Feasibility Studies for Medical Cannabis and Hemp Projects
Before undertaking a major medical cannabis project it is essential to undertake a feasibility study to evaluate potential opportunities.
A medical cannabis feasibility study is comprehensive study of a cannabis project in which all agricultural, engineering, pharmaceutical, legal, regulatory, operating, economic, social, environmental and other relevant factors are considered in sufficient detail that it could reasonably serve as the basis for a final decision by an investor or financial institution to finance the development of a cannabis production and/or processing facility. This approach is inspired by feasibility studies for infrastructure and mining projects
Medical Cannabis Economic Feasibility
When we talk about feasibility, we don’t mean practical feasibility (“Can Cannabis be grown here?”) but economic feasibility (“Can Cannabis be grown here at a profit?”) – because if you can’t make good money doing it long term, it won’t be affordable or worthwhile starting the project.
We need to evaluate the cost and potential return for every seed sourced, clone taken, crop harvested, batch extracted, analytic test conducted, product packaged and everything else that will be required to bring a facility into production. We know cannabis is a weed and will grow pretty much anywhere, but it takes a unique and rare combination of factors to make cannabis cultivation and manufacturing financially worthwhile. Even if the ultimate goal is getting medicine to patients, that won’t be achievable or sustainable unless the business can be financed and give a return on investment.
Feasibility studies are not unique to cannabis, of course they are widely used in mining, agricultural and infrastructure projects.
In the mining world feasibility studies boil down to 3 simple questions: What do we have? What’s the best way to get it out of the ground? How much money can we make doing that?
In the cannabis world these become:
- What can we produce?
- What’s the best way to get grow, manufacture and distribute it?
- How much money can we make doing that?
Let’s look at some typical topics in a summary of hypothetical feasibility for a cannabis project as they fit into our three main categories:
- What can we we produce? Typical topics include local regulation and markets for medical cannabis, property location and infrastructure, expertise, personnel and resources, available genetics and technologies, budget, and other resources.
Take particular note of regulatory loopholes and market advantages – if you can produce something under local conditions that is in demand but difficult to produce elsewhere, this can be a major advantage.
Pay close attention to factors which give strategic advantage (local markets, low cost production, export markets).
Note advantages which may be valuable but short term (early legalisation) and those that ensure long term sustainability (ideal outdoor cultivation or low electricity or labor costs).
Things to look out for are infrastructure advantages (or disadvantages) and price sensitivity of the potential project (If prices drop by 10% how profitable will you be – what about if they drop by 50%?).
- What’s the best way to get grow, manufacture and distribute it? Typical topics include applying for licenses and permits, sourcing genetics, cultivation approach (indoor vs greenhouse vs outdoor), cultivation technology and automation, target products (flower vs extracts vs pharmaceuticals), level of processing (bulk vs refined vs final product forms), target customer (internal vs domestic vs export), destination regulatory and compliance requirements, quality assurance processes (cGAP, cGMP, cGDP), processing technology, analytic testing, process plant design, water and waste management, management, infrastructure and support facilities, and paths to market.
- How much money can we make doing that? Typical topics include capital costs, operating costs, production output, product pricing, financial analysis that shows the bottom line Internal Rate of Return (IRR) and Net Present Value (NPV) figures, and conclusions and recommendations . Things to watch for are mainly unreasonable assumptions (e.g., are the prices plausible or locked in with offtake agreements) and what impact will falling prices or increasing costs have on profitability.
Be sure to factor in time-to-market – especially when many other large projects may be planned internationally. If prices are high now but you won’t start producing for 18 months after many other projects come on line that will impact returns – has this been factored in? Thinking long-term is critical.
Remember, even a well constructed project study is only an estimate and guide for the best path forward – the more you can validate your assumptions and lock in pricing (eg: with forward sale contracts) and timelines (eg: using turnkey installations to shorten the time to market) the more accurate the model will be.