Canada’s medical cannabis market began as a flower-only market, but, following a court ruling, the licensed producers (LPs) were permitted to begin producing extracts in late 2015. While these products are quite limited, as they are required to be liquid and must conform to a THC potency cap (30mg per ml) that effectively outlaws vaporization products, which are wildly popular in the U.S., their popularity has been fueling very strong growth in recent quarters. The most recent Health Canada data showed that the category had grown 871% in the quarter ending from the quarter ending 3/31 compared to dried cannabis growth of 89%, with the most recent quarter showing 5,673 kilograms sold. During that same time, registered patients grew by 213% to 167,754.

Many in the industry argue that it was the inclusion of oils that has driven this robust growth in patient enrollment. David Brown, Director of Communications of Lift, a patient-driven community that provides information about the Canadian cannabis market, suggests that the availability of oils has made medical cannabis a realistic option for doctors, who have been more willing to write authorizations for patients. “Cannabis oils allow physicians to look at cannabis not in grams of dried flower plant matter, but mg/ml of active components like THC and CBD, similar to how they can prescribe other medications.”

The demand is so great that suppliers can’t keep up. In its MD&A for FY17-Q2, Canabo Medical (TSXV: CMM) (OTC: CAMDF), which operates medical clinics focused on cannabinoid therapies, has seen patients leave its care due to shortages:

The Canadian market is currently experiencing a shortage of Cannabis based oils. Many licensed producers did not anticipate the uptake in demand for Medical Marijuana and are facing difficulties providing a consistent supply of product. As a result many patients are finding an alternate source of product and leaving Canabo’s research program. The company is not able to fully optimize our business plan in this environment until the supply issues are resolved in the coming months.

Health Canada has issued 50 licenses under the Access to Cannabis for Medical Purposes Regulations (ACMPR), though the number of producers permitted to produce or sell oils is a smaller subset, which includes Aphria, Aurora Cannabis, Broken Coast Cannabis, Canna Farms, CanniMed, CannTrust, Canopy Growth (5 licenses, including 3 for Mettrum, 1 for Tweed and 1 for Bedrocan Canada), Emblem (production only), Emerald Health, Hydropothecary, Maricann, MedReleaf, Organigram, Peace Naturals, THC BioMed, Tilray, WeedMD (production only) and Whistler Medical Marijuana, for a total of 18 companies (16 authorized to sell).

Aphria (TSX: APH) (OTC: APHQF) uses both trim and flower to produce its oils, which are processed using a Waters Supercritical CO2 machine. According to the company, it is exploring a different provider of extraction machines and different extraction processes. It currently sells 5 types of oils that are based in medium-chain triglycerides (MCT), each of which are produced with a specific but undisclosed strain. The most popular oil is its Rideau, a CBD dominant sativa strain that is listed on its site for C$99. The company said that about 25% of its sales are derived from oils, which are about 5% more profitable to the company than dried flower.

Aphria sees extracts and oil products as one of the drivers of growth of the cannabis industry. The company is dedicated to improving its extraction efficiencies through investment in state of the art extraction technology and continuous process innovation. Our goal is to carry our low cost producer status in the cannabis industry through to our oil processing and be the most efficient producer of high quality cannabis oil in the industry.

Gregg Battersby, Director of Operational Logistics at Aphria

Aurora Cannabis (TSXV: ACB) (OTC: ACBFF) uses flower and trim with a Waters Supercritical CO2 extraction machine, though it is working on microwave technology. It uses MCT and sells oils in 3 varieties, including a high-THC sativa, a high-THC indica and a high-CBD oil that uses cannatonic. The THC products aren’t strain specific at this time. The CBD oil is the company’s most popular. As a public company, ACB couldn’t discuss the margins of its oils or the percentage of sales that they represent, but the company shared an update recently that oils, which it began selling in April, fueled record sales in May of C$2.4mm. Each ml of oil contains approximately 26mg of cannabinoids.

Broken Coast’s website indicated that the company is sold out of oils and provided no information about its products.

CannaFarms sells three oil products, including a high THC product, a high CBD product and a balanced product. It uses a proprietary extraction process utilizing water and ice to create whole-plant cannabis resin and then heats it up in its carrier, grape seed oil, to decarboxylate it.

CanniMed Therapeutics (TSX: CMED) (OTC: CMMDF) sees a bright future in oils, as it is investing significantly in production capacity. In April, it announced plans to construct a new ethanol extraction facility in Saskatchewan at a cost of C$10.5mm capable of supplying 12mm 60ml bottles of oil. CMED has also exported small amounts of oil to Australia and to the Cayman Islands. The company currently offers three oils, including a high THC product, a high CBD product and a balanced product, and it intends to launch gelcaps later this year. In April, the company suggested that oils accounted for 46% of March Sales, and the company reported that for the full quarter ending in April they amounted to almost half of sales.

CannTrust claims to be the first LP to sell “pharmaceutically standardized” concentrated cannabis oils, which commenced in August 2016. The company offers three products, including a high THC, a high CBD and a balanced product. Its products appear to be among the most potent among the LPs with approximately 25mg of cannabinoids per ml, and it uses a MCT as a base. CannTrust, which is in the process of going public and has filed a prospectus, generated revenue of C$1.09mm in the quarter ending 3/31 from oils, representing 36% of sales. Its financials indicate that the revenue per gram of marijuana equivalent from oils at C$9.85 represents an 18% premium to its dried flower per gram.

Canopy Growth (TSX: WEED) (OTC: TWMJF) has stockpiled over 4.8mm grams of dried cannabis that it plans to convert to oils with its soon-to-be commissioned massive extraction machine produced by Advanced Extraction Systems, based in Prince Edward Island, Canada. I saw this gigantic machine myself in May before it became operational, and it uses a supercritical fluid extraction process that allows the retention of terpenes that might otherwise be lost in traditional CO2 extraction processes.

Mettrum was the first LP to sell oils, and it uses only the flower. Bedrocan began selling oils in June 2016. Tweed, which commenced sales in February 2016, sells its oils with single strain names. It uses sunflower oil as its carrier and recently introduced softgels. In the quarter ending 3/31, oils represented 22% of sales, but the company has been capacity-constrained.

Emblem Cannabis (TSXV: EMC) (OTC: EMMBF) isn’t yet authorized to sell oils, but it has been producing them since receiving its license in December and expects to commence sales this summer. It is using supercritical CO2 as its extraction process and MCT derived from coconut oil as its carrier, as the company explained in a post in April. The Emblem business model, with its pharmaceutical focus in the medical market and high-end flower focus for the adult-use market, suggests that extracts will play a key role in the future of the company.

Cannabinoids and other components of cannabis have real therapeutic value. Emblem is identifying the cannabis strains with the greatest evidence of benefit in various conditions, cultivating those strains at medical grade and developing advanced dosage forms to provide patients with accurate, consistent, high quality and convenient to use cannabis formulations.

John Stewart, CEO Emblem Pharmaceutical Division

Emerald Health (TSXV: EMH) (OTC: TBQBF) uses both flower and trim and utilizes ethanol and CO2 extraction processes. It currently uses MCT derived from coconut oil but is exploring other carrier oils. The company offers 30ml dropper bottles but will introduce capsules later this year and other formats in the future. Its 8 products are not strain-specific, but it offers some unique oils, including both a THCA oil as well as a very potent 50mg per ml CBD oil, which it began to sell in April. For the quarter ending 3/31, oils represented 20% of its $201K in sales. The company said that oils are more profitable than flower. CEO Bin Huang stated that the company is collecting data and plans clinical studies to verify the merits of its products.

Hydropothecary (TSXV: THCX) (OTC: HYYDF) has been approved for the sale of oils but hasn’t yet launched its first product, Elixir N°1 (expected this summer). It does offer an interesting product, Decarb, which is decarboxylated milled cannabis intended for oral ingestion. The company ships the product with a free CannaCap product capsule machine and capsules, and it is available in four formats.

Maricann (CSE: MARI) (OTC: MRRCF) produces its iCann Oils with trim and flower using supercritical fluid fractionation (CO2) and a base of olive oil. It offers four different brands, including Forte (high THC), Balanced (CBD/THC ratio between 0.5X and 2.5X), Moderate (CBD/THC ratio between 2.5X and 3.5X) and Rich (high CBD). The company, which has partnered with Colorado-based Evolab, expects oils to surpass flower in terms of revenue generation in the coming months.

MedReleaf (TSX: LEAF) (OTC: MEDFF) uses supercritical CO2 equipment with proprietary know-how and unique equipment design and specifications, with the process using food-grade carbon dioxide to protect terpene degradation. Its offerings, including oils and capsules, are tied to proprietary strains (sometimes single strains), using flower and trim, and the carrier is high oleic sunflower oil, and it typically offers at least four oils and four capsules. The company argues that its proprietary strains and its extraction process that retains 99% of the terpenes creates a superior product. The company doesn’t break out its oil sales, which commenced in November, but it projects that it could account for 30-40% of sales within a year.

Organigram (TSXV: OGI) (OTC: OGRMF) has commissioned Advanced Extraction Systems to build a commercial scale system capable of processing more than 5mm grams per year and is expected to come into production later this summer. The company, which began selling oils last August, has also partnered with Colorado-based The Green Solution to introduce other forms of extracts over time as approved by Health Canada and hired a Director of Edibles and Extraction earlier this year to oversee its new extraction lab. Its current offerings of OrganiOils use grapeseed or sunflower oils as carriers. During the quarter ended 2/28, its sales of 139 liters of cannabis oils represented 80% growth over the prior quarter.

Peace Naturals, which is wholly-owned by Cronos Group (TSXV: MJN) (OTC: PRMCF), uses both flower and trim with both supercritical and subcritical CO2 extraction machines custom-built for the company to separately extract cannabinoids and terpenes, which are recombined and blended with a pharmaceutical MCT carrier oil (chia and coconut). Its two offerings are currently a blend of strains that are THC-focused, but it expects to offer strain-specific oils and to introduce capsules as well. The company began selling in December 2015, and its Cerene oil, which has a lower THC potency than Omega, is the more popular variety.

THC BioMed (CSE: THC) (OTC: THCBF) makes no mention of cannabis oils on its website despite having been approved for production and sale.

Tilray lists three capsule products (low THC, medium THC and low balanced THC/CBD) and four oil drops (indica, sativa, hybrid and high CBD). The carrier oils it use include coconut oil (for drops) and sunflower lecithin oil (for capsules), and it uses a cold extraction method. Tilray has exported extracts to both Chile and New Zealand.

WeedMD (TSXV: WMD) just received its production license in mid-June and will be producing using ethanol extraction on a German machine.

Whistler Medical Marijuana has the widest selection of cannabis oils, offering 22 different varieties detailed in an interactive table. Many of the varieties, some of which are blends, including high CBG and high THCA, and the majority of which are strain-specific, are available in more than one of the three sizes offered. Interestingly, the company offers more strain-specific oils than strains of dried flower. One oil variety is designed for topical applications. A shortcoming is that its most potent CBD oil tops out at 9mg per ml and has significant THC, with Whistler lacking a high-CBD low THC product. The company also offers sample packs of three different varieties. Whistler uses ice and water for extraction and organic coconut oil and organic extra virgin olive oil as carriers.

Cannabis oils are clearly driving the medical cannabis sales growth in Canada despite having many limitations, and the momentum is likely to continue. Thus far, only a few companies are offering formats in the softgel or capsule form, and it is probable that Health Canada will allow other formats, such as cartridges for vaporization or pre-loaded pens, in the near future. As Canada embraces full legalization, it seems likely that producers will be able to sell non-liquid forms of extracts or edibles and topicals, which are popular in the United States, and many of the LPs are already preparing for these new formats.

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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