Unpacking the Cannabis Industry (TSE: WEED)


Taking a different turn this week at Fresh Capital. We’ve jumping on the cannabis hype train to better understand the industry, the products and its long-term future, especially as more countries debate legalisation of both medicinal and recreational cannabis.

  • Canopy Growth - a listed cannabis company
  • The cannabis industry and how it has evolved
  • The key market segments including medicinal and recreational cannabis
  • The difference between the active ingredients, CBD (CannaBiDiol) and THC (TetraHydroCannabinol)
  • And the challenges with marketing cannabis to consumers

Source: CB1 Capital


What is the cannabis industry?

The cannabis industry is a broad one, covering the legal cultivation of cannabis, extraction, manufacturing, testing and ultimately, production, delivery and then sale of cannabis.

The industry has been fast growing in the last five years alongside a push for legalisation in Western countries (namely Canada, the US and the UK) and is estimated to be a ~$300bn industry.

Broadly, we can segment the industry into two based on use case:

  • Medicinal cannabis - Often comes in the form of a pill or oil and is used relieve the symptoms of some medical conditions. Legalisation of medicinal cannabis often precedes the legalisation of recreational cannabis. Medicinal cannabis is generally the more attractive part of the industry, given it produces higher margins due to pricing (priced as a pharmaceutical).
  • Recreational cannabis - Commonly comes in the form of edibles, vapes, dried flowers and pre-rolled blunts. These are generally used to provide consumers with a ‘high’. Legalisation of recreational cannabis has been on the agenda of policy makers around the world, particularly following the legalisation of medicinal cannabis.
  • Source: Encore Labs


What is CBD and THC?

There are two cannabinoids (active ingredients) extracted from the cannabis plant that are used in various amounts across both medicinal and recreational cannabis:

  • TetraHydroCannabinol - more commonly used in recreational cannabis
  • CannaBiDiol - more commonly used in medicinal cannabis

THC is the main psychoactive compound in cannabis that produces the high sensation. Consumers feel the impacts of THC by smoking cannabis but it can also be extracted and made into other consumer products such as oils, edibles, vapes and much more.

The other cannabinoid is CBD. CBD is the non-psychoactive portion of the plant, so it doesn’t product a high sensation but does reportedly assist with pain relief, anxiety and depression.

The use of THC and CBD isn’t binary - products can contain one or both these cannabinoids. Commonly, CBD is used to offset the intoxicating effects of THC. By binding to cannabinoid receptors, it will keep THC from activating those receptors. This translates to a less intense psychoactive effect, which is why products with a mix of CBD and THC are great for first-time consumers.

Source: Canopy Growth


What are the core consumer products in the market?

We’ve touched upon these briefly but cannabis manufacturers and producers leverage three core forms of cannabis and cannabinoids into a broad suite of products. These forms include:

  • Dried Flowers - Cannabis flower that is grown, dried and then packaged for sale as dried flower and pre-rolled joints for both medicinal and recreational use
  • Oils and Concentrates - cannabis extracts that are produced into cannabis oil products with different ratios of THC and CBD in order to meet the unique medical needs of customers or infused into other products
  • Softgel Capsules - precise and discrete dosing solution for users who want to consume cannabis in pill form, and are available in a variety of concentrates, from micro to full doses.

Each of these forms are then infused or bundled with other consumer products - products like gummies, drinks, chocolates, creams, oils and even pet food to create a range of products that gives consumers a high or offers pain relief effects.

Source: CB1 Capital


There are broader uses arising from the hemp plant (which is a type of cannabis plant) and it has potential across both consumer and industrial products (but that will be a subject for another time!).

On a macro level, you can see why some investors are incredibly bullish on cannabis - the broad use cases and ability to infuse with other consumer products that already exist in the market are signs of an industry that could explode.

Blue areas indicate legalisation, yellow for decriminalisation and red are countries / states where cannabis remains illegal. Source: Wikipedia


What is the future of the cannabis industry?

Without a doubt, the cannabis industry has reputation and regulation issues that impact both consumer and investor sentiment. Cannabis is still illegal in most countries around the world. Generally only regulators in progressive and developed countries are debating its legalisation.

In order for the industry to grow at the pace some investors are speculating it to grow, a number of key levers have to be true:

  • Legalisation of cannabis accelerates across the globe - As you can see in the picture above, there are few places where cannabis is completely legal. Medicinal legalisation often comes before recreational, and medicinal attracts higher margins and can help with improving the reputation of cannabis which could then improve sales of recreational cannabis. This hinge point is the key part of any bull or bear thesis
  • Evangelicalisation’ of cannabis - Cannabis has a poor reputation in the market, one that may not be fixed by a top-down change driven by legalisation. Rather, this may need to be driven by ‘grass-roots’ (sorry had to make the joke 🤔) , either through ‘Influencers’, celebrities or key members of the public who come out to support cannabis. In this week’s episode, we joke about the unlikely possibility of Melinda Gates becoming the face of cannabis. If the right person came along, it would drive a complete shift in consumer sentiment
  • Decentralisation of cannabis vendors - This is an interesting point and one we explore more in-depth on the podcast this week. In some parts of Canada and the US, you can only buy cannabis from Government-run vendors. In order for cannabis to succeed, it has to shift away from centralised vendors and permeate through grocery stores and shops. By co-locating these products alongside other consumer products, you’re not only normalising cannabis, but reducing barriers between future consumers and their future highs
  • Shift towards cannabis enabled wellness - This is one well-documented in literature, investment theses and online forums. CBD in particularly has a range of properties associated with relieving physical and mental pain. A major part of the bull thesis on cannabis is its ability to relieve this pain or promote improved wellness within our society

Source: Canopy Growth


What’s our overall verdict on cannabis?

This is a highly regulated and speculative industry that has generated a lot of hype by both retail and institutional investors who are banking on legalisation. But even once that happens, the industry itself is still capital and labour intensive, particularly with the amount of R&D, manufacturing and production required.

On the podcast this week, we give our verdicts on Canopy Growth - a leading cannabis company operating in Canada, the US and Europe and the attraction towards particular segments of the market from a product perspective and from a value chain perspective. So be sure to check it out!

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