Why grow marijuana when you can create its most potent molecules in a lab?
Cannabis producer Cronos Group Inc. (CRON.TO) is partnering with Ginkgo Bioworks Inc. in a US$122-million deal to genetically engineer the active compounds in marijuana. Ginkgo, which counts Bayer AG (BAYRY.PK), Archer-Daniels-Midland Co. (ADM.N) and Cargill Inc. among its partners, will work with Cronos to identify rare cannabinoids that appear in tiny quantities in the plant, extract the DNA and produce them in a lab.
It’s like going into “a foot race with a Formula One race car,” Mike Gorenstein, chief executive officer of Toronto-based Cronos, said in a phone interview.
Boston-based Ginkgo, which has a 100,000-square-foot lab in the city, got its start creating scents for the fragrance industry. In a process similar to brewing beer, it takes the DNA code that makes a rose smell like a rose, for example, and transfers it into brewer’s yeast.
“Now when you brew it up in that same brewery, instead of beer coming out, rose oil will come out,” said Jason Kelly, CEO of closely held Ginkgo, who has a PhD in bio-engineering from the Massachusetts Institute of Technology. “It’s cheaper, it’s not subject to weather conditions, the price isn’t all over the place, it’s not different if you grow it in Morocco or somewhere else, it’s just a much better product.”
The technology’s application to the cannabis industry is clear, said Gorenstein. For example, a compound called tetrahydrocannabivarin, or THCV, acts as an appetite suppressant, potentially offsetting the “munchies” effect of pot. It appears in very small quantities in the cannabis plant, making it difficult and expensive to produce at scale. Using Ginkgo’s technology, pure THCV can be produced in a lab.
“Being able to consistently and efficiently produce high-purity cannabinoids, that’s the holy grail,” Gorsenstein said.
Cronos will give Ginkgo about US$22 million to fund research and development, and will issue up to US$100 million worth of common shares in tranches as it achieves certain production milestones.
The deal comes after Cronos was hit by short-seller Citron Research, which questioned its valuation, distribution agreements with provinces, limited international sales and its lack of R&D spending. Some analysts dismissed the report, calling it “unfounded and biased." Cronos’s shares tumbled 28 per cent Thursday before rebounding 8.8 per cent to $12.81 Friday for a market value of $2.27 billion.
“We are in the early innings of a global paradigm shift and our focus is and will continue to be on our business and on creating long term value not on short term stock movements and volatility,” Anna Shlimak said in an emailed statement on the stock’s volatility.
Kelly said Ginkgo met with several other cannabis companies and chose Cronos because it treats the industry as a technology venture rather than an agricultural business.
“They hadn’t spent a zillion dollars buying out too many farms. Their focus is to get the right stuff and make it the most efficiently with the highest purity,” he said. “The reality is that brewery economics is going to wipe the floor with farming economics.”