Jim Plamondon: Precision Fermentation: An existential threat to the cannabis industry – Isolates

Cannabinoids made by precision fermentation pose an existential threat to much of the cannabis farming & processing industry.

Here we discuss the disruption of cannabinoid isolates.

 

Jim Plamondon

Precision Fermentation: An existential threat to the cannabis industry

Cannabinoids made by precision fermentation pose an existential threat to much of the cannabis farming & processing industry. This article discusses the disruption of cannabinoid isolates.

 

Introduction

Genetically modified microbes are being fermented in breweries, today, to produce cannabinoids. The combination of genetic engineering and fermentation is called “Precision Fermentation” (PF). The resulting Precision-Fermented Cannabinoids (PFCs) can be sold as isolates, blended with terpenes and flavonoids into pseudo-extracts, and soaked into cheap hempseed flower biomass to make pseudo-marijuana flower. These PFC-based products are likely to be very attractive to those who just want to treat their medical conditions (or get high) inexpensively—that is, to everyone except connoisseurs.

Because of this attractiveness, PFCs will disrupt much of the cannabis farming and processing industry over the next dozen years, give or take. This is an absolute certainty. The only question is: how much of your corner of the industry will be lost to PFCs?

This article is the first in a three-part series that will attempt to answer that question:

  1. PFCs: Disrupting Cannabinoid Isolates
  2. PFCs: Disrupting Cannabis Extracts
  3. PFCs: Disrupting Cannabis Flower

Let’s start by discussing traditional fermentation, precision fermentation, and precision-fermented cannabinoids.

Traditional fermentation

Fermented products are everywhere: bread, beer, wine, pickles, yogurt, etc.. Living yeast is added to bread dough, where it eats some of the dough’s carbohydrates and exhales carbon dioxide gas (just as humans do). This gas inflates the dough with tiny bubbles, causing the dough to rise and giving bread a soft, sponge-like texture. Without the yeast—or a chemical alternative such as baking soda—all bread would be “flatbread,” like tortillas, pita, and matzo.

Likewise, adding live yeast to a mash of hops and barley makes beer, adding live yeast to grape juice makes wine, and adding live bacteria to milk makes yogurt. Sourdough bread is made with a blend of live yeast and live bacteria.

In general, fermentation uses living “microbes”—yeast, bacteria, algae, fungi, or a combination thereof—to convert a cheap input into an expensive output.

Precision fermentation (PF)

In PF, microbes are genetically engineered so that, instead of converting grape sugar into alcohol, they convert a cheap input to insulin (1982), or to human growth hormone (1985), or to chymosin (a protein used in cheese-making, 1990), or to DHA (an ingredient of infant formula, 2002), or to squalane (an ingredient of cosmetics, 2010), or to vanilla flavoring (2014).

PF: Disrupting agriculture

These PF outputs have been widely embraced, satisfying 90% or more of demand in some markets. As PF’s microbe-engineering technology improves, new microbes are being engineered to produce an ever-expanding range of outputs. As a result, PF is poised to disrupt many agriculture-based products within the next decade.

One such disrupt-able agricultural product is dairy—especially the proteins isolated from dairy milk. According to this TEDx talk, New Zealand’s dairy industry is poised to be disrupted by PF dairy proteins, devastating the economics of its dairy farmers.

Could the world’s cannabis farmers be similarly disrupted? Yes. To learn how and why, read on.

Disrupting Isolates

PF cannabinoids (PFCs)

The spreading legalization of cannabis has created demand for isolated cannabinoids, especially cannabidiol (CBD), for use in cosmetics, beverages, and other consumer goods. The relatively high price of these isolated cannabinoids begs the question: can PF be used to create these cannabinoids profitably at a lower price than farming and isolating them? More than a dozen PFC companies have sprung up, each offering a slightly different answer to this question.

Each such PFC company must:

  • Understand the pathway by which the cannabis plant produces a given cannabinoid;
  • Modify a microbe to include a similar pathway; and then
  • Use that modified microbe, fed by cheap inputs, to produce that cannabinoid profitably.

Let’s consider the cannabis plant’s cannabinoid-production pathway.

Cannabis’ CBG-first pathway

Within the cannabis plant, the cannabinoid-production pathway leads first to CBGA (cannabigerolic acid). From there, the pathway branches. One branch converts CBGA to CBDA. Another branch converts CBGA to THCA. Each branch converts CBGA to a different cannabinoid.

In CBGA, the ‘A’ stands for “acid.” CBGA is the “acid-form” of CBG; CBG is the “neutral-form.”

Because most other cannabinoids are derived from CBGA, the PFC companies must start by modifying a microbe to produce CBGA. Later, they can modify that microbe’s children so that one child-strain produces CBDA, another produces THCA, etc. Each would produce a single cannabinoid, but among the microbe’s dozens of child-strains, each cannabinoid found in the cannabis plant could be produced by PF.

Outside the plant, heating an acid-form cannabinoid (by smoking, vaping, cooking, or otherwise) removes its ‘A,’ turning CBGA into CBG, CBDA into CBD, THCA into THC, etc., in a process called “decarboxylation.”

CBG and CBGA are, together, referred to as “CBG/A.”

PFC companies’ CBG-first announcements

Because PFC companies must design a CBGA-producing microbe first, it is not surprising that many PFC companies have announced that they expect their first commercial PFC to be CBG. For examples, see announcements from Amyris, BIOMEDICAN, Creo, Demetrix, Ginkgo/Cronos, and Willow Biosciences.

More surprising is that many of these PFC companies have also announced that they expect to start producing CBG in commercial quantities before the end of 2021, which is only six months after this article was written.

100% pure CBG is a commodity

Any kilogram of 100% pure CBG is interchangeable with any other, whether it comes from:

  • A cannabis plant, a chemistry lab, a yeast, a bacteria, a fungi, or an algae;
  • An organic farm or a kosher brewery;
  • This company or that company;
  • This state or that state;
  • This nation or that nation.

This interchangeability is the defining characteristic of a commodity, for which the only significant differentiators are purity level, the nature of any impurities, and the price—just like gold, soybeans, iron ore, and lean hogs. Because of this, buyers can be expected to buy the lowest-priced CBG that meets their purity specifications. If buyer wanted to pay more for SunGrown CBG, organic CBG, kosher CBG, or whatever, then they could do so (assuming transparent track-and-trace). However, they would be paying extra for a different logo, not for a different molecule.

The same is true of CBD, THCV, and every other cannabinoid: each pure cannabinoid is a commodity.

According to Stephen Goldman, Chief Science Officer at Kaycha Labs (a national leader in cannabis testing technologies and methods), “From a chemical perspective, products are identical if they have the same make-up, whether they are derived from natural or synthetic sources.”

Next after CBG/A?

As stated above, the cannabis’ plant’s pathway branches after CBGA. Each pathway involves a unique series of chemical reactions, so each will require unique R&D (although there will be commonalities).

The steps in some of the branches are more complex than the steps that led to CBGA, and require a more specialized cellular environment. This is one reason why, in the cannabis plant, the last steps in THCA synthesis (for example) take place in trichome heads, separated from the rest of the cannabis plant’s biochemistry by trichome stalks: to provide the specialized environment needed to make THCA. The same is true for the other cannabinoids, with some pathways requiring more specialization, and some less.

R&D budgets are not infinite, so each PFC company must decide which cannabinoids to target next after CBG/A. The key factors that influence this decision are:

  • The expected cost of R&D;
  • The risk of R&D failure;
  • The availability of licensable intellectual property that could reduce the risk of R&D failure (potentially to zero) and the cost of licensing that IP;
  • The market demand; and
  • The expected margin.

That’s a lot of variables, so we can expect that different PFC companies will choose to focus their R&D on different cannabinoids.

What will PFCs cost per kilogram?

The next dozen months

According to a report published by the analyst firm Raymond James on 23 September 2020, “COGS [Cost Of Goods Sold] is a very, very closely held piece of information in the cannabinoid manufacturing space.” Here are the only two PFC costs that I have been able to find in the public record:

  • $1,000/kg: In the 2018 deal between Ginkgo Bioworks and the Cronos Group, the ceiling cost-of-production agreed upon was $1,000/kg. Ginkgo had strong commercial incentives to get its cost below this ceiling. This same ceiling applied to all eight of the cannabinoids that Ginkgo agreed to design: THC/A, CBD/A, CBC/A, CBG/A, THCV/A, CBGV/A, CBDV/A, and CBCV/A.
  • $400/kg: In 2019, UC Berkeley researcher Jay Keasling, whose work informs much of the development of PFCs, stated “We know…that we’ll be able to produce these molecules at less than $400 per kilogram…and we might be able to get down even cheaper than that.”

From this, we can conclude that the cost of producing PFCs, in the next dozen months, is likely to be within the $400-$1,000 per kg range.

The next dozen years

How low can PFCs’ cost of production be expected to fall, and how fast?

Before I answer that directly, please consider this: Apple released its first iPhone in 2007 at a price of $499. Had it been released 16 years earlier, in 1991, its computing power would have cost more than 3 million dollars. That is, the cost of computing power was half a million times cheaper in just 16 years. That’s a specific example of Moore’s Law, which predicted that the cost of computing power would fall by half every 12-18 months. That adds up fast.

An analysis by RethinkX of the cost of making proteins by precision fermentation—a technical challenge that is similar to making PFCs—predicted that “PF proteins will reach cost parity with their animal-derived equivalents by 2023-25, with the marginal cost converging over time towards the cost of sugar (less than 10¢/kg) plus water and energy.”

Dimes per kilogram—not dollars, not tens or dollars, not hundreds of dollars. Dimes. Within the same timeframe as the half-a-million-fold decrease in the cost of the iPhone: 16 years, give or take, with the $/kg falling fastest in the next few years.

Even if the cost of making PFCs were, at market maturity, 100x the cost of making proteins (just for the sake of argument), then the price of making PFCs would still be headed rapidly towards some small multiple of $10/kg.

Current cannabinoid prices & costs

Let’s look at the current market prices of CBD, CBG, and THCV using the bulk-sales platform Kush.com. These are asking prices, which are higher than the selling price (see discussion here). At the time this article was written:

  • CBD isolate (claiming 100% CBD) was available in bulk for as little as $700/kg (with lower concentrations costing much less). If that price includes a typical retail markup, then that price implies a production cost of approximately $350/kg. That is below the low end of the expected $400-$1,000 per kg cost of producing CBD by precision fermentation.
  • CBG isolate was available in bulk for an average price of $2,041/kg across five sellers. That bulk price implies a production cost of approximately $1,020/kg. That’s slightly higher than the ceiling on the cost of production of PF cannabinoids.
  • I could find no current listings for THCV on Kush.com. However, I found one listing, six months old, that offered THCV for $50,000/kg, which matched the price of THCV found on com.

Competing against these prices, we can see from the above that PFC companies, at their $400-$1,000 per kg costs and a typical retail markup, would initially:

  • Lose money selling CBD;
  • Break even selling CBG; and
  • Make a fortune selling THCV.

From this, we can expect that many of the PFC companies will target THCV/A (and similar high-priced, high-demand, rare cannabinoids) after CBG/A, and not focus on CBD until after they reduced their production costs over the next few years.

Impact of PFC isolates

What impact will PFC isolates have on cannabis farmers and their processors? That’s the multi-billion dollar question.

“Timing is critical,” according to Zheng Yang, General Manager at HempRise, one of the USA’s largest hemp processors. “The major food, beverage, and ingredient companies can’t get serious about cannabinoid food ingredients until they are legalized by the USA, the EU, and internationally. In the meantime, precision fermentation is racing farming & isolation to reduce costs.”

“New strains of cannabis will produce more of the currently-minor cannabinoids,” said Andrew Jeffery, Founder of 1J Capital, a venture capital firm that invests in cannabis-related companies. “That might keep cannabis biomass farmers competitive for a while. If a company is not positioning itself to fully utilise all available advancements in technology then I’m afraid the future does not look bright for them.”

If the PF companies can push their costs down far enough and fast enough, then cannabis biomass farmers will suffer, even if they are in low-cost jurisdictions like Colombia. Oliver Zugel is CEO of Colombia-based FoliuMed, which grows medicinal cannabis for the global market. He said, “When the time comes eventually for minors in pharmaceutical products, we think they will be derived synthetically. The question is how long that will take…and until then producing them from high yielding plant genetics in low-cost jurisdictions remains viable.”

Ben Chiarelli, CEO of Cellibre (a PFC company), said that it won’t take long for PFCs to become cheaper than plant-derived isolates. “After CBG and CBGV we will continue to deconstruct the plant into its individual components thus allowing brands and innovators to consistently scale their product experiences, whether that be an isolate or an entourage, cheaper and without fear of contaminants or supply chain disruptions.”

For some with deep roots in the cannabis industry, the emergence of cheap PFCs can’t happen soon enough. “Once precision fermentation makes the major cannabinoids cheap, extractions with dangerous chemicals, processes, or waste will go by the wayside. And frankly: good riddance,” said David Drake, Founder of Cannabis Reports and 20-year veteran of the industry. “The obsession with THC and CBD will start to wane and we’ll see a return to cannabis grown because cannabis deserves to be grown. For food, for fiber, for recreation, and for just being a great plant to have in the field, in your garden, or in a tent in your garage. Not just for THC or CBD.”

Richard Rose, Publisher of The Richard Rose Report and the founder of the USA’s modern hemp foods industry, said “I think PF is eventually going to take the cannabinoid industry by storm. PFCs could easily supply 80% of demand for isolated cannabinoids, such as APIs [Active Pharmaceutical Ingredients]. Some people will still want their flowers, but they’ll be connoisseurs. For cannabis farmers, branding will become even more important. Differentiation by quality, appellation, or artisanal production. The big players will get hurt the worst (Canopy, Tilray, Aurora, et al.).”

Conclusion

Any company that farms cannabis primarily for isolates, or that processes farmed cannabis primarily for isolates, will be disrupted by PFCs over the next several years. These companies need to develop a comprehensive strategy that can delay and/or limit their disruption…or prepare to close their doors. Similarly, cannabis farmers that sell their trim, shake, and/or substandard flower to processors for isolate extraction must prepare to have most of that revenue to vanish over the next several years.

What’s Next

You may be now thinking: “Who cares if we lose the isolate market to PFCs? PFCs can’t disrupt demand for extracts, because PFCs can’t deliver the Entourage Effect! No worries!”

Copyright 2021 Jim Plamondon. All Rights Reserved

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