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Neptune looks to catch wave in CBD extractions

By Hank Schultz

21-Aug-2017

Neptune looks to catch wave in CBD extractions

Neptune could be at the crest of the wave in a new industry — CBD extractions from cannabis — as the company shifts away from bulk krill oil supply and moves more toward finished product solutions.

CEO Jim Hamilton spoke with NutraIngredients-USA last week on the company’s new direction.  The news that Neptune Technologies and Bioressources was exiting the krill business via a deal with competitor Aker BioMarine came as something of a surprise.  Neptune pioneered krill oil as a dietary ingredient and did some of the early science on its unique phospholipid delivery of omega-3s.  Neptune had also taken out some of the early patents, and it vigorously defended that IP suite, spending millions of dollars on legal fees during the so-called ‘krill wars’ phase of the industry. 

Market changed, and management suite did, too

Hamilton said a change in the executive suite was one of the keys for the deal.  Removing the emotional connection to winning, to having your side of the argument being proven to be right, enabled executives on both sides to sit down to discuss what might be best for both companies. It opened the door to a win-win solution, rather than the earlier scenario in which somebody had to lose, he said.

Hamilton said the dynamics of the krill industry had changed, with the huge growth in demand from aquaculture for a high quality protein feed now driving a big part of the equation. This put a vertically integrated manufacturer like Aker a position to profit from that shift, and to drive the economies of scale that Aker CEO Matts Johansen has identified as one of the key metrics for success in the business. Aker already brings in 60% of the world’s total krill catch with its two existing vessels and is building a third.  And the company has invested in its own extraction facility in Houston that not only gave it more capacity but also the ability to innovate new product forms. Neptune from the start had been buying krill on contract from independent fishing vessels, and so was at a disadvantage in this market changeover.

But Neptune retains its processing facility in Sherbrooke, Ontario.  As a sign to how committed the company was to the krill business, that facility was rebuilt at great difficulty and expense after an explosion and fire in 2012 that killed three workers and wrecked the plant (insurance payments did cover some of that bill). The plan, Hamilton said, is to use the plant’s capacity to shift toward extractions of cannabis for medical marijuana and consumer products markets. 

“When we looked at the overall krill category and our ability to accelerate investment in new and high growth industries, we though that effort could be put to better use than trying to compete in krill oil supply,” Hamilton told NutraIngredients-USA. “We are not totally out of the business. We will still be working with Aker on the delivery of finished product solutions.”  Neptune, which now goes by the name of Neptune Wellness Solutions, has a turnkey finished products formulation arm in the form of its subsidiary Biodroga, which it acquired in 2016 , after Hamilton came on board .

Potentially huge market, but one that lacks clarity

Neptune’s facility at Sherbrooke will wind down its krill oil extraction activity as inventories are drawn down and contracts expire or are transferred to Aker, Hamilton said.  That gives the company a unique opportunity to put a commercial scale extraction facility to work in a new sector where the regulatory requirements are just now starting to come into focus. The United States is a bit of a mess on the regulatory front for cannabis products at the moment, with a number of states having medical marijuana laws in place and several having full approval as a consumer product. Yet the botanical is still a controlled substance at the federal level. And the use of CBD (or cannabidiol, a biologically active but nonnarcotic fraction of Cannabis sativa) in dietary supplements has been complicated by its development as a drug to treat some forms of childhood epilepsy.

In Canada, the picture is potentially clearer, with Prime Minister Pierre Trudeau having introduced a bill to fully legalize the botanical .  The bill is expected to pass, and when it does Canada will join Uruguay as the only two nations that have fully legalized trade in the plant.

“With just medical marijuana, we think the market in Canada is about $1.8 billion to $2 billion.  With full legalization, we will have a market that is in essence about $8 billion just in Canada, and we think that half or more of that is going to be in extracted oils,Hamilton said.

Loren Israelsen, president of the United Natural Products Alliance, said the situation with CBD supplements and other cannabis products reminds him of where the dietary supplement industry found itself in the late 1980s and early 1990s, before the Dietary Supplement Health and Education Act (DSHEA) was enacted.  Israelsen spoke earlier this year on teh subject to a gathering of stakeholders in the marijuana industry.

“I told them about the lessons we learned as we worked on created a legislative framework for the dietary supplement industry.  The CBD and marijuana markets have all the same ambiguities that we faced about what category our products belonged in, and with regulators flipping us from one category to another based on what made sense to them at the moment,Israelsen said.

“And we had those same uncomfortable points of connection with the pharmaceutical industry,Israelsen said. “With some members of their community already having gone the drug route, they have to look at is there another potential place in the regulatory structure where they need to be.

Hamilton said another parallel of the two markets is that, much like the dietary supplement industry of the late 1980s, much of the extraction work being done in the cannabis sector is in small scale facilities.  If Neptune is able to negotiate this switchover successfully, it will be able to bring a commercial size facility to bear, and drive economies of scale that could potentially see some smaller producers fall out of the market.