In the United States, it’s basically a matter of time before the federal government legalizes marijuana use. All but two states already allow access to some form of marijuana. This is a once in a lifetime opportunity for entrepreneurs. Because although the industry is growing rapidly, it is still emerging. At the Las Vegas trade fair MJBizCon in 2019, there were just as many mom and pop businesses on the floor as there were big players. You could feel the hum in the room … no pun intended!
In 2020, it should come as no surprise to find a record number of cannabis-related patents issued by the U.S. Patent and Trademark Office. From delivery mechanisms to medical devices, innovative companies are rushing to shape the industry with intellectual property.
For the Canadian company Nextleaf Solutions, which plays a licensed game primarily by patenting the processes and equipment necessary to get from dry cannabis or hemp biomass to a standardized cannabinoid oil as efficiently as possible, speed is of the essence.
Founded in 2017 by Paul Pedersen and Ryan Ko, the company recently received its 14th U.S. patent. More than 80 patents have been granted worldwide and more than 30 other patent applications are pending. Their extraction facility in downtown Vancouver, BC, processes up to around half a ton of cannabis biomass into oil every day.
My decades of experience in the packaging industry have taught me that with the right equipment and a superior product, you definitely have an edge in the market if you are the most efficient manufacturer.
I sought an interview with Pedersen to talk about NextLeaf’s IP strategy and where the greatest opportunities for inventors today lie with cannabis.
Stephen Key: “Let’s talk about your patent application strategy. Is it just for licensing? Is it just to block others?
Paul Pedersen: When I looked at who the top cannabis patent holders were in 2017, I noticed that at least seven of the top 10 big drug companies in Canada were. When we started our business, we acquired a number of intellectual property created by what I call cannabis pioneers or citizen scientists – guys who were doing things in California in the 1970s. They didn’t really know what they were doing, but it worked and they were doing pretty cool things.
We’ve surrounded this intellectual property with 40 years of hands-on experience from our team of engineers and scientists, and we’ve really improved what they created. We professionalized it in the sense that we improved, validated, scaled and protected a whole range of intellectual property.
Our goal is really to protect what we believe will be very commercially valuable to the pharmaceutical companies, the big tobacco companies, who are making massive investments here in Canada, where cannabis is federally legal.
key: Well, this is really a licensed game.
Pedersen: In the long term, we believe that licensing our intellectual property has incredible blue skies. In the short term, we also see opportunities to deploy and further validate our technology domestically in the Canadian market. [Licensing] was a great opportunity to drive our innovation further while generating income to fund further development.
However, investing in our extraction infrastructure would have been unnecessarily risky just to have someone else prevent us from practicing it. Canopy’s patent infringement suit against GW Pharma regarding extraction technology confirms our decision.
key: Who registers your patents?
Pedersen: Our Director of Intellectual Property works with a number of intellectual property advisors around the world, with the US being our primary jurisdiction for patent applications. Then, on the Patent Prosecution Highway, we file in Canada, and we file in Europe, Australia, and other countries where cannabis is legal for medical use or we think it will be legalized in the next five, ten years could.
key: How do you find out which countries to submit to?
Pedersen: In each jurisdiction, we consider the geopolitical environment with cannabis regulations and free trade agreements, projected demand or other relevant factors within a given market and what and where the world’s largest cannabis companies operate, and we report in those jurisdictions.
We also look at where Pharma is operating.
key: Do you have an IP strategist in your staff?
Pedersen: Taran Gray, our Director of Intellectual Property, previously worked for Phillips Electronics, where he was instrumental in building the patent portfolio. We have tried to really involve experts, be it on the R&D side with our chemists and engineers, or on the intellectual property creation side, with our director having technical experience. So we’re just applying [all of that experience] to cannabinoids.
key: Are you filing preliminary patent applications first?
Pedersen: We are not. We have filed full, non-provisional patent applications.
key: Do you take this approach because of the speed?
Pedersen: Yes. We really believe that right now it’s an arms race, a land grab. When we received our first patent two years ago, Taran said, “This is the fastest granted patent I’ve ever seen.” This is a great implementation by our IP team. More importantly, the U.S. Patent Office lacks state-of-the-art technology on cannabinoids because it is federally illegal. And I think that’s a huge benefit for Canadian companies that can legally do research and development.
key: Your patent portfolio budget must be large. Is that correct?
Pedersen: I think we made it economically. As a founder, I am very proud of how we spent about $ 20 million, largely raised by our friends, family, and very supportive investors. We didn’t build greenhouses and spend on executive salaries; We really tried to invest in intellectual property that we believe will create long-term shareholder value.
key: Have you already licensed something?
Pedersen: We have. We started generating IP license fees from a license agreement about a year ago. To date, cash flow licensing has more than covered all of our patent law and filing costs. And we believe we’re just scratching the surface of the possibilities – that’s what I’m most proud of.
key: This is impressive. How do you decide where to submit next?
Pedersen: As Gretzky said: “Go where the puck goes, not where it was.” We try to think ahead what kind of products will be attractive to the mass market in a government regulated market like Canada. Canada is like a testing ground for the United States, isn’t it? This weekend we’re doing one of the largest human vape pen studies.
It’s our first study, and it was a hell of a long process to get it licensed and approved. But how else do you ensure that these products are of high quality? How can you design and develop them if you cannot legally consume them before they are sold?
The challenge and opportunity with cannabis is that it has been difficult to legally conduct R&D and legally develop intellectual property.
key: Where do you see the greatest opportunity in cannabis? Edibles, liquids
Pedersen: In the infused products. So don’t smoke flowers, but products that are made with a standardized THC- and CBD-based molecule. If you look at the data on consumers who are replacing alcohol or more dangerous recreational drugs with cannabis, I think that is a great opportunity.
key: Let’s talk about your license agreements.
Pedersen: There is a great licensing opportunity in the United States. What our patent portfolio represents is the means to efficient production, isn’t it? Safe and regulated extraction facilities like the ones we have here in Canada will ultimately be built and commissioned in the States.
While it is really exciting to sell cannabis-based products, we think it is more exciting to sell the funds for very efficient production and novel product formats through licenses.
key: Who did you give the ability to build the equipment for you?
Pedersen: To date, our patent licensing goes to a local, private British-Colombian company in the equipment sector. They mainly sell extraction equipment to the US. You licensed some of our non-core patents based on a design of some of the equipment we use.
We have three types of patents – some are based on unique equipment that we use in our process, others cover the process itself, and the third type is focused on delivery.
Much of our current R&D focus is now on delivering cannabinoids. We have applied for some patents for our rapid emulsification technology, which takes our CBD-T2 molecule and essentially encapsulates it to make it water soluble. If you drink it, you will feel the effects in 10 minutes instead of going through your stomach. “
By building a patent wall to protect ownership of its proprietary technologies, Nextleaf is sending its competitors a clear message about the seriousness of its intentions. It’s a strategy that prevents others from trying to circumvent it. The message conveyed is: “It is easier to work with us than against us.”
A disadvantage of patenting procedures is how difficult they are to monitor. How can you tell if someone is breaking the law without visiting the manufacturing facility in person? It is usually not obvious in the market. The majority of my patent portfolio relates to the manufacturing process of a rotating label. When I sued Lego for infringement, it took years and a lot of money to answer the question of whether their litigation infringed my intellectual property.
Still, I believe that inventing, developing and patenting a more efficient manufacturing process can be a gold mine.
Inventors have to keep this in mind.
Speed. Will the process and / or equipment keep up with the rest of the production line?
Costs. The smallest additional costs add up quickly during production. Your invention must be competitive in cost or have a difference that produces a higher return on investment. Basically, the price of your product must be acceptable in the market.
Size. The space in production is always limited. Does the invention fit into the footprint of existing production facilities?
Point of difference. Will the improvement appeal to more than one customer?
Scalability. To make the equipment you design and protect you need partners. Avoid this potential bottleneck by planning ahead.
Filing patents internationally can be disproportionately expensive. Nextleaf’s strategy of figuring out where the biggest players in their industry are filing and tracking in-kind contributions is smart.