What if there was a marijuana industry without marijuana? That might sound crazy, but it's a real possibility.
There's a lot of research under way right now to genetically engineer yeast strains to produce cannabinoids, including cannabidiol (CBD) and tetrahydrocannabinol (THC). In a nutshell, scientists are taking the genes from cannabis plants that are key in making cannabinoids and putting them into yeast.
This approach could reduce the time required to produce cannabinoids. Marijuana plants take at least three months to grow, but genetically engineered yeast can create cannabinoids in around a week. It could also be much less expensive.
Several privately held companies are working on methods to produce high-quality cannabinoids from yeast. However, there are also a handful of publicly traded companies that are involved in this research. Here's why Amyris (NASDAQ:AMRS), Cronos Group (NASDAQ:CRON), and OrganiGram Holdings (NASDAQ:OGI) are three stocks that are poised to profit from the massive disruption that could be on the way for marijuana.
Amyris is a synthetic biology company that has significant experience in developing chemicals using fermentation technology. It has been issued 499 U.S. or foreign patents for its technology and has another 314 patent applications pending.
The company's current products include chemicals used in cosmetics, flavors, fragrances, sweeteners, and vitamins. But Amyris now has its sights set on producing cannabinoids, too.
In February, Amyris announced a collaboration with a "confidential partner" to develop cannabinoids using its technology platform. The company said that the deal is valued at up to $255 million including an upfront payment and contingent milestone payments, with more revenue possible from royalties.
Amyris provided no details about its partner, other than to say that it is "well-capitalized" and recognized Amyris as "the company best suited to leverage fermentation-based technology in the production of the best quality and lowest cost and sustainably produced cannabinoids."
2. Cronos Group
Cronos Group captured the attention of many investors in December after tobacco giant Altria announced that it was buying a 45% stake in Cronos for $1.8 billion. This partnership elevated Cronos to the top tier of Canadian marijuana producers.
But there's another partnership that could also be extremely important for Cronos. In September 2018, the company announced that it was teaming up with Ginkgo Bioworks to develop high-purity cannabinoids from engineered yeast strains.
The value of the deal with Ginkgo was valued at nearly $100 million if all contingent milestones are achieved. Cronos Group will gain exclusive worldwide rights to Ginkgo Bioworks' technology for making cannabinoids from yeast.
Ginkgo Bioworks calls itself "the organism company." It specializes in developing microbial biofactories that produce chemicals at lower costs than conventional processes. Ginkgo has engineered yeasts to develop ingredients for cosmetics, foods, and perfumes.
3. OrganiGram Holdings
OrganiGram Holdings is, like Cronos Group, a Canadian marijuana producer. The company is one of the lowest-cost producers in the cannabis industry and has a solid presence in the Canadian medical and recreational marijuana markets as well as a foothold in the Australian and German medical marijuana markets.
Also like Cronos, OrganiGram has a key partnership that could allow it to profit down the road from cannabinoid production from engineered yeast strains. In September 2018, OrganiGram announced that it was investing $10 million Canadian (around US$7.5 million) in Hyasynth Biologicals, a Montreal-based company with proprietary enzymes and yeast strains that it's used to produce cannabinoids.
OrganiGram's focus in the partnership with Hyasynth appeared to center on the potential for using these cannabinoids in medical products, beverages, and edibles. The company's CEO, Greg Engel, acknowledged that the market for premium cannabis flowers wouldn't go away. However, he expressed his view that large-scale production of cannabinoids through bio-fermentation could be a game-changer for the cannabis industry.
Wait and see
How long will it take for cannabinoids produced from engineered yeast strains to be commercialized? Amyris says that it will do so within the next 18 to 24 months pending regulatory approvals. The company has overpromised and underdelivered in the past. However, that timeline doesn't seem unrealistic.
Investors are probably better off taking a wait-and-see approach before buying any of these stocks solely on the potential for the bio-fermentation technology for making cannabinoids. It's possible that the cost advantages from the approach won't be significant enough to take away substantial market share from plant-based extract methods for a while to come.
In the meantime, perhaps the best path for investors is to look at the total value propositions for each of these stocks. Their connections with a potentially disruptive method of producing cannabinoids could be viewed kind of like a lottery ticket. But it's a lottery ticket that could pay off in a big way if the technology delivers on its promise.