There Are Business Opportunities That Are Potentially More Lucrative Than Growing, Processing or Selling Cannabis
The cannabis industry has evolved at a relatively rapid pace over the past few years. This is particularly true in the states which that have legalized recreational or medical cannabis, and whose regulations and regulators are favorable to the cannabis industry. The majority of these “cannabis-friendly” states are located in the Western part of the U.S and include Alaska, Washington, Oregon, Colorado, Nevada, and the “800-pound gorilla” of the U.S. cannabis industry, California.
Generally, states that are unfriendly to the industry, while having some form of state-legalized medical cannabis program, are those that are East of the Mississippi, including, Illinois, Massachusetts, Rhode Island, Connecticut, New York, New Jersey, Pennsylvania, Maryland and Florida.
Because of the rapid growth of the new, emerging cannabis industry, I am frequently approached by individuals who want to invest in a cannabis business. Almost always, their interest is in the area of owning a grow operation, a dispensary or a retail store.
While the cannabis industry certainly centers on the plant, there are a number of opportunities which are potentially more lucrative than growing and processing and certainly less of a financial challenge than owning a dispensary or retail store.
The Cultivation of Cannabis
In states that have legalized both recreational and medical cannabis, cultivation is evolving into two distinct industries, growing for recreational purposes and growing for the medical purposes. Today there is much overlap between strains and cannabis-based products that are available in recreational stores and medical dispensaries, but increasingly these distinct business operations will sell very different strains and products.
Growers of medical cannabis are increasingly focused on strains with cannabinoid profiles tied to providing benefits for specific medical conditions or disorders. Those strains include Charlotte’s Web or ACDC, which have low levels of THC, and high levels of the non-psychoactive cannabinoid, CBD. Medicine derived from these plants has been used successfully for children suffering from forms of epilepsy, specifically, Dravet syndrome. The movement for cannabis legalization at the state-level has much to do with providing medical benefits to those children. Other medical strains will be increasingly available to provide benefit for other medical conditions and disorders.
Recreational cannabis production has centered on producing plants that are high in the psychoactive cannabinoid THC. Many of these high-THC strains have won Cannabis Cups, which recognizes the best cannabis strains. Many have THC levels that often exceed 30 percent. Colorado’s Chem Dawg and California’s Emperor Cookie Dough are two of these high-THC strains.
Cannabis Processing and Extraction
Proprietary products derived from cannabis are increasingly becoming an important part of the business in states that have legalized medical or recreational cannabis. They are often superseding the selling of flower because of the benefits to consumers and because they provide the dispensary or retail store with a higher profit margin than selling flower.
In the state-licensed medical cannabis industry, concentrates and extracts are manufactured in various forms. These include tinctures, capsules, pills, vape pens, transdermal patches, lotions, and creams, all of which have numerous indicated medical benefits.
The recreational cannabis industry focuses on the production of concentrates, oils, waxes and shatter. These extracted cannabis products typically provide an immediate and intense “high” for the user.
The most well-known products derived from concentrates or extracts are edible products. For recreational purposes, edibles provide a surreptitious way for users to travel interstate or to use cannabis in public. For medical purposes, edibles provide a user-friendly delivery method and one that provides patients with the ability to obtain the medical benefits slowly.
Dispensaries and Retail Stores
Dispensaries and retail stores are the public faces of the state-licensed cannabis industry. Dispensaries generally specialize in selling cannabis for medical purposes while retail stores sell cannabis for recreational use.
Colorado is a state that has separate licensing regulations for medical and recreational cannabis. Of note by many industry participants, is that approximately 30% of recreational sales in retail stores are for medical purposes and the recreational stores find that about 30% of their sales are for medical use.
In Colorado, the sales tax on medical cannabis is substantially less than the sales tax on recreational cannabis, and medical cannabis products themselves are usually significant less expensive than recreational cannabis products. Many regular recreational users go through the state process to obtain a state-issued “red card” to purchase medical cannabis. Since medical cannabis is substantially less costly than recreational cannabis, it’s logical to ask why anyone desiring to use cannabis recreationally would not seek to obtain a “red-card” since it reduces the cost significantly. The reason is the immediate availability and instant gratification of walking into a retail store and purchasing the product. In Colorado, anyone over the age of 21 can buy the cannabis without having to make an appointment, visit a doctor, and wait for the state to issue a medical red card, which can take weeks to arrive by mail.
Described as “pick and shovel” models, numerous businesses have cropped up to provide services to state-licensed cannabis businesses. These include software solutions; testing, laboratory and security services; packaging suppliers; the sale or leasing of equipment including extraction systems, grow lights, greenhouses and hydroponic systems; and the providing of consulting and marketing services.
Many of these service businesses have business models that have more potential for profitability and scalability than growing, processing or selling the plant. But, they’re often not viewed by entrepreneurs as being as “sexy” as businesses that “touch the plant.”
The Growing of Industrial Hemp and the CBD Industry
Industrial hemp is cannabis, but in the United States, it is legally defined as a cannabis plant that has less than .3 percent THC. Until February 2014, when President Obama signed the Farm Bill into law, the growing of industrial hemp in the U.S. was illegal. The Farm Bill allowed the growing of industrial hemp for research and development purposes in states that had a regulatory process typically under a state’s department of agriculture.
While the Farm Bill did not allow the commercial sale of industrial hemp or any of its byproducts, many state-licensed growers of industrial hemp in states including Colorado, Kentucky and Tennessee have ignored the illegality of commercially selling products derived from industrial hemp. Many of these industrial hemp growers are selling seeds. Others are extracting the cannabinoid, CBD from the flower and trim, primarily for the medical market. While not approved by the Food and Drug Administration (FDA), CBD is acknowledged as having many benefits, including as an anti-inflammatory and a neuroprotectant.
While illegal under Federal law, many growers and processors of industrial hemp are commercially selling CBD, hemp oil, and other products derived from industrial hemp not only in their state but across state lines. The common justification is that selling products derived from hemp, including CBD, is not an enforcement priority for the Drug Enforcement Administration (DEA) because CBD is not a psychoactive substance.
Companies Focused on Cannabis Research
There are many companies who are researching cannabis despite the legal and operational challenges they encounter. In many cases, the goal is the development of a compound that could be approved as a medicine by a government regulator, such as the Food and Drug Administration (FDA) in the United States. The country that leads the way with cannabis research is Israel, where research has been underway for decades.
Research is occurring in three different areas.
First, research is underway on the plant itself. This includes plant genetics, breeding of various strains or varieties for desired characteristics, and cultivation techniques. Much of this research can result in a product or service that can generate revenues relatively quickly.
Secondly, basic scientific research is underway to better understand the various cannabinoids, terpenes and other substances of the cannabis plant and their effect on the human body. Much of this research is basic science and is university-based, without any envisioned short-term commercialization or business model.
Lastly, research is increasing with the objective of developing cannabis-based medicine, what I refer to as “real medicine, based on real science.” Included in this group are the clinical trials that the United Kingdom-based, GW Pharmaceuticals (GWPH) has underway under Food and Drug Administration (FDA) protocols for Epidiolex, which is a liquid formulation of pure plant-derived CBD. Epidiolex is being developed as a treatment for various orphan pediatric epilepsy syndromes. The FDA has granted GW Pharmaceuticals Orphan Drug Designation for the treatment of Dravet syndrome and Lennox-Gastaut syndrome, and “Fast Track” designation for the treatment for Dravet syndrome.
Cannabis-based pharmaceuticals are also being researched for other medical conditions and disorders including the treatment of pain, sleep disorders, post-traumatic stress disorder (PTSD) and as an appetite stimulant for patients undergoing chemotherapy or suffering from AIDS. The objective of this research is to obtain government approval from the FDA, or similar agencies in other countries, for sale of a cannabis formulation as a drug, which can then be sold through conventional drug distribution channels, including pharmacies.
Investors interested in the cannabis industry, and entrepreneurs seeking to start a business should broaden their horizons. There are far more opportunities in the cannabis industry than just growing this plant, many of which I’ve concluded are potentially more lucrative.
Copyright 2016 Jeffrey Friedland
Author: Jeffrey Friedland (www.jeffreyfriedland.com, email@example.com, Tel. 1-646-450-8909.) His book, “Marijuana: The World’s Most Misunderstood Plant” is available at Amazon in print and Kindle editions.
Mr. Friedland is CEO of INTIVA Inc., director of CannRx, a founder of Israel Plant Sciences and has other involvements in the cannabis industry in the United States, Canada and Israel.