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420Investor Founder Alan Brochstein on Cannabinoid Biosynthesis Value Proposition

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

420Investor founder Alan Brochstein, CFA provides a rundown of the Paradigm Capital Biosynthesis Conference. Brochstein explains that companies are attempting to create biosynthetic cannabinoids with the goal of creating a standardized, low-cost source of cannabinoids. Brochstein suggests that, if successful, biosynthetic cannabinoids could be a game-changer for the industry. He cautions that while institutional money is starting to flow into the space, no company has been able to synthesize cannabinoids at scale and at cost. Brochstein breaks down what biosynthetic cannabinoids mean for existing cannabis companies, indicating that while it could be negative for cultivators, it offers a potential boon for cannabis product manufacturers. Brochstein believes cultivators aren’t currently under threat and notes there will always be a demand for flower, especially premium dried flower. Brochstein suggests that with growing acceptance and evidence that cannabis consumption has health benefits, extracted products will grow in market share. He feels CannTrust Holdings Inc (TSE:TRST) (NYSE:CTST) (FRA:C9S) management should have been more proactive with guidance prior to releasing its latest financials. However, he notes the market has responded too harshly to CannTrust and the company’s recent downward trend is providing appealing entry points.

Transcript:

James West:   Alan Brochstein joins me now, CFA extraordinaire from the United States of America. Alan, welcome to the show.

Alan Brochstein:        It’s great to be here live.

James West:   It’s great to have you here. Yeah. So you’re here for the Benzinga Conference tomorrow.

Alan Brochstein:        And I was at Paradigm yesterday.

James West:   So let’s talk about that Paradigm Capital Conference because that was really the first biosynthesis cannabis conference that I’ve ever heard of. Do you know of any other one?

Alan Brochstein:        These guys have done a good job of bringing it to the institutional investor awareness and I’ve been following biosynthesis. I learned yesterday a lot of people prefer to call cellular agriculture.

James West:   The other guy said metabolic engineering.

Alan Brochstein:        Oh, yeah, there you go. So I’m not a scientist. I’ve been following the stuff for about, I think, about three years, and very aware of what might happen and what the risks and opportunities might be. So I’ve been watching it play out and ironically, of all those companies that were there yesterday, what were there dozen? Only two of them were around three years ago, focused on cannabis. And now we’ve seen very impressively some well-funded companies with good connections to Silicon Valley investors etcetera, you know entering the space. I thought it was funny, a lot of these are failed biofuels companies, but they’re on a different kind of oil now.

James West:   Right, well case in point: Amorous Inc. Was probably….went from $60 back in 2012, I guess it was, to a low of $2 recently, based on the fact that they were trying to engineer biofuels from algae, after $1.5 billion in paid-in capital. They arrived at this new low market cap before they pivoted to you know, now that the largest producer of squalene in the world, which is arguably the best ingredient for skin care.

Alan Brochstein:        Right. He was bragging about that billion and a half. [laughter]

James West:   He was, and I thought that was an interesting approach, you know? But that’s exactly the main takeaway for me from that conference was this is not like ‘oh growing cannabis is legal now, let’s start a grow op.’ You can’t just say ‘oh, yeah, actually, let’s biosynthesize it, were just going to start a little bioreactor here on the table and figure it out.’ You mean you can’t do that. As the one speaker made very abundantly clear. I think it was actually Jonathan Page from Aurora. It’s a multi-disciplinary scientific approach that actually requires a team for each of the sub-disciplines to bring it all together into a product. One of the main things that I took away from it that is in the world of cannabinoids, some of them are producing at scale but none of them are producing at the “in the money” economic level.

Alan Brochstein:        It’s still a dream.

James West:   Right.

Alan Brochstein:        But just for your audience’s benefit. So, what they’re trying to do in case people aren’t aware, is to take cannabinoids out of the cannabis cultivation and put it into the fermentation process or other types of biotech processes and I learned a new one microalgae. I mean, I’m familiar with that. That’s the way a lot of DHA is made and some others but yeast has been a common one, E-coli. I know people in your audience pay attention to InMed. There was not a lot of good talk about E.coli but yeast, lot of people working on that.

I learned yesterday that yes, you can technically make these cannabinoids using yeast or algae or these other processes, but there may be harmful byproducts that are created. So I think the takeaway for people should be this is something to watch, there’s a lot of capital now starting to flow into the space. There’s definitely some brilliant people that are focused on it. And the goal is to create a standardized, low-cost, source of cannabinoids and this will obviously impact many LPs if it’s successful. Because number one, if they’re good branding companies, it’s going to benefit them because they’ll be able to find their cannabinoids to go into their quote-unquote cannabis products at a much cheaper price of more reliable consistency. At the same time, imagine, you know, a lot of people like to pound their chest and say, ‘oh we’re going to grow a gazillion grams of cannabis.’ Well, it’s not going to be necessary if this works out. So I suggest investors pay very close attention to these dozen or so companies. There’s a few others as well that are working on this because it really could be a game-changer for the industry.

James West: You know, it’s interesting and just for the sake of discussion, I want to challenge you on the idea that this will be lower cost in the future. I mean the great present hope is that we will be able to bio produce huge vats full of cannabinoids, specific ones, not just the major ones, but the minor ones as well. As the one gentleman said in a very promotional way, I thought, that in one facility they will be able to produce all of the demand for all cannabinoids in the world every year.

Alan Brochstein:        I challenge them on that because it’s theoretically true but it’s not likely to happen. I think the other thing that people need to understand is that THC and CBD, these are well-known, well-understood in use. These other ones are the rarer ones that Cronos Group talks about. Nobody’s selling products with this right now and what I’ve heard from a lot of people in the crowd, that know more than I do, is that you’re not going to be able to just slap these products on to the public without some sort of testing and things like that. So that part of the story is a little shady.

I do think you can look at, and they gave a great example yesterday ,vanilla, you know. Natural vanilla is still around but it’s much cheaper to buy the stuff that’s made through these biotech processes and there were some other examples as well. And so, I would not be surprised if five years, ten years from now a lot of the industry products are from this source.

James West:   One of the takeaways for me also was that okay, so you guys are able to engineer these genetically modified organisms to bio create specific CBDs that are not of the, you know, most popular THC and CBD, but some of the minor cannabinoids. It strikes me that at the same time in the evolution of plant engineering is it not likely that they will create strains of plants that are capable of concentrating on a specific compound up from among the cannabinoids as well? Therefore, just as these processes are evolving forward, so is the actual craft of cultivated cannabis.

Alan Brochstein:        Sure the genetics are improving.

James West:   Right and you know cannabis has this amazing ability to generate biomass from a small, relatively small proportion of nutrients, water, soil, and other inputs, right? Yeah. So this is the thing, it’s like well five years down the road let’s assume that the biosynthetics are going to be there. Are they really going to be cheaper than the cultivated crops once they’ve had their full frankenmoment?

Alan Brochstein:        I think so, because most of the hemp industry you’re talking about, at least for now, the genetics aren’t good enough. You have to take so much mass, and the transportation cost, and processing costs and all that. I can’t imagine that’s a more efficient way than these processes, but we’ll see.

James West:   Right, so for now, you’re very much of the opinion that the cultivation industry is under no immediate threat now?

Alan Brochstein:        A lot of people that say it’ll replace, no, because there’ll always be a market always, especially for premium flower, but even crappy flower, there’ll be a market for it because that’s what people like, that’s not likely to change. People still smoke even though we’ve seen a big shift in the tobacco market towards other delivery mechanisms that are healthier, so sure. I would imagine there will always be a demand for a lot of flowers, especially premium flower.

James West:   Right? Yeah, for sure. The interesting slide I saw that they put up was that 25 percent of the market they were expected to remain premium dried flower, relative to 75 percent which would be the part of the pie that all of the extracts have to share.

Alan Brochstein:        Right? Well, just remember these guys are really bullish on their own stuff.

James West: [laughter] Actually interestingly, I was in the was in the most, well, anecdotally and empirically, what I thought to be the most, financially robust operation on the retail side in San Diego, California, a place called Urban Leaf. I had the chance to speak to the CEO and he said that they did $48 million of top line revenue in 2018 at this one single store. I said, okay, so tell me what is the breakdown of the segments of product? And he said well 50 percent was premium dried flower, 15 percent was extracted products, like edibles and beverages, and then the remainder was more or less made up of hybrids. So like not extracted but certainly concentrated forms of like shatter, butte, waxes, the vape pens and fillings.

So to me it was like wow, you know California, from a consumer perspective, is probably one of the most sophisticated…

Alan Brochstein:        And they’re still flower.

James West:   Right and it’s still 50 percent dried flower.

Alan Brochstein:        That’s all the markets. I mean if you look at Washington, Colorado, all that and the growth seems to come from the newer products and I think what’s going to really change those numbers is as more evidence comes out. Hopefully, that the use of cannabis products is, you know pro health and not adverse, will see new consumers coming in the market and they won’t be buying premium flower, they will be buying vape pens. They’ll be trying edibles. They’ll be trying other forms that are you know, more of these beverages that don’t really exist yet. I think that’s where the markets headed.

James West:   Cool, alright Alan and finally, what’s your favorite top cannabis company pick right now in the world?

Alan Brochstein:        Wow, so I’m kind of a contrarian, you know, it’s been disappointing to see some of these reports. I don’t want to make it sound like I think that they did a good job. Peter Aceto’s doing a good job, but he failed on guidance and he should have let the market know. Maybe Aphria as well which just reported. They should have kind of let the market know that the expectations that the analysts had were just so far off. Of course these weren’t the first ones but I think the reaction to CannTrust was a little bit too severe. I’ve liked their story. I think they’re well positioned, their market cap is low. I think they haven’t executed as well as Organigram, but they’re trading in a lower valuation right now. So I guess if I had to pick a stock right now, that one’s pretty appealing.

James West:   Alan, pleasure as usual. So great to have you here in the flesh.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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