Saturday, September 23, 2017 12:20:26 PM
From the report The Value Case For Investing In The Cannabis Sector
July 26, 2017 – by VIII EIGHT CAPITAL
Page | 9
"... We would like to draw a parallel between the growth in specialty versus traditional coffee and the growth in cannabis oil versus dried cannabis. The first cannabis oil sales data was available for the January to March 2016 quarter where cannabis oil accounted for 3% of amount sold to clients. In the last reported quarter (January to March 2017) cannabis oil had risen to 12% of amount sold to clients, representing an average quarterly growth rate of 82% compared to dried cannabis which grew at an average quarterly growth rate of 18% over the same time period. We believe that cannabis oils will continue to grow as oils and oil capsules are gaining in popularity among patients and physicians due to familiarity with taking medicine in capsule form, and being more comfortable with the ability to dose cannabis more precisely. An eventual roll-out of edibles and other derivatives (tinctures, sprays, creams) will only increase the popularity of "specialty" cannabis offerings ..."
Page | 10
"... As for tobacco companies, cannabis is not yet listed in their risk sections but there have been a couple of interesting developments.
In 2016, Philip Morris invested $20 MM into Syqe Medical, makers of a portable meter-dosed cannabis inhaler, with the intention of making a device that will reduce the harmful effects of smoking tobacco. Imperial Brands appointed Simon Langelier as a non-executive director. Mr. Langelier had extensive experience at Philip Morris but is now chairman of PharmaCielo Ltd, a company aiming to become a medical-grade cannabis oil producer and Imperial Brands will use his experience in “wider consumer adjacencies.” While this is no confirmation of a move into cannabis, it is worth noting that the company removed Tobacco from their name a while ago ..."
Page | 19
"... New customers would enter the market with the introduction of more diverse offerings. Though it's difficult to place value on the new products that could be introduced, given the lack of clarity on the framework, we can look to sales in recently legalized US states for insight. For example, only 50% of Colorado's first year's sales were comprised of flower or bud; the rest were derivatives, oils, edibles, tinctures, creams and the like. Canada is unlikely to unfold as quickly given we believe a more stepwise approach will be taken, but medical cannabis oils are starting to catch on ..."
Page | 26
"...Some LPs are developing cannabis-based products, including oral, topical, edible, and inhalable delivery methods. However, these products are subject to relaxation in the stringent concentration limits of the regulations and subsequent approval by Health Canada before being made available for sale. The company is focused on the innovation needed to develop new products, including best practices for cannabis production, oil extraction, purification, design, and formulation. Only 3 LPs have received clearance to sell cannabis oil capsules that are simpler for physicians to prescribe and better for patient compliance and health (over smoking). Extraction processes that protect cannabinoids from in - process oxidation and protect terpenes (other aromatic and therapeutically relevant compounds) from breaking down are important. Research has shown that terpenes work in concert with properly preserved cannabinoids for therapeutic effect ..."
"... Terpenes are fragrant oils secreted from the cannabis flower's resin glands that produce cannabinoids, but are not unique to cannabis plants since they are found in other plants, fruits and herbs. Each strain of cannabis has a unique terpene type and composition and over 100 terpenes have been identified. The key attribute of a terpene is its capability to act synergistically with cannabinoids and other compounds in the plant, sometimes referred to as "the entourage effect" ..."
Page | 27
"... The variety of ways that cannabis can be consumed is increasing, especially in mature markets, and this has led to many categories of products being available. Smoking remains the most popular method of consumption and is served by the flowers and pre-roll categories. Due to the concerns of adverse effects on the respiratory system, other methods are gaining popularity, especially concentrates and edibles. Concentrates encompasses oils, resins, waxes, hash, rosin and cartridges for vape pens. Vaporization has gained traction as a vaporizer uses lower temperatures than smoking and so produces fewer by-products. Oils can be consumed by themselves, as a capsule, or added to food and drink. CO2 is the cleanest method of extraction and results in a pure cannabis oil extract. Edibles include food and drink consumed orally. Other methods of cannabis consumption are tinctures (drops placed directly under the tongue), sublingual sprays (similar to tinctures but in spray form) and topical creams/sprays. Data from three mature markets with legalized recreational use (Colorado, Oregon and Washington) demonstrates that concentrates and edibles are the fastest growing product categories ..."
Page | 29
"... Our $3.0B flower & extracts medical market assumes 50% of patients only purchase flower and 50% of patients only purchase extracts, we assume no cross-selling though it is likely. We introduce other products into our medical market estimate in Figure 43 (green bar) , and look to two US states to draw comparison. In Oregon some "recreational-like" products have been made accessible to patients through prescription as that state transitions from medical to medical +recreational, and in the first two years of legalization in Colorado only ~50% of all sales were from flower, meaning the rest were from oils, extracts, edibles, creams, etc. ..."
We use the same 1.0g(eq)/patient/day consumption rate for extract products as smoked cannabis because we assume the much higher concentration in extracted products (60-80% THC for extracts vs. ~15% THC for smoking) is offset by their much lower bioavailability (4-12% for extracts vs. ~50% for smoking) (British Journal of Psychiatry, Feb 2001). For pricing we assume $15.00/gram (eq), which is roughly the implied price per 'infused edible unit' we calculated from the Colorado Department of Revenue, and in line with the pricing some of the LPs are charging for oils today.
Our $9.0B total market estimate is derived from our $3.0B medical estimate above and the assumption that Canadian recreational sales drive 65% of total revenue. In Colorado's first year of legalization, medical and recreational sales were split 50:50, but in its second full year recreational sales outweighed medical 60:40, with sales of extracts accelerating. A summary of our estimates is in Figure 44 below, and we have also looked at the market using a bottom up approach in Figure 45 to back into our recreational estimate.
We believe the Canadian cannabis industry is likely to reach a similar point that other legalized jurisdictions have, where the medical program and the adult use or legal program coexist and contain a wide range of products. However, a slower stepwise approach with a best-in-class medical framework already in place, in a country that regularly fosters innovation, Canada has a chance to yield a flourishing recreational market ..."
Page | 47
"... In May 2016 the Canadian Journal of Hospital Pharmacy published a survey that showed ~50% of Canadian hospital pharmacists who responded agreed that medical cannabis is safe and/or effective, yet there exists a large knowledge gap about how to prescribe since many of them work in institutions that don't have proper policies in place. Some pharmacists would need more published evidence to prescribe smoked cannabis, and may be more inclined to prescribe or dispense oil or extracts in a pill or capsule provided proper dosing regimens were outlined ..."
Source: http://docs.wixstatic.com/ugd/51c183_34348813c00846869dd1012695a33cf1.pdf
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