Medical Cannabis Products, their Associated Market Pricing and Stability Studies

Welcome to my second edition of Insider Cannabis Q&A, where we do a deeper dive into the market, trends, innovation, failures, and success of operating and building a medical cannabis business. The goal of this newsletter is to bring to light open-source knowledge for an industry that is starting to standardize itself and bring news of consolidation of a maturing sector.?

Today’s topic we will be diving into the topic of what products can I sell as a medical cannabis operator, their market pricing with assumed supply chain margins, and their associated stability studies.

Medical Cannabis Products, their Associated Market Pricing, and Stability Studies

Question: What Products are Sold in the Medical Cannabis Market Globally?

Product A: Bulk Medical Cannabis Flower – API Grade – Germany

If you read my previous newsletter, Edition 1 – Selling Medical Cannabis as a “Medicine”: How and What Are Your Options?, you would notice I put emphasis on the German medical cannabis market and what the lowest barrier to entry would be for bulk cannabis flower sold as an Active Pharmaceutical Ingredient (API) under Part II GMP. We will dig deeper in another newsletter as to selling your cannabis flower as a medicinal product according to Part I; however, this would also require a different approach to your GMP quality management system and each state in Germany operates differently with some states choosing cannabis flower as an API and some states regulating cannabis as a medicinal product, but we will discuss this in another edition.

On June 2022, I got in touch with a German pharmacy owner who compounds cannabis flowers, extracts, and APIs to get the latest pricing, which they receive in a document called “LAUER-TAXE”. It is the market pricing with APIs and shows the pack sizes and relevant pricing models for each wholesaler and brand of cannabis flower. The table below shows the various bulk pack sizes and their associated price and price per gram as of June 2022. While this list is long, I tried to be conservative by choosing pricing that is likely relevant and tried my best to consider that there may be premiums on the flower based on the fact it may or may not be irradiated or derived from unique strains or have some anecdotal evidence for prescribing. ?

Let’s assume an average over the bulk offering, which would bring the price sold to the Pharmacy to an average of € 7,55 per gram. Let’s assume an average market margin of 60% from wholesaler to pharmacy. Quickly analyzing the data, it seems that it would be best to be competitive in the 15g and 30g pack sizes.

Margin = (Revenue – Cost) / Revenue; Margin = 0,6,

0,6 = (7,55 – Cost) / 7,55

4,53 = 7,55 – Cost

Cost = 7,55 – 4,53 = €3,02 per gram dry cannabis flower = price earned by cultivator bulk wholesale.

Let’s assume you want to also work with a 60% margin from your production cost to sell to the wholesaler. This would require that your cost of production be managed at scale incl. overhead cost, and G&A to bring an aggregate cost of production to

Margin = (Revenue – Cost) / Revenue; Margin = 0,6,

0,6 = (3,02 – Cost) / 3,02

1,836 = 3,02 – Cost

Cost = 3,02 – 1,836 = €1,2 per gram dry cannabis flower = cost of production per gram flower from cultivator

The next step of importance to delivering this flower beside the GMP certificates and regulatory audit passes is the planning of your stability studies based on your chosen pack size for the market. You can read all about stability testing here. The table below shows the stability studies needed for each individual pack size.

For each pack size, you decide to go with you will have to do stability in that final packaging. This would be based on your budgeted amounts for stability studies, or your space allocated for the build-out of stability rooms.

As shown above in the table one would need to plan appropriately by purchasing relevant stability chambers or finding a company that could perform these stability studies based on your pack size. Since cultivation is all about the new strains, it would be needed to be considered that planning with the stability studies will be very important.

Lessons: a) Selling cannabis as an API Part II is a proven business model, b) Prices are going low, c) Cost of Production seems to be the only real play here, d) Choose two packaging types and don't change

Product B: TGO 93 Medical Cannabis Flower – Australia

In my first edition of the newsletter, I mentioned Canna Reviews Australia where one can create a free account and do some market research on the various Australian-sponsored medicinal cannabis special access cannabis products. Australian imported cannabis is imported according to the recently updated document released by TGA in March 2022, Version 1.5: Guidance on quality requirements for medicinal cannabis products – Conforming with Therapeutics Good (Standard for Medicinal Cannabis) (TGO 93) Order 2017 – including 2022 Amendments. The most notable change from March 2022 is that a transition period will occur from March 2022 to 1 July 2023 whereby all imported medicinal cannabis products must comply with the relevant GMP manufacturing qualities.

On the Canna Reviews website, I went and sorted the pricing from low to high and then scrolled to the middle of the pages to get an average of the Australian per gram pricing.

From the table above it would be useful to be cultivating two strain offerings that are 25±2% THC and 20±2% THC to be competitive on a price per mg active. If we convert this to USD with the exchange rate of USD to AUD – 1:1.54 that would mean that the recommended retail pricing for these two products is USD 24,19 per gram and USD 18,326 respectively. While the prices seem almost double the German prices from wholesaler to pharmacy, one must remember that these are prices direct to patients without medical reimbursement and are private paying patients.

Let’s assume an average of USD21,26 per gram of high THC flower 20-25% THC sold to patients direct from the clinic and let’s assume the following supply chain.

1.????Pharmacy:???????200% mark-up (assumption to get to the prices in market)

2.????Wholesaler:?????200% mark-up (assumption to get to the prices in market)

Assume a patient USD 21,26 per gram flower, therefore.

·??????Pharmacy - Wholesaler

o??Markup = (selling price – cost) / cost

o??Cost = 21,26/3

o??Cost = USD 7,09 per gram flower = selling price for wholesaler

·??????Wholesaler – Producer

o??Cost = 7,09/3

o??Cost = USD 2,36 per gram flower = selling price for cultivator

Let’s assume you want to also work with a 60% margin from your production cost to sell to the wholesaler. This would require that your cost of production be managed at scale incl. overhead cost, and G&A to bring an aggregate cost of production to

Margin = (Revenue – Cost) / Revenue; Margin = 0,6,

0,6 = (2,36 – Cost) / 2,36

1,416 = 2,36 – Cost

Cost = 2,36 – 1,416 = USD 0,944 per gram dry cannabis flower = cost of production per gram flower from cultivator

If we agreed that the mark-ups of the Australian supply chain model are correct this would mean that Germany is still a market operating at a premium likely due to the EU GMP requirements and that Australian flower has only been required to pass the TGO 93 requirements compared to the expensive necessary EU GMP batch release.

It will be interesting to observe the Australian market in the following months during the transition period ending 1 July 2023. We will likely see a consolidation of company offerings, as well as pricing as certain companies' pricing, will drastically change now by having to incorporate GMP into their supply chain and some not having perform this at scale yet.

Lessons: a) Australia is in transition period moving away from TGO 93 products to GMP products, b) Shake-out will occur, c) Market wants as high THC as possible for as cheap as possible, d) Some elements of company branding exists that are different to Germany regulatory

Product C: Bulk Cannabis Extract

Cannabis extracted products are also sold in Germany as an API starting material where the extract is transferred from one container to a pharmacy container typically sold as “bulk” to allow for compounding. These products have been formulated according to the DAB Cannabis extractum normatum.

Go see my first newsletter on the databases and resources one can familiarize themselves with to understand what oils, strains, and products are on the German medical cannabis compounding market.

Let’s assume an average over the bulk offering, which would bring the price sold to Pharmacy at an average of € 0,20 per mg active. Let’s assume an average market margin of 60% from wholesaler to pharmacy. Quickly analyzing the data, it seems that it would be best to be competitive in the 25ml and 30ml pack sizes with 25mg THC/ml, and 25mg THC/ml, and 25mg CBD/ml respectively.

Margin = (Revenue – Cost) / Revenue; Margin = 0,6,

0,6 = (0,20 – Cost) / 0,20

0,12 = 0,20 – Cost

Cost = 0,20 – 0,12 = €0,08 per mg active = price earned by extract manufacturer bulk wholesale.

Let’s assume you want to also work with a 60% margin from your production cost to sell to the wholesaler. This would require that your cost of production be managed at scale incl. overhead cost, and G&A to bring an aggregate cost of production to

Margin = (Revenue – Cost) / Revenue; Margin = 0,6,

0,6 = (0,08 – Cost) / 0,08

0,048 = 0,08 – Cost

Cost = 0,08 – 0,048 = € 0,032 per mg active = cost of production per mg active in extract

This would mean that if you wanted to sell at a 25ml with 25mg THC/ml your cost of production would need to be € 20 per unit and for a 30ml 25mg THC/ml, 25mg CBD/ml the cost of production would have to be € 48 per unit.

Lessons: a) Bulk cannabis extracts to a compound pharmacy are seen not as large bulk, b) Oils are yet to be competed with and room for price war to start, c) Does not seem to be a market that is selling if there isn't a price war like flowers, d) Formulations are generic

Product D: TGO 93 Medical Cannabis Flower – Oils

On the Canna Reviews website, we this time toggled our search for oils only and rated the products from most reviewed to last reviewed. Since oils are a dominant market in Australia compared to Europe where flower dominates, we felt it would be better to rank and do pricing from the most reviewed since this is the most dominant product used in the Australian market.

From the above table you can see that you have three product categories that should be competed with:

1.????High CBD oil in a 30ml MCT formulation with 115+ CBD per ml – higher volume at same cost = competitive

2.????Balanced THC and CBD in 50ml – higher THC/CBD per mg per ml = competitive focus

3.????High THC in 30ml – higher THC per mg per ml = competitive focus

Lessons: a) Australia oils are in a price war with little room to squeeze in amongst the big players, b) CBD oils are a large proponent for the Australian prescription market, c) Since Oils are likely mostly GMP it will be difficult to compete with unless that is your only focus

In this newsletter, we wanted to illustrate the focus required on understanding pricing, where you are most competitive from a generic perspective, and how to effectively perform batch sizing. In process and supply optimization if you want to be streamlined it's important to design and optimize your supply chain from design and build out to stability and how batching and campaigning batch sizes with a hyper focus ultimately lead to a serious competitive edge.

Whether you’re a cultivator, manufacturer, or vertically integrated supply chain, optimization of these costs to deliver a cost-competitive high-quality product is where your focus should go. It’s not as simple as the “Build it and they will come” mentality. The mentality should be “Build it and I will deliver on X”.

In next week’s newsletter, we will dive into building a resourceful team that can execute your chosen strategy from experience required from other industries, qualifications necessary from a regulatory standpoint as well as leadership roles necessary in your organization to bring a well-oiled team with the necessary skills and experience to deliver on a planned strategy.