture proliferation and genome mapping. These companies are producing strains with targeted cannabinoid and terpene profiles for specific medical conditions or user experiences.
There is a value proposition here beyond just making new strains. Companies that can help stabilize genetics, enhance disease resistance, increase yields and create cultivar libraries with intellectual property protection are building assets other cannabis companies will have to license. This makes them “arms dealers” to the wider industry rather than being in the volatile retail market.
Pharmaceutical Cannabinoid Products
There are a handful of biotech companies following the traditional drug development model but with cannabinoid based drugs. That entails clinical trials, applying to health regulators and ultimately selling prescription drugs in the form of cannabinoids or chemical relatives of them.
And although this is a costly and time-consuming way, yet the gains can be huge. Prescription cannabinoid drugs approved by the FDA may be priced at a premium, reimbursed by insurance companies and protected from therapeutics competition. Pharma-centric cannabis biotech companies can provide exposure to potentially game-changing medical treatments for those with longer time horizons and a greater acceptance of risk tolerance.
Novel Delivery Systems
Disruption of how cannabinoids are binding to the body offers another potential biotech opportunity. And some companies are creating transdermal patches, sublingual strips, inhalers and time-release capsules that utilize new techniques like nano-encapsulation to increase the bio-availability of CBD as well as provide more predictable dosing.
They can be licensed to other cannabis companies. Or, turn into proprietary products. For medical uses in particular, where accurate dosing and onset timeframe are highly relevant, more advanced formulations solve actual problems and justify high premium pricing.
Investment Considerations and Due Diligence
A framework for analyzing cannabis biotech Like other forms of investing in this industry, the way you approach investing in the biotech field is going to be a lot different than how you analyze traditional operators. Here are some of the most important considerations for investors:
Intellectual Property Portfolio
A company’s patent portfolio is frequently the company’s greatest asset. Investors should not only look at how many patents but also the claims, geographic scope and remaining life. Broad claims can offer decades of competitive advantage to process and compound patents, while narrow claims may provide little protection at all.”
Knowing the patent landscape also entails learning about other patents that might be potentially infringing your business. If you are working in a crowded technical field, it is very possible that other companies or even patent troll type entities may challenge the patent and use up resources / time of management.
Scientific Team and Advisors
Cannabis biotech is extremely technical, needing to draw on expertise in molecular biology, pharmacology and clinical development. It is important to ensure that the scientific leadership of a company has the proper credentials and track record in place. Have they successfully run drugs through clinical trials in the past? What about their experience in the pharmaceutical industry? Are they publishing peer-reviewed research?
The level of the company’s scientific advisory board may also be a sign how credible and accessible expertise is behind that company. Highly credentialed or industry-experienced advisors can help you gain legitimacy and open the door to potential partnerships and funding.
Clinical and Regulatory Strategy
It is critical for companies developing a pharmaceutical strategy to be aware of the plan for their clinical development. What indications are they targeting? In which trials phase are they? What endpoints are they measuring? What size trials would have to be for approval?
Investors also should evaluate the regulatory play. Is the company seeking F.D.A. approval in the United States, or is it going to friendlier markets abroad first? Are their in-house experts on regulatory affairs? What do the regulators say about their development plan?
The regulatory pathway for cannabis-based pharmaceuticals is now slightly less opaque, after approvals of drugs like Epidiolex, but it is still labyrinthine and costly. Realistic Timelines and Proper CapitalizationCompanies also need to be properly capitalized, with realistic timelines.
Market Opportunity and Competition
Estimating the addressable market for a biotech company’s product(s) entails capturing key patient population figures for targeted indications and sizing competition in the sector. How many patients might the therapy help? What alternatives exist? What are pros of that approach?
Competition analysis should not consider just other cannabis biotech companies, but also pharmaceutical companies developing traditional treatment for the same medical conditions. Any cannabinoid intervention would need to show superiority to existing products in terms of efficacy, safety, price or patient convenience for inputs into routine care cost as pharmacy management is not generally considered a barrier since nearly all (approximately 90%) care is delivered at wholesale contract rates.
Financial Runway and Funding Strategy
Most of the cannabis biotech sector companies are money-losers in development, so another good metric to look at is financial runway. How much cash does the company have on the books? How much are they burning per month? When will they require more financing?
Understanding the landscape of sources that fund cannabis biotech is also key. Does the company have access to traditional biotech VC and institutional investors? Or only cannabis funds? The larger the potential investor universe, the more that the company will find itself able to raise funding on advantageous terms.
Risk Factors Unique To Cannabis Biotech Industry)}
Regulatory Uncertainty
While the legalization of cannabis has made strides, federal prohibition in the United States still significantly hinders research and commercialisation. The DEA licensing, the bar to interstate commerce and the Schedule I status all add hurdles that pharmaceutical companies developing other substances wouldn’t encounter.
The regulatory environment could be affected in unpredictable ways by political leadership changes or shifts in enforcement emphasis. There has been a liberalization trend but investors should remember that policy backsliding is still possible.
Clinical Trial Challenges
Running a cannabis clinical trial has its own set of problems such as challenges in obtaining pharma-grade material, DEA oversight protocols and patient recruitment trouble in areas where it is illegal to possess the drug. All of these can slow the progress and boost the price tag.
Market Acceptance
Even if clinical trials are successful and regulatory approval is granted, cannabinoids as pharmaceuticals may encounter future market receptivity issues. Some doctors are difficult to convince of the medicinal value of cannabis simply because they associate it with getting high, whereas some patients feel more comfortable obtaining their cannabis from dispensaires than pharmacies. Considerable commercial effort is needed to establish physician and patient awareness.
Intellectual Property Disputes
The world of cannabis patents is developing quickly, and the dust has not yet settled. Certain patents issued on cannabis-related innovations could be challenged for validity, and businesses may unknowingly infringe upon patents they had no idea existed. For small biotech companies, the cost of patent litigation can be crippling.
Portfolio Strategy for the Cannabis Biotech Investor
Investing (strategically) in cannabis biotech since it’s so high-risk, and the potential returns are giant, investors should approach the sector quite strategically:
Diversification Across Subsectors
Instead of going all in on one company or approach, investors might put smaller investments across various biotech subsectors — synthetic cannabinoid companies and genetics firms and pharmaceutical developers. That lowers the chance that any one technology approach will fail to catch on.
Stage Diversification
Mixing earlier-stage organizations that are riskier (on a positive or negative basis) with more established companies whose products are closer to market can achieve superior risk-adjusted investment results. Early stage has longer holding periods but more upside, later stage may give you some callable catalysts.
Integration with Traditional Cannabis Holdings
A cannabis biotech stock can serve nicely alongside traditional cannabis investments in a portfolio. This is not the case with biotech stocks, as they are creating long-term value that doesn’t necessarily rely on current supply and demand. This is also a built-in hedge in terms of exposure to the cannabis sector.
Watching Ahead: What’s Next for Cannabis Biotech?
The intersection of cannabis and biotech is one of the more scientifically fascinating — and financially promising — facets within the larger cannabis business landscape. As the potential use cases for different cannabinoids continue to be object of research, while manufacturing technologies develop and regulatory structures take shape, bio cannabis companies are poised to extract a lot of value.
For investors, the challenge is to separate companies with actual technological advantages and clear paths toward commercialization from those making inflated claims around early-stage science. Patience, diligence and the long view all come into play here.
The cannabis biotech industry is very much in its infancy. Companies that are able to successfully pass the long and complex path through clinical development, regulatory approval and commercialization during this decade might offer outstanding returns. But the road will be littered with failures, defeats and unscheduled detours. Investors who have a grasp of both the promise and the perils should deploy capitals to this brave new world.
As the cannabis business advances beyond its Wild West stage, biotech will play a greater role in separating winners and losers. Companies able to leverage science towards the development of proprietary, high-value products will win out over those competing based on growing cheap cannabis and building brands as margin compression accelerates. Biotech is a good way to get into cannabis for investors who want exposure to the plant with sustainable competitive advantages — but only if (and this is a big “if”) they approach it with caution, perform deep research and have realistic timelines and anticipations about risk.
The ascent of cannabis biotech is not just an investment opportunity; it’s a transformation of cannabis from an agricultural commodity to a high-tech and nutraceutical ingredient. Investors who can successfully identify this trend and position themselves accordingly will prosper as stakeholders begin to embrace the evolution in years to come.