THC Is an Ingredient, Where Pharma, MSOs & Hemp Collide, ft. Zach Edge

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Zach Edge: Whenever we see the regulatory change that happens on the federal level, whether that's a rescheduling or a descheduling, that door will swing open wide and quickly. Bryan Fields: What's up, guys? Welcome back to another episode of The Dime. I'm Bryan Fields. With me as always is Kellan Finney. And this week we've got a very special guest, Zach Edge. Zach, thanks for taking the time. How you doing today? Zach Edge: Oh, I'm living the dream, fellas. I appreciate you making the time to have me on. Excited to dive in. Bryan Fields: Kellan, how are you doing? Kellan Finney: Doing good. Grateful to get the chance to talk to Zach. How are you? Bryan Fields: Yeah, I'm stoked. I've got a lot of questions I want to ask Zach about manufacturing, about the vape category, about some of the new projects he's on. But before we get into the fun stuff, Zach, for our listeners who aren't too familiar with you, can you give a quick background on yourself and how you found your way into the cannabis space? Zach Edge: Yeah, absolutely, be my pleasure. I've been in the space and around it for about ten years now. I was doing executive coaching at the time and I was given a bottle of CBD oil that put my autoimmune disease into remission, which really caught my attention. I was able to stop taking a bunch of the steroids and medications I was on at that point. I joined an organization called Folium Biosciences, out of Colorado Springs, Colorado, back at the end of 2014 and beginning of 2015, and spent about five years with that organization growing the sales side of the business. We built the business up to about $10 million a month in revenue before some shifts in the regulatory landscape started to change the direction of the industry. In 2020, when everything was locking down, I resigned my position, got married, and moved my family back to Texas. I spent about two years as Director of Global Strategy for an organization called Open Book Extracts out of North Carolina, a really top-notch company. After about two and a half years there I transitioned into the pharma space, and at that point I also founded my own consulting business to maintain a presence in both hemp and licensed cannabis. Since then I've been doing all three — I manage deal flow and do consulting and advising in licensed cannabis, hemp-derived cannabinoids, and pharmaceutical cannabinoids. We're also doing a little work in international markets, though that's fairly new. Most recently, I've taken a position as VP of Commercial Operations for Suni, a private equity group based here in Austin, Texas that's deployed across both the hemp and cannabis spaces. I also operate RHO Advisory, which commercializes natural cannabinoids refined from hemp-derived sources and does process development and consultation for the hemp-derived cannabinoid supply chain. Bryan Fields: It seems like you've got your hands all over the spectrum, but the one key constant seems to be THC. Can you talk to us about how commercialization is changing everything? Zach Edge: Yeah, absolutely. I think regulation is the name of the game and the number one question for everybody in all three of those categories right now. Everybody has been looking to the federal level for clarity around rescheduling or descheduling, and what happens there will ultimately drive regulatory change at the state level in each of these markets. None of us has a crystal ball, and everybody's got a high-paid lobbyist out fighting right now, so it's unclear how the chips will fall. What I've seen that's most interesting is a hedged, multi-pronged strategy from a number of organizations to participate in the most successful pieces of each segment in parallel — that's the strategy I drive for my own organizations and for the ones I consult for. THC is going to get commercialized and continue to drive revenue in pharma, licensed cannabis, and hemp, and there's demand that doesn't necessarily overlap across those categories. What's most interesting to me is what's common between all three. The truth the hemp guys got to first, out of necessity, is that THC is an ingredient. Outside of hash-making, genetics, and farming — all the things that make boutique flower special and nostalgic to the consumer — as we move into a CPG consumer base where people want convenience and consistency, we're going to see cannabinoids treated as commoditized ingredients, whether as an advanced pharmaceutical ingredient in an API or as a dietary ingredient regulated under GMP 111 and 117 like other standard nutraceutical ingredients. What's interesting is that because the federal government and most state governments have refused to regulate, self-regulation has largely been driven by distributors — and that often doesn't align with best practices from a science or production standpoint, because you've got distributors and their lawyers opining on regulations without understanding the science or the supply chain behind the ingredient. Internally we talk a lot about whether contaminants of concern are actually being tested for and addressed in a given supply chain. It's not that one supply chain is better or safer than another — we're trying to drive proper controls for any given contaminant based on the supply chain and production method, and that's hard given the opacity that currently exists. But regulation is finally starting to demand it. Even as recently as the executive order that came out from Governor Abbott today, we're seeing customers — and behind them retailers, distributors, and regulators — demand transparency in the supply chain: what's actually going into these products, how much is in them, and how they're labeled and marketed. Kellan Finney: I think my first question would be to understand more of the hedge strategy you proposed earlier. That's an interesting dynamic — the way you've described the three verticals as similar but also independent. Talk to us about that hedge strategy, and then let's dive into how those need to be nuanced together. Zach Edge: Yeah, absolutely. There are a number of organizations playing in different combinations of those three buckets. At a macro level, look at big tobacco and their pharmaceutical subsidiaries — the majority of their development work has been around vaporization and inhalation devices. We're starting to see a lot more enforcement and regulatory push around things like PMTAs — pre-market tobacco applications — even on the nicotine side, and I think that continues to push into cannabis as far as the safety data required for regulatory filings on devices. There was actually a raid going on earlier today in the Midwest that Pam Bondi was speaking about, enforcing regulations around needing an active PMTA on file to distribute nicotine products like Juul in the US. So at a high level, I'd expect tobacco's push to be around regulating vaporization devices — I don't know that for sure, but we're starting to see proposed legislation that would regulate hemp-derived cannabinoids like tobacco. I have no idea what traction that gets federally, but tobacco will likely continue to control some piece of the market through its subsidiaries by controlling the devices and the safety data behind them. Alcohol has clearly swooped in too, largely on the hemp side. Most of the trade groups in hemp-derived cannabinoids right now are largely composed of beverage companies, and they've driven state-level regulation that specifically protects low-dose THC beverages — a compromise from both alcohol manufacturers and MSOs and cannabis companies, allowing hemp-derived THC to be commercialized without upsetting the industry, at least from an optics standpoint, while letting them front-run their own brands into otherwise closed-off markets ahead of adult-use legalization. Curaleaf and their beverage would be a great example. Most large marijuana companies have at least toyed with launching a hemp THC beverage, if they're not already in the market, because it's an easy way to centralize manufacturing, reduce costs, and push the brand into markets where they'd otherwise have no awareness or revenue. Then in a Schedule 3 world, doors open pharmaceutically that have never really been open before. It's yet to be seen how rescheduling or descheduling interplays with state-regulated licensed cannabis markets, but it's clear that THC in a derivative format, like dronabinol, would immediately move into a Schedule 3 setting and become available for manufacturing and study in ways it never has been. I'd expect to see THC form factors available by prescription through compounding pharmacies relatively quickly. But the science is the same across all three categories — ultimately we're talking about cannabinoid purification and separation. We've seen a lot of fear-mongering from each camp about the safety or purity of competitors' products, but no willingness to harmonize what the safety specifications for the ingredients should be. We have a totally safe spec established for FDA-approved dronabinol, and plenty of safety specs for dietary and food ingredients generally — but because the FDA and federal regulators are unwilling to recognize cannabinoids as food or dietary ingredients, we've been unable to apply even basic standard safety specs. We regularly see gaps in testing, safety protocols, and EHS concerns in labs that go unaddressed, mainly due to lack of education and the ability in non-GMP settings to change processes without a full review of the effects on both the target ingredient and the environment in which it's produced. Bryan Fields: Whose role is it to monitor that, to oversee that? And if we do get rescheduling, would that lead to outside industry companies becoming more actively interested in participating in the space? Zach Edge: Yeah, absolutely. In an FDA- and DEA-regulated format, it's ultimately FDA and DEA who audit facilities for compliance with 211 GMP standards. Outside of that, we've encountered the head of the problem — there's no single regulatory body that sets those definitions. Industry has argued for years that we'd like to see the FDA acknowledge and regulate these ingredients like it does others. Outside of that we've been piecing together state-led regulation, and those regulations vary from state to state, even down to what pesticides are tested for and what heavy metal specs apply. I'd personally love to see harmonization, at least around the contaminants of concern we can all agree need to be tested for. Kellan Finney: That layers into the deeper-rooted issue — if there are different variations state by state, how do companies producing these products adhere to a regulated framework? And who's going to organize that, given all these different channel partners are competing with different interests and carve-outs? That's going to be complicated, and it's going to lead a bunch of 70-year-olds in Congress trying to figure out the right path forward. Zach Edge: Yeah — which is why we're in the morass we're in now. This is opinion, fairly well-informed opinion, but largely everyone's trying to figure out how to split up the revenue that will come through these distribution channels and how it'll be taxed and monetized. That's probably why we're seeing delay at the federal level. If you talk to the trade groups from the MSOs and large marijuana companies, they'll give you a very specific answer — they're targeting regulation that's inclusive of everything they produce and exclusive of everyone else's. What's most likely is that we'll see an ease in regulation overall and some parity in taxation and financing across marijuana, hemp, and pharma. I don't think this administration creates any kind of regulatory moat federally or at the state level. We've already seen in the most conservative states — Florida and Texas — that outright bans on hemp-derived cannabinoids are unbelievably unpopular with constituents, and lawmakers have had to allow some continuation in the market. I don't think that changes in more liberal states or federally. So we'll likely get regulatory relief and clarity in each individual vertical that makes the strongest companies in each more investable and competitive, but I don't think we'll see real clarity between the three categories for the next three to five years. Bryan Fields: Kellan, is that the same perspective you're seeing? No clarity in the next three to five years, or are you hoping for something sooner? Kellan Finney: No, I don't think there'll be any clarity in the next three to five years at all. I think the hemp industry will continue to thrive and get a lot bigger — they have economies of scale. I think the cannabis industry will continue to be stymied by having to play whack-a-mole across twenty different states and twenty different sets of regulations, and that gap will keep growing. I actually think the hemp industry will accelerate over the next two or three years. You saw the uproar when these products were removed from the market in very conservative places — people aren't going to keep pushing cannabis when they have access to products through hemp supply chains. So it's going to be interesting for anyone operating twenty different facilities across the nation in cannabis — flower is your moat in terms of your differentiation from a separation perspective. Zach Edge: Yeah, I think it's slightly more nuanced than that. I think you'll see positive regulation in licensed cannabis too, giving easier capitalization and clearer pathways to commercialization than exist currently — but I don't think we'll get overall clarity on the hemp-versus-marijuana question; that's going to continue. You hit the nail on the head, though — the closer you are to flower and flower extract, the more protected it's going to be for licensed marijuana markets. Things directly tied to flower, like rosin, closer to the plant naturally, will continue to have more of a regulatory moat in licensed cannabis. Whereas beverages and edibles — a lot of which are really going down to single-molecule purity anyway — are more likely to succeed in e-commerce, where you can centralize manufacturing and distribute nationally without all the overhead. Kellan Finney: It almost makes no sense to explain to people that these companies have four different facilities all in the Northeast versus one centralized facility to mass-produce products. The person who continues to lose is the consumer, because businesses have to pass those costs on, and the price per unit ends up higher. If they had one centralized facility with economies of scale, the price goes down, the product is more consistent, there's more precision, and a deeper understanding of the scientific principles you laid out — which is likely lacking in some of these manufacturing companies. Zach Edge: Yeah, absolutely, I think all of that is true. Over the next three-to-five-year landscape, each of those verticals will see considerable growth — I'm pretty bullish on all three. I can't tell you exactly how or when the regulations will fall, whether we'll get Schedule 3 and be off to the races in compounding pharmacies, or complete clarity on milligram caps and production means for hemp THC. But looking at the data, cannabinoids are overtaking alcohol consumption year by year. It's a category that will keep growing, and there are people who will only be comfortable consuming cannabinoids from one of each of these three verticals — particularly true for pharmaceutical, which I think has been underestimated. Everyone's recognizing that you're not going to get a regulatory moat or win from government given the deregulation happening under this administration. So we're seeing diversification, like the Curaleaf story or MSOs pushing into hemp-derived THC. I haven't seen much from the pharmaceutical side yet, but I'd guess we start to see interest and consolidation around cannabinoid IP and purification technology from pharma over the next 18 to 24 months. Bryan Fields: Do you think conversations like that are happening now? If consolidation is coming and Big Pharma is interested, they can't start their research six to twelve months before everyone else — there could be a first-mover advantage around certain assets or IP. Do you think those conversations are happening today and people just aren't aware, or is it more distant-future? Zach Edge: No, I think those conversations are absolutely already happening. I saw it reported — I can't remember which article — that Pfizer was in attendance at a dinner about six weeks ago with Curaleaf where they were discussing rescheduling. It would be silly to assume those conversations aren't happening. We're seeing a lot of interest on the pharmaceutical side in developing novel cannabinoids and cannabinoid derivatives, and in a Schedule 3 world a lot of the rules change even at the state level around production, distribution, DEA quota, and moving product between licenses. That's going to open up a tremendous amount, and whenever the regulatory change happens federally — reschedule or deschedule — that door will swing open wide, and it'll probably move fast. Kellan Finney: Right, there's a first-mover advantage, and certain assets are going to be more attractive than others given how some of these companies are structured, some of them saddled with massive debt. It's not like there are all beautiful girls at the dance to choose from — there are a few really good-looking ones, and some others where you're like, I guess maybe. Zach Edge: Yeah, 100%. And I think what makes a company attractive in that landscape changes to some degree from what made a company attractive for acquisition six months ago. Bryan Fields: Can you give an example? Zach Edge: Controlled substance distribution by e-commerce. When ketamine got approval for online prescription and mail-to-home delivery, you saw a proliferation of businesses using compounding pharmacies to compound ketamine or get various formulas approved for direct-mail delivery via online prescription. Those are all Schedule 3 drugs — testosterone is also Schedule 3. Any online pharmacy that already has prescribers set up for telemedicine will very easily be able to pick up any Schedule 3 drug — not just THC, but others on the docket over the next couple of years, like MDMA, psilocybin, and psilocin. Those are all likely to roll into controlled-substance compounding pharmacies that push product out by prescription, on- or off-label, over time. That's probably the most pressing example in a Schedule 3 world. I don't think it's some end-of-the-world scenario where the government locks up all the state-licensed cannabis markets — I think it opens the door to centralized manufacturing, like on the hemp side, where you take a form factor, centralize manufacturing under 211 GMP, and distribute by prescription nationwide. That's a disruptive model relative to what exists currently, and those online pharmacies are very, very interesting. Bryan Fields: The thing that comes to mind is that they have such detailed data on the demographics and behaviors of their users — they'd just be piping another product into the chain knowing, for example, males 25 to 45 have interest in these products, this search behavior, these needs, and they've bought these products before, so they likely want this other one. Those are the kinds of companies I think are going to shock everybody with big acquisitions — people will say they don't see the value, but when you think about the data segments, it makes a ton of sense. Zach Edge: Yeah, I'm of a like mind, and I don't think a lot of people have thought that through — or they've gotten stuck behind fear-mongering from consultants and lawyers in the space telling everyone that if you don't cough up a million and a half dollars to this PAC or that lobbyist, you're cooked. I just don't think that's true. That's not how government works — it's really hard to pass a law and really hard to change one, and we are where we are now because it's popular with constituents and unpopular to change it. Kellan Finney: So if you were a large-scale MSO operating in these protected markets today, and they reached out and said, "Hey Zach, should we consider expanding into the hemp category where we're seeing less growth than anticipated, or double down on operational efficiencies and centralize manufacturing in anticipation of rescheduling?" — what would you suggest? Zach Edge: I participate in all three, and that's typically what I'd recommend. It depends on the opportunity and what existing assets and infrastructure are already there, so it depends which MSO we're theoretically talking about — I'd have different suggestions for each. For some, it's clear hemp is the right move and they should be monetizing certain form factors in markets where they're not currently. For others, they're probably better prepared to support pharmaceutical development, even if not developing the drug or API itself — maybe providing the input material on a biomass level for downstream purification and refinement. Bryan Fields: And in that example, they should be focusing more on GMP certification, getting the tools in place to meet those rigorous demands from a supply chain standpoint — is that correct? Zach Edge: Yeah, and that depends slightly on how rescheduling happens and when, and what the rule-making looks like. But yes, that's correct — providing for those opportunities requires a different set of infrastructure, or adjustments to how you produce that flower or biomass, than you'd typically need for a state market, particularly in markets with less developed regulation than ones that have had time to fine-tune specifications, safety, and recall SOPs. Kellan Finney: Is there a consideration around borrowing costs — investing now while all these hurdles still exist? These companies don't typically have access to standard capital equipment loans, so there's an increased cost of borrowing for that investment against the potential first-mover advantage. How do you weigh a big cash investment to convert to a full pharma cGMP facility, which isn't like just changing the lights — it's changing the walls? How would you guide them through that decision? Zach Edge: Yeah, a lot of that will ultimately be acquisition-driven. All of these companies are in for a penny and a pound in their existing infrastructure. There hasn't been a lot of fresh capital investment in the cannabis space over the last 24 to 36 months — there are exceptions, companies successfully raising and deploying capital — but the bulk of the capital that's in has been in for a while, and the infrastructure is already there. So I think a lot of this will be acquisition-driven, with those acquisitions priced around how much work it would take to make the changes. I don't think anyone is properly capitalized, or willing to bring in debt, to change infrastructure without a for-sure acquisition or capital coming alongside that change. Bryan Fields: Are there existing pharma companies that could just flip a building over — is that a thing? Zach Edge: Yeah, absolutely. There are a million ways to skin a cat. You have to go through a certain number of GMP steps and meet supply chain requirements from FDA and DEA, but there's no single set way to do that. You might bring material in internationally for one piece of the supply chain, then do purification and chemistry to get it under GMP conditions, ultimately landing on a product or ingredient that meets FDA and DEA specifications — without needing to rebuild greenhouses, lighting, or air-change systems for GACP-level growth. If there are enough GMP steps or proper remediation and kill steps in between, there's likely allowance from an infrastructure standpoint that can be negotiated, as long as the DEA is happy with the security, track-and-trace, and chain of custody around the material. Bryan Fields: That's it right there. I hadn't thought that process through, but between you and Kellan describing it, that's exactly how it's going to go — there's no chance these companies take these old, raggedy facilities and put $250 to $500 million into them. The biggest word we've said a few times is change — change is really hard, really expensive, and seems unlikely. But if there are carve-outs like you're describing, and the DEA is happy with how things play out, there are opportunities where the supply chain gets adjusted a bit, some chemistry gets involved, and the end product meets all the specifications needed. Everyone's happy. Zach Edge: Yeah, 100%. There's obviously regulatory change involved in all of that too, and some guidance that needs to happen to massage that outcome — but when you look at the science and the overall safety data that exists currently, it indicates that's the direction it needs to go. Bryan Fields: 100% on that. So let's talk a little bit about the science, right, because you've sat on the fence across all these elements and seen how it works. At a high level, when we talk about the science, can you let listeners understand what you're referring to? Zach Edge: Yeah, of highest interest to me since I got into the industry has been how you take a raw cannabis extract, divide it into its component parts, and remove the contaminants of concern. When I joined the industry it was with Folium, which built and scaled the largest chromatographic separation operation for cannabinoids at the time — so I had direct knowledge and insight into how that was happening as early as 2015 and 2016. What we're talking about across all these different forms and facets is how to get to a safe and pure extract that can be consumed by humans. I've spent the last ten years looking at all the different ways to do that, whether removing THC from CBD or CBD from THC, purifying various natural or synthesized cannabinoids. We've looked at a lot of different equipment, infrastructure, and chemical processes that create those separations and purifications. When I talk about chemistry, I mean either physical chemistry through some form of chromatography — CPC, SFC, direct phase, reverse phase, SMB — or actual chemical modification of the molecules themselves, what I call "real chemistry." If we're taking a CBD molecule and performing a chemical reaction with other chemicals and solvents to turn it into a THC molecule, that's real chemistry, not just purification or separation. We participate in and consult on both, and we commercialize products resulting from both. I'm agnostic to whether an ingredient is isomerized or naturally extracted and refined, as long as it's refined to proper purity specifications. That chemistry and science has developed enormously over the last ten years, and we understand things now we didn't understand at all in 2015 — that has implications for all the regulation playing out. RHO Advisory is a company I co-founded about 18 months to two years ago with Matthew Moore, a partner in the company — shout-out to Matt, one of the most brilliant cannabinoid chemists I've come across and just an incredible human being to work with. Matt and I, alongside the other partners at RHO Advisory, have taken on a number of consulting opportunities across different types of purification, synthetic or natural cannabinoids, and it's been interesting because the problems are the same across different form factors and production processes — it's ultimately the same iterative process of identifying contaminants of concern and remediating them in a GMP way so they're not present in the finished product, whether that's pharmaceutical, hemp, or licensed cannabis. As a result of that work, we've actually developed a process that pulls cannabinoids out of complex mixtures at a much more efficient rate than anything else we've seen. Kellan Finney: Can you give us an example of a customer or company that would reach out, and what they'd ask for? Zach Edge: Yeah, absolutely. The best use case right now is large-scale hemp processors and extractors looking for ways to monetize the waste stream from CBD isolate production. They've got cannabinoid-rich mixtures — we typically call it mother liquor, the remaining fraction left after manufacturing and crystallizing CBD isolate. Typically you'll see 30 to 45% CBD left in that material, and maybe three to five percent, sometimes higher, of CBC, CBG, CBN, and THC. It gets really hard to crystallize that material because those other cannabinoids inhibit crystallization. We're able to take that material and, at a much more efficient rate than any other process we've seen, pull out CBD and THC in particular at about 90% efficiency. That's a significant development over the current state of the science in the industry, and we're in the final stages of scale-up and commercialization — we'll be excited to talk about it more publicly over the next couple of weeks. That kind of technology applies to each of these segments, and it's become our organization's highest interest, both at Suni and at RHO Advisory, in commercializing cannabinoids in the most regulatory-compliant and efficient manner possible. That will keep changing based on form factor, source material, and state and federal regulation over the next five years — there's no set roadmap we can all just follow to success, but the science stays the same and the ingredient stays the same. Bryan Fields: Just to be super clear, is that your team helping a CBD processor with tools, or you giving them a recipe, or they purchase the finished product from you? How does that relationship dynamic work? Zach Edge: Yeah, in general we'll either purchase the waste stream and supply pure CBD and downstream cannabinoids back, or sell them directly into the market, or for the right partners bring them on as toll processing, where they bring their material and we do the separation and purification for them on a toll basis. We've got plenty of downstream distribution and sales for the material itself, so it's a matter of working with the partners that are the best fit, and trying to align regulatory strategy as much as possible as the coming consolidation happens. We'd buy mother liquor and provide individual cannabinoids back, operate on a toll-processing basis, and we're also looking at other commercialization partners in pharmaceutical or licensed cannabis verticals. Kellan Finney: That gives you diversity depending on which channel potentially wins out, or influences the outcome more than the others. Zach Edge: Yeah, absolutely. From our perspective there's not a ton of competition between them — I think that's a false narrative painted by certain individuals in the space, but the data doesn't play out that way. We're seeing separate pools of consumers, whether for prescription cannabinoids, licensed marijuana users, or someone picking up a hemp THC beverage at their local corner store, however it's licensed in their state. Bryan Fields: Love it. So, last question for you — what question do you wish more people asked you? Zach Edge: I don't know the answer. I should have had a good question ready for this. I don't know — what do I wish people asked me more? I'm so antisocial, bro, I almost wish people asked me less. Bryan Fields: I think that's perfect — that's honesty, right? That's a fair, honest opinion. Zach Edge: Yeah, I think the question I wish people asked me more is: why is there any difference between any of these to begin with? Ultimately it's because we're in this capitalistic society where everyone's got their own lobbyists with their knives out in Washington, fighting to protect their own little boat, because ultimately that's what keeps everyone standing pretty. Bryan Fields: That's the perfect way to end it, Zach. So for our listeners who want to get in touch or explore partnership opportunities, where can they find you? Zach Edge: Yeah, zach at zachedge.com. Bryan Fields: Cool, we'll link it up in the show notes. Thanks for taking the time, this was a lot of fun. I appreciate you, guys. Zach Edge: Thanks, man.