April 1, 2019

Paradigm Capital Analyst Discusses First Biosynthetics Cannabis Conference

Midas Letter
Midas Letter
Paradigm Capital Analyst Discusses First Biosynthetics Cannabis Conference

Paradigm Capital Equities Analyst for Healthcare and Biotechnology Rahul Sarugaser discusses the company’s biosynthetics cannabis conference, which will be held on April 15 and is the first of its kind in the industry. Sarugaser notes that while no company is producing biosynthetic cannabinoids at scale yet, biosynthetics have the potential to bring down the costs of goods. Sarugaser provides an overview of the process and the benefits of using yeast, E. coli, or algae as a chassis. While the industry has not been able to identify the best chassis yet, he suggests the best biosynthetic cannabinoids are a result of the best combination of chassis, intellectual property, and scientific team. Sarugaser highlights Ginkgo Bioworks Inc as the segment leader and notes the company’s partnership with cannabis heavyweight Cronos Group Inc (TSE:CRON) (NASDAQ:CRON) (FRA:7CI) to develop cultured cannabinoids has the potential to produce biosynthetic cannabinoids at scale.


James West:   Rahul Sarugaser joins me now. He is the analyst with, sorry –

Rahul Sarugaser:   Paradigm.

James West:   Paradigm Capital. I had to give my head a shake there – we’ve had so many analysts in the few days. Rahul, welcome.

Rahul Sarugaser:   Thank you, thank you very much for having me.

James West:   Rahul, the thing that generated my first interest in reaching out to you was, I received an invitation to a biosynthetics conference as it pertains to cannabis, and I thought, wow, this is what I call first mover! That’s the first time I’ve seen that. So what – how did you become the first sort of institutional name that was actually promoting a group of biosynthetic producers?

Rahul Sarugaser:   Yeah, that’s a great question. So basically, myself and my associate, Michael Friedman, we’re both engineers, and we’re both biopharma guys. And we’ve been focusing on the development of clinical assets, both in cancer, but also in the cannabis space. And we wanted to understand what are the technologies that are going to be the future of this industry. And because we’re biopharma guys, pharma makes their drugs in e.coli and in yeast, and this is a clean, crisp way of making drugs.

And so we wrote a white paper back in January; we’ve really been talking about this for the last year, but we wrote a whitepaper in January talking about how biosynthesis, the use of yeast or e.coli or some other microorganism, can be used to make THC or CBD or what we call APIs – active pharmaceutical ingredients. And by using this modality to manufacture APIs, we can bring down the cost of goods significantly – probably 10 to 100 times what can be produced in the plant. It can be consistent, and it’s very, very scalable.

And so for example, a room this size could probably replace thousands of square feet of grow space of plants.

James West:   Yeah, so there’s so many interesting aspects to the biosynthetic sourcing of cannabinoids. At this time, there is nobody producing cannabinoids on a commercial scale, correct?

Rahul Sarugaser:   That’s correct.

James West:   And yet there are several companies that are through the laboratory phase and sort of starting to experiment with commercial phases.

Rahul Sarugaser:   Right.

James West:   And for me, now, you can correct me if I’m wrong, I’m watching seven companies right now. They’re in, some are trying with genetically modified yeasts, some are trying with genetically modified bacteria, and some are trying with genetically modified algae. And is there – my first question with that setup is, are there additional mediums being experimented with, that you know of?

Rahul Sarugaser:   Those are the primary three media that are being used, and there are some non-traditional microorganisms that are being investigated by a company like Celibre. So Ginkgo, for example, that did the deal with Cronos, they’re looking at using yeast, or effectively, baker’s yeast. And then you have companies like InMed in Vancouver, who are using e.coli. And you know, Ameris, who just did the $300 million deal with Leveon, are likely to be using baker’s yeast as well.

So we see the majority of the companies using yeast; a few of them using e.coli, and a small number using algae. And as we look at these companies, really are finding there are three primary criteria that we’re looking at to evaluate the strength of these companies, and that is one of three, which is, what is the microorganism, or the industry term is chassis, that is being used.

But just as importantly is, what is the strength of the team that is looking to develop this particular chassis for the manufacturing of cannabinoids, whether it’s THC, CBD or some other cannabinoid? And biosynthesis has really been around for more than 40 years. You know, we’ve been making insulin for, you know, for 30 years using biosynthesis. We’ve been using biosynthesis to make most of our cancer drugs, which are antibodies. And so this technology is not new; it’s just application of it into a new space. And as a result, there are teams out there, for example, that have come from Synthetic Genomics or Intrexon or other places like that, and even Ameris, that have expertise in being able to do this.

And so we’re looking for the companies that have teams that have kind of spun out of these first in class companies. And then of course, finally, and just as important, is the intellectual property. And again, because yeast and e.coli have been used as chassis for such a long time, they’re fantastically malleable, and they’re great tools in order to engineer them. But as a result, there’s also quite a lot of IP that’s been filed in the space over many, many years. And so the companies that we see positioning themselves best are also looking to file IP and/or secure IP that’ll give them the freedom to operate in the space.

So really, those three criteria are kind of symbiotic, and they all have to work together.

James West:   Sure. So you used the term chassis; how do you spell that?

Rahul Sarugaser:   Oh, boy. Chassis.

James West:   Okay. So is it like, is it chassis on the car that carries everything else, kind of thing?

Rahul Sarugaser:   Exactly, it’s like a vehicle.

James West:   Okay, that makes sense. Interesting terminology. So, out of the three main media or chassis types, you’ve got your bacteria, your algae and your yeast that we’ve both been hearing about. Do any of those strike you, at this time in the evolution of your career, as way out in front of the others in terms of functionality or limitations?

Rahul Sarugaser:   That’s a fantastic question; it was a question that we’ve been wrestling with. In our whitepaper, we had sort of taken the position around a yeast or some form of yeast, but as we dug into the space and met most, if not all, of the companies that are doing this, we’re learning that it’s really symbiotic between the chassis, the team and the IP. Because if you’re developing a mechanism of manufacturing in e.coli, you have to have the IP to be able to do it there; or, if you’re doing it in yeast, you have to have the IP to do it there. So I wouldn’t say that one is necessarily the best; we are not yet, the technology has not evolved yet that we’ve been able to identify which is the best by far.

But it’s important to recognize that this is not a zero sum game. It’s not just going to be one biosynthesis company that’s going to win; there’s probably going to be five, maybe even ten. And that’s why we see this space similar to the large cannabis companies. We don’t have – investors don’t have to be scared and say ‘Oh, which one, did I pick the wrong one?’ It’s about trying to pick one of those top five or one of those top ten. And herein lies the opportunity, which is why we’re hosting this conference on April 15th, to present to investors and to present to the large growers who are looking to, you know, take a hedge in this space. you know, aggregating the best companies that we’ve seen. And this is really the first time, to our knowledge, that there’s been a critical mass of biosynthesis companies that have come together.

And even some of the CEOs of these companies have been quite impressed with the other companies that have, you know, have agreed to participate. So we’re quite excited about it.

James West:   Sure. So then, has any one company emerged as being far out ahead of the pack, at this point?

Rahul Sarugaser:   That’s a tough one. So I’ll mention sort of what we think are some of the best five, recognizing that this is a dynamic list and things are changing.

James West:   Sure.

Rahul Sarugaser:   So, you know, near the top of that list, of course, is Gingko, that did the deal with Cronos, and Cronos made a very savvy bet, there. Celibre, which is a start-up company out of San Diego, which is using a non-traditional chassis, and have a team out of Synthetic Genomics, which is essentially the brain trust of synthetic biology.

There is, of course, Intrexon, that have years and years of expertise doing this. Ameris, of course, who did a $300 million deal with Leveon in the space; and then the last one is actually a still in stealth mode, but they will be having their IP published really in the next couple of weeks, and they’ll be presenting at our conference as well.

James West:   Is that the algae one?

Rahul Sarugaser:   No, not the algae one.

James West:   Okay. [laughter] I’m trying to squeeze out any little tidbit that I could get that might give me a hint as to who it is. Okay, so your conference on April 15th, I’m excited about that. I hate conferences, I almost never go to them, but this is intriguing because it’s kind of like, right out there at the cutting edge in an area that a lot of people aren’t even aware of, yet.

Rahul Sarugaser:   And that’s the key reason that we’re having this conference, is that, you know, we’ve been talking about this space for a year. Gingko and Cronos did the deal almost, you know, almost about a year ago, or six months ago, and most investors in the cannabis space tend to be intimidated by – when they hear biosynthesis, they see a chemical cascade. You know, they’re more comfortable with grow space or square footage or, you know, grams per square foot.

But the fact is, with the advent of differentiated products coming online in October, the APIs that are going to be included in these differentiated products are, you know, sourcing them is going to be very, very important. So this freight train is coming, and investors can hide as long as they want, but if they don’t want to get left behind, it’s really important that they learn about where this next generation of APIs are going to be produced. And for example, when Walmart and General Mills and Pepsi and Coke get into the space, you know, it’s going to be difficult for them to source APIs from plants, where it can be relatively inconsistent, where pricing is going to be a significant issue, and they’re going to want high quality, low cost, consistent and very scalable production.

James West:   You bet. Okay, so where is the conference, who qualifies, and how do you get to go?

Rahul Sarugaser:   So, it’s invitation-only at the moment, so you have an invitation. We are planning it at our offices on York Street, however, we’ve had such an overwhelming response that we’re now looking for a larger space. So stay tuned on the exact location; it’s going to be an afternoon event on April 15th, and then of course we’ll have a networking session, something that’s very important for all of these companies because we only had 10 slots, and there’s at least, probably 20 companies coming. And so we’re providing for a lot of networking opportunities during the conference, for both investors and the companies to get to know each other.

James West:   Wow, very exciting. Rahul, I’m so glad to have had you today, and we’re going to look forward to the conference, and we’ll have you back afterwards to get an update on what you saw that you liked. But thank you for joining me today.

Rahul Sarugaser:   Cheers.


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