The Investor's Guide to Marijuana – Part 3

In Part 2, we wrote about the market itself. The economic potential of this market is undeniable and this is being driven by efficacy based medicinal results that are underpinning legislative changes. The changes are giving birth to an industry considered to be the biggest boom since the early days of the Internet.  And so to Part 3, and the cannabis industry itself.

The industry is composed of legal cultivators and producers, consumers, independent industrial standards bodies, ancillary products and services, regulators and researchers focussing on cannabis and its industrial derivative, hemp.

Essentially all of the above can be grouped into two channels.

Non-Ancillary – touch the plant

  • The Producers
  • The Processors
  • The Distributers
  • The Retailers

Ancillary – don' touch the plant – and can be grouped into the following types

  • Consulting
  • Software
  • Hardware
  • Growing technology
  • Extraction
  • Packaging
  • Laboratory/Testing

So, let's get right to it. We'll start with the companies that cultivate, manufacture and produce cannabis and cannabis-derived products.

Cannabis Cultivation
A very large and highly automated greenhouse in Canada.

The Producers (Cultivators)

  • Grow the marijuana under the ACMPR (Access to Cannabis for Medical Purposes Regulations) Licensed Producer certification and are known as LP's.
  • Very high capex create a high barrier to entry
  • Will be at the forefront of revenue for the coming 5 years as demand will completely outstrip supply
  • Once supply catches up (best estimates are ~2022) prices will fall and the LP's will need to be very diversified both horizontally and vertically to maintain margin

Growers want what all farmers want: the certainty of price and distribution.  But there is a lot of diversity when it comes to the size and sophistication of suppliers in this industry.  Some growers only work in "closed box" (indoor) growing facilities to ensure the production of pharmaceutical-grade marijuana. Others use a greenhouse plot or an entire field.

Licensed producers are companies that are equipped with pharmaceutical specialists, chemists and growers that have obtained the license to grow, harvest and dry medicinal cannabis. The cannabis sector is laden with opportunities for Canadian licensed producers (LPs) and affiliated companies. However, players in this sector face an uncertain operating landscape that challenges even the savviest, and experienced, business leaders.

Many of the rules that will govern the recreational industry have yet to be finalised and capacity to meet consumer demand is an unknown. It's a critical time for the cannabis sector, and an opportune moment to ask important questions about the future.

LPs will have to be able to compete with other established adjacent industries — such as tobacco, pharmaceuticals, alcohol and consumer products — which are likely to have an interest in entering the market for recreational cannabis.  These companies have strong ties to capital, possess mature infrastructure, brand recognition and the knowledge of operating in a highly regulated environment.

Top companies in this category (ranked by revenue) include Canopy Growth, Aurora Cannabis, and Aphria. The Canadian LP's form the backbone of The Green Fund and are best positioned for medium to long-term growth and price gains.

The Processors

They take the flower and turn it into medicinal cannabis (oils, capsules and pills)

Recreational Cannabis (edibles, oils and flower) are produced either by specialist retail focussed LP's or by the larger LP's themselves (Canopy Growth and Aurora Cannabis would be prime examples of this, as they produce – presently – for medicinal market, with the foundations being laid to produce for the recreational market when legalised).

The processing of the marijuana, where the buds are harvested from the plants, could take place at the grower's facility, or it could be a separate link in the supply chain, depending on the grower's resources and business model. This processing would involve different pre-distribution procedures, depending on whether they were intended for wholesale or retail buyers, in other words, whether it is being sent to an end-user, or to additional parties in the supply chain.

Marijuana is perhaps best known as plant material that is dried and smoked. Not everyone is able or willing to smoke, even when it's to consume medicine that will relieve serious symptoms. One of the benefits of medical marijuana, though, is that it can be administered in a number of different ways and this is where the processors come into play.

From cannabis flower to edibles and extracts. The options are endless.


Consuming marijuana in a vaporiser is safer for your lungs than smoking. The material is not burned, so there are no dangerous byproducts. The temperature of the vapour going into your lungs is lower than the smoke from a joint. The moisture of the vapour might even protect your lungs. The marijuana is still absorbed through your lungs into your bloodstream and takes effect rather quickly.


Many medical cannabis products are available in capsules. They look just like any medicine from the drug store and work the same way. The marijuana goes through your digestive system and is absorbed into your bloodstream. It takes some time for the effects to be felt because you have to wait for your digestive system to work. Depending on your health and the contents of your stomach, this could take several minutes or an hour or more.


Marijuana is mixed into drinks or baked into goodies to make administering easier for those who have trouble swallowing pills. The dosage is harder to manage in this form because one cookie could contain four doses. You have to take one bite at a time and wait for it to move through your digestive system. Essentially this product is far better suited for the recreational market.

Tinctures and Oils

These are concentrated liquids that can be added to food or drinks. For a fast-acting dose, you could put a couple drops under your tongue. They are absorbed into your bloodstream quickly and the effects should be felt within a minute or two. This form of marijuana administration is especially convenient for those who need to dose several times throughout the day. It just takes a few seconds and can be very discreet. Oils can also be used (and primarily are) with vapes.


Lotions, potions and patches infused with marijuana can be applied directly to an area of localised pain. The effects will be felt quickly and only in the area of application. Patches work differently — they actually deliver marijuana to the bloodstream and can have systemic effects. A patch is time-released, so you do not have to repeat doses.

Many of the companies in The Green Fund are vertically integrated, meaning they cover both the production and processing stage. In terms of pharmaceutical production, GW Pharmaceuticals leads the way with its (hopefully to be FDA approved) Epidiolex. MPX Bioceuticals and Liberty Health are just a couple of the larger players in this market. It should be noted that most of the producers (in the current life cycle of the market) are both producers and processors of medicinal marijuana. And just a handful of those is focussed on both the medicinal and recreational markets.

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The Distributors

  • Supply the marijuana to the dispensaries and recreational retailers
  • The distributors are not required in every market and state. But where they are, they play an integral role in the value chain, albeit not as profitably as the Producers
  • In California, all licensed dispensaries (retailers) must acquire their cannabis exclusively through a licensed distributor
  • The distributors are also responsible for the safety and testing of all cannabis and to keep a record of sales for the purposes of taxation revenue.

Distributors in California include RVR and Alta (recently purchased by CannaRoyalty – one of the stocks in The Green Fund.)

MedMen Cannabis Industry
The MedMen dispensary on 5th Avenue in New York City

The Retailers

  • Medicinal dispensaries
  • Recreational retail outlets
  • It is in this channel that both the recreational brands and the brick and mortar dispensary play an equally valuable role (the right location with the right stock on the shelves).
  • Part of the retail opportunity is education.

Although this is a very small part of the market now (in terms of revenue), in the long run as supply catches up and then greatly exceeds demand, this channel ultimately owns the end-user, and hence, owns the largest share of margin in what will be a $500bn market by 2035.

Currently leading the retail pack are MedMen (listing on the CSE in May of this year) and the chain of Blüm outlets (owned by TerraTech – a vertically integrated US focussed medicinal and recreational company). The business model for this channel is usually the opening of a dispensary for the purposes of medicinal supply and, following eventual recreational legalisation, and the supply of recreational products.

Education both on the cannabis plant itself and the associated medicinal benefits plays an integral role in the patient acquisition process. The stigma needs to be addressed and the administration and dosage of the product explained. Once a dispensary has a medicinal customer, their recreational purchase has followed (this was demonstrated by a study of the Colorado market)

The Ancillary Industry

The cannabis industry is supported by a network of ancillary products and services that "do not touch the plant". A unique benefit of this market is that it is not dependent (in most of the channels) on the legalisation for either medicinal or recreational purposes. This significantly lowers the risk profile of this channel.  For this reason, ancillary companies are currently very appealing to investors.

Take GrowGeneration and KushCo Holdings as an example:

GrowGeneration – picks and shovels

  • Consider them the Bunnings/Home Depot of the marijuana industry
  • Supply everything required to grow marijuana
  • All hardware, soils, fertilisers etc.
KushCo Holdings
Some of KushCo's childproof cannabis packaging

KushCo Holdings – packaging

  • Largest supplier of bespoke packaging to the industry
  • Patented childproof systems and, where applicable, all labelling and legislative specifications

Both of these ancillary businesses are unaffected by the political environment as neither touch the plant. And they can count the black market as their client, as they too need both the tools to grow and the packages to supply.

These types of businesses – which provide products and services to the industry but don't handle marijuana – provide some shelter from legal issues and the risk of policy fluctuations. An ancillary company also typically isn't subject to the same rules and regulations as cannabis-touching businesses. So they are less complex, and their expenses can be lower.

Additionally, margins for companies that grow and sell marijuana are expected to diminish over time as the industry expands and more cultivation operations enter the market – providing investors with yet another reason to target ancillary businesses.

Cultivation structures, installments, and equipment are the most common ancillary products followed by consumption devices, paraphernalia, packaging, processing equipment, software, security equipment, and laboratory supplies.

The addition of ancillary products and services amounts to an economic impact that is estimated at four times the value of direct sales of cannabis. Based on this multiplier, the total economic impact of the cannabis industry in the United States was $16-$18 billion in 2016 and is expected to reach $47.6-$68.4 billion by 2021.

A long way to grow…

The marijuana industry and its supply chains are still in their infancy.  There are countless ways for it to expand and evolve in the coming years.  Production will become more sophisticated and tailored toward either a volume or high-quality, artisanal supply chain.  Extracts, oils, butter, and edibles, and drinkables will proliferate in any number of directions.  As businesses grow, they will build their reputation and brand within their community.

As the legal cannabis industry grows and develops, so to will the industry's supply chains. There are dozens of potential links to this chain, from budtenders and accountants to growers, attorneys, social media consultants, couriers, security and quality control.

Much of the key is getting in early. The cannabis industry has unique opportunities to build an entire industry from the ground up, and that gives the first ones out of the gate a lot of leeways to shape the future of that industry.

And they told you money doesn't grow on trees.

This could be one of the best investing opportunities of 2020

Legislative changes are blowing through the US, and with it, an ever-increasing number of states legalising cannabis for recreational use.

With the success seen in Illinois, which legalised for adult-use on January 1 and saw products moving off the shelf at an unprecedented rate, this company is primed to take advantage of the booming US recreational market.

They have secured partnerships with the biggest cannabis companies in the US, and their portfolio is second to none.

And with the sector-wide pullback of 2019, this company is now at a bargain-basement price.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.