August 6, 2018 MJ Shareholders
With legal adult-use cannabis sales set to launch in Canada this fall, the global industry is watching intently to see what market trends emerge.
When it comes to extraction and extracted products, quality and consistency will be key, according to Joel Sherlock, co-founder and chairman of Vitalis Extraction Technology, a Kelowna-based engineering and manufacturing company that produces industrial supercritical CO2 extraction systems for the cannabis industry. Patients and consumers are starting to desire different consumption methods (aside from flower), and dose control in the medical markets will become more important, Sherlock says.
Here, Sherlock discusses his predictions and insights on the Canadian extract market and how the Canadian and international markets are influencing one another.
Cannabis Business Times: How do you see extraction fitting into the broader Canadian adult-use market?
Joel Sherlock: The Canadian landscape has evolved from just, “I had a license, so that makes me valuable,” and [then] it was, “I have a license and a lot of cultivation,” and then the quality of product is now starting to come into play. People are picking who grows better flower, and I think we’ll see a very similar trend on the extracted products. First off, it will just be who’s licensed to make extracts.
There are some companies now that are selling basic extracts—and when I say basic extracts, there are really, really crazy potency limits right now, so with the dilution that happens in Health Canada’s regs currently, it really doesn’t matter the extraction method [and] you can’t really taste or experience quality differences because there’s so much dilution that happens to that oil right now. The market evolves, and as Health Canada rolls out cannabis extracts, … all of a sudden, we start to look at what we’ve learned in other markets like California, Oregon, Washington [and] Colorado, where they’ve got a very fiercely competitive product landscape, and now you need great boxes and crystal-clear oil and consistency in run to run. If you order a Starbucks latte one day and then you go back the next day because you liked it so much and it’s a completely different taste, that would turn you off the brand entirely. And that’s really where I think a lot of the Canadian LPs are going to be spending a lot of time, money, energy [and] attention, is really training up those extract professionals or extract artists, … who can really … maximize the yield out of those products and also can formulate it into a lot of different products.
CBT: What are your international predictions for extraction and extracted products as the cannabis industry continues to evolve and mature?
JS: As the industry continues to evolve and mature, there has been a move away from flower and into consumption in different methods. I think dose control [will become important]. … You look at a market like Colombia, which is extract-only, and that’s a 32-million-person market, medical-only and extract-only. They believe that if a doctor is going to prescribe cannabis, the best way to do that is in an extracted or controlled dose form instead of saying, “Take a little bit of this flower, roll it up into a joint, smoke some, but not too much, but make sure you get enough.” It’s moving away from how a doctor traditionally prescribes any type of medicine. So, having some sort of soft gel pill or topical or tincture oil … is more conducive to what they’re used to prescribing.
When you look at what’s happening in Germany—Greece [and] Australia I believe will also follow—where the Canadian LPs are set up to help cannabis standards, then when some of the German pharmaceutical companies have come to Canada, they’ve had a whole other level of expectation of cleanliness [and] facilities. Basically, their requirements are significantly higher than Health Canada’s. I think the export markets will drive professionalism, innovation, quite significantly, while the Canadian retail market of products might take a little bit of time to establish itself.
CBT: How have you seen Vitalis’ clients growing and changing over time?
JS: Our clients are in different markets. Vitalis is the largest in the world for hemp and cannabis industrial process equipment, so our customers are usually some of the larger LPs in Canada who are getting ready for what’s coming. A lot of the contract manufacturers in the U.S …. —what we’ve seen is as consumer trends change, the demands of the lab change.
We saw a huge flood to distillate, which can really be extracted from flower, trim, anything. It can be extracted by any method—butane, ethanol, or CO2—and then just distilled down into almost pure THC or really, really high-potency THC. The distillate markets became quite commoditized, prices fell significantly and now there’s been a push back to whole plant oils [and] strain-specific extracts—like a vape cartridge that would taste like the flower it came from—and that takes more specialized equipment. It takes some changes in the lab setup. I think the processors are learning as quickly as the market is evolving.
CBT: Do you have any insights or predictions on extraction-related sales?
JS: I think what we’re starting to see now is this consolidation. I think much like flower production, we’re going to see a very similar consolidation where there are going to be craft extractors who are making very small amounts of really, really high-quality product, and then you’re going to have really high-throughput labs, and I think those labs are going to have a multitude of extraction methodologies. You might have a couple of CO2 machines, you might have a couple of ethanol machines, and you’re processing your distillate down this line, you’re doing your whole plant oil down that line, and I think we’re going to see a sizable consolidation. The labs will get gobbled into one bigger company, and then they’ll start building bigger labs and larger buildings, much like we’ve seen in the cultivation space.
Really interesting for us right now is this movement into cannabis-infused beverages. You saw Molson did the deal … with Hydropothecary, and then you have Canopy’s investment from Constellation Brands. I believe there’s going to be a very interesting shift into a whole other portfolio of products on the beverage side. It’ll be interesting to see the customer option of that. Vape cartridges came out, and we know those are incredibly popular. They’ve got a phenomenal following and a lot of high-volume sales in almost every market that they’ve gone into—Oregon, especially in California, Washington [and] Colorado. Vape cartridges dominate the consumption methodology. It’s definitely the favorite by a landslide. It’ll be interesting to see what kind of market share the drinks take up.
There’s a big push, as well, for the CBD-only products and potential export markets there, as well. I think it’s going to be a very, very exciting year of getting the retail networks set up, getting the provincial wholesale accounts set up, and then also what’s going to happen on the export markets.
Top Image: © Mitch | Adobe Stock
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