Vertical integration in the medical cannabis industry: exploring strategy and benefits

The medical cannabis industry continues to grow and increase in market size. According to Statista, the industry is expected to grow at a compound annual growth rate (CAGR) of 13.16% from 2023 to 2028. With the gradual legalization of the medical use of cannabis in many countries, new business opportunities are emerging. An important strategy for businesses in this industry is vertical integration. 

 

What is vertical integration in the medical cannabis industry? What advantages does it offer to companies? Read the article to find out the answers to these questions.

 

Definition of vertical integration in the medical cannabis industry

 

Vertical integration is a business strategy in which a company controls multiple steps in the production or distribution of products. It may involve several links in the production chain, from the cultivation of raw materials to the sale of the final product to consumers. In this way, the company controls all processes, allowing it to better manage product quality, reduce costs, and have more control over the market.

 

In the context of the medical cannabis industry, vertical integration means that the company controls and executes the various stages of production and sales of medical cannabis products, from cultivation to distribution and sale to end customers.

 

 

Cultivation and production

 

A company that adopts vertical integration may have its own plantations for growing medical cannabis. This allows for greater control over the quality and purity of the product, as well as strict compliance with cultivation standards.

 

Processing (extraction)

 

Once the plants are harvested, the company can process them themselves and extract active compounds such as tetrahydrocannabinol (THC) and cannabidiol (CBD). The processed product is further utilized to produce various forms of medicinal products. These can be capsules, oils, extracts, transdermal patches, and other forms of products.

 

Distribution and sales

 

A vertically integrated company in this field may have its own medical centers, pharmacies, and wholesale partnerships to sell the products. This gives it greater control over the sales market and the ability to provide its products directly to end patients.

 

Impact of vertical integration on the medical cannabis market

 

The implementation of vertical integration in the medical cannabis industry is having a significant impact on the entire industry market. Here are a few key aspects of the strategy's impact.

 

Market dominance. Companies that have successfully implemented a vertical integration strategy can have a significant competitive advantage. By controlling all phases of production and distribution, they can be more flexible in responding to market changes and shorten the time to market with new products. Such companies can become dominant players in the market and influence prices and terms of sale.

 

Restricted access for new market players. It is difficult for small companies that cover only one stage of production to compete in the global market with large vertically integrated companies. Larger companies have more resources to market and reach new markets due to higher production and sales volumes and lower costs. 

 

Standardization and product quality. Vertical integration promotes greater control over product quality. This can increase consumer confidence in medical cannabis and drive demand for the product.

 

Impact on product pricing. Vertical integration allows companies to manage all parts of production and distribution, which in some cases can lead to price control in the market.

 

Advantages and disadvantages of vertical integration in the medical cannabis industry

 

 

Let's take a closer look at the advantages of a vertical integration strategy for cannabis companies.

 

1) Production control. Companies that are vertically integrated can control seed quality, research, and standards for growing plants, extracting active ingredients, and producing medical products. This reduces the risk of defects and ensures controlled production conditions.

 

2) Reduced costs. Vertical integration allows companies to reduce the cost of intermediaries and unnecessary links in the distribution chain. More efficient management of resources and processes improves product competitiveness.

 

3) Faster production speed. Reducing information and product transfer time between different stages of production allows for a faster production speed of medical cannabis. This is especially important considering the growing demand for the industry's products.

 

4) Standardization. Owning all stages of production makes it easier for companies to implement standards and harmonize production processes. This is important for regulatory compliance, passing quality certifications, and increasing consumer confidence.

 

Vertical integration also has a number of disadvantages that companies can face.

 

1) Large investment. Owning all stages of production requires significant investment in equipment, technology, staff training, and research. This can cause difficulties for companies with little start-up capital.

 

2) Lack of diversification. As a company integrates different phases of production, the risks associated with each phase also become more interconnected. For example, problems with plant cultivation can affect the entire production chain downstream.

 

3) Strict regulation. The medical cannabis industry faces a variety of national and international regulations. Companies integrating the various stages of production must strictly comply with all relevant rules and regulations.

 

Summary

 

Vertical integration is an effective approach for building a business in the medical cannabis industry. This strategy allows you to control product quality, reduce costs, and increase production speed. These factors contribute to the company's sustained success and growth, which is attractive to potential investors.

 

 

S-Pharmaceutical is a vertically integrated medical cannabis company. It covers the full production cycle: plant cultivation, extraction, product manufacturing, and sales to consumers. 

 

The company offers the opportunity to invest in both individual stages of production and the full cycle. This allows investors to choose the most suitable option that matches the investment strategy and risk tolerance level.