This article was published originally at 420 Investor in October

A highly disruptive technology that I have discussed over the past few years appears to be gaining traction. Biosynthesis, an alternative, natural method of producing cannabinoids, could have profound implications for the cannabis industry. In recent months, we have seen two Canadian LPs, Cronos Group (TSX: CRON) (NASDAQ: CRON) and Organigram (TSXV: OGI) (OTC: OGRMF) make investments that will allow them to pursue cannabinoid production through this method.

What is Biosynthesis?

Very basically, biosynthesis is the formation of complex compounds from simple substance by living organisms. Cannabinoids are found in the cannabis plant, for example, but they can also be produced in other ways. In contrast to synthetic production, which creates molecules in the lab like analogs to naturally occurring cannabinoids, these compounds are the exact same as what cannabis expresses.

While it’s not the only method, yeast is a common way to produce cannabinoids using biosynthesis. This chart, from Librede, explains the process, which uses yeast, water, sugar, carbon dioxide and enzymes:

Here is a graphic from InMed Pharmaceuticals (TSX: IN) (OTC: IMLFF) that shows their process, which uses E. coli rather than yeast:

The key advantage to this process is that it results in higher purity and lower costs with a much lower carbon footprint than through extraction from cannabis. Importantly, these are the exact same compounds that would be produced from cannabis extraction.

What Are the Implications for the Cannabis Industry

If the cannabis industry were all about smoking or vaping flower, then producing cannabinoids from alternative methods wouldn’t be an issue, but mature markets for medical and consumer cannabis typically experience at least half of the sales generated from derivatives and ingestibles. These products may in the future use cannabinoids produced from biosynthesis rather than extracted from cannabis, wiping out demand for a large amount of production. To be clear, the industry may end up being overbuilt substantially if biosynthesis emerges as a scalable technology.

Biosynthesis appears to create cannabinoids with higher purity, which is an additional factor beyond cost that could spur its adoption. Additionally, the technology should be able to create cannabinoids that aren’t expressed significantly in the cannabis plant itself. These rarer cannabinoids are particularly appealing to pharmaceutical companies, and we could see biosynthesis become the de facto standard for that industry’s production rather than extracted cannabis, such as what GW Pharma uses for Epidiolex. In 2016, I confirmed that GW Pharma (NASDAQ: GWPH) is actively pursuing this technology.

Who Are the Players?

Thus far, I have identified 7 companies that are working on advancing biosynthesis for cannabinoid production:

Anandia Laboratories

Previously independent but recently acquired by Aurora Cannabis (TSX: ACB) (NYSE: ACB), Anandia Laboratories is a Canadian cannabis science powerhouse. The company has been publishing research on the topic since 2012, though it’s not clear exactly where their team, lead by Dr. Jonathan Page, is in terms of development. Hopefully its new owner will detail the company’s efforts.

Gingko Bioworks

Gingko Bioworks, a Massachusetts-based company founded in 2009 by MIT scientists and a participant in Y Combinator since 2014, recently partnered with Cronos Group to develop cannabinoids. The company is well-funded compared to others, tough it is working on applying the technology more broadly. Gingko includes Bill Gates among its investors, and the company has raised a stunning $429 million.

The Cronos deal, which was announced in early September and has Cronos investing $22 million in R&D and issuing up to 14.7 million shares to Gingko upon milestones being hit, aims to develop THC, CBA, CBC, CBG, THCV, CBGV, CBDV and CBCV. On the conference call, Cronos indicated it could be more than a year before the first milestone of THC produced at less than $1000 per Kg for more than 200 liters.

Hyasynth Bio

Montreal-based Hyasynth Bio is a Licensed Dealer in Canada. The company had not raised significant money until recently, when Organigram participated in a funding round that took the form of a convertible secured debenture in three tranches totaling C$10 million. The initial investment was C$5 million, with milestones tied to the next two tranches. Organigram will have the option to purchase cannabinoids produced by Hyasynth. According to Organigram, the company has made CBG, CBD and other cannabinoids cost effectively.

InMed Pharmaceuticals

As the only publicly-traded company among its peers, there is significant financial information available for InMed Pharmaceuticals, which is based in Canada and trades on the TSX (IN) and the OTC (IMLFF). Those interested can download their most recent investor presentation.

The company differs from rivals that use yeast, as its process employs E. coli. The company is developing its technology along with a bioinformatics platform that has a goal to select drugs to develop with a high probability of success, targeting initially glaucoma and epidermolysis bullosa (a genetic skin condition).

CEO Eric Adams has significant pharmaceutical experience. The company spent only C$1.93 million on R&D in the year ending June 30, which is cautionary. It ended the quarter with cash and short-term investments of C$26.5 million after raising C$15 million in June selling units at C$0.90. The company has about 171 million shares outstanding (221 million fully diluted), giving it a market cap of C$108 million at the recent close of C$0.63, a 2018 low.

Librede

California-based Librede first caught my attention in early 2016 after the New York Times discussed Hyasynth and Anandia Labs, which prompted me to explore the topic further. The company has received two government grants to date from the National Institutes of Health (Small Business Innovative Research Grants), totalling $1.7 million. The company successfully patented production of cannabidolic acid (CBDA) in yeast earlier this year after having earned another patent in 2017 for the broader production of cannabinoids in yeast.

Renew Biopharma

Based in San Diego, Renew Biopharma is working with Indiana University’s Gill Center for Biomolecular Science to develop cannabinoid molecules using microalgae and yeast. The company claims to have access to an extensive portfolio of patents and plans to develop its own therapies for chronic pain management, Huntington’s Disease, Parkinson’s Disease, concussion therapy and Chronic Traumatic Encephalopathy.

Teewinot Life Sciences

Previously known as CBC Technologies and backed by Tuatara Capital, Teewinot Life Sciences, based in Florida, has developed patent-protected biosynthetic processes for manufacturing THCVA, CBDVA, CBCVA and CBGVA. The company also has U.S. patents for creating water-soluble cannabinoids and recently announced a Canadian patent with broad claims. The company raised $12.3 million in a Series B round in 2017, boosting its total to $19.3 million. I have not been able to verify, but I have heard that GW Pharma has a relationship with the company.

Outlook

While biosynthesis has not yet proven itself as a scalable technology, it has the potential to radically alter the way cannabinoids are manufactured in the near future. If the technology proves successful, many cannabis production companies could be left with unnecessary assets, as about half the market that will be focused on non-flower product will be supplied in this alternative manner. Some LPs have already made investments that could position themselves to capitalize on the shift. Finally, product companies may be able to capitalize on the technology with less costly access to feedstock as well as the ability to procure cannabinoids expressed less frequently than major ones, like THC and CBD. Investors should monitor developments in biosynthesis over the coming years.

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Exclusive article by Alan Brochstein, CFA Facebook | LinkedIn | Email Based in Houston, Alan leverages his experience as founder of online communities 420 Investor , the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures , he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha , where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter