On July 2012, Ocean Nutrition Canada, a producer of omega-3 oils from fish, was acquired by DSM N.V. for $540 million.

This is the first post in a “Master Class” series on “how to do stuff.” In this case, how an industry and a science-based company are evaluated in a business development deal.

This case study will be comprehensive in presenting the global enterprises, the entrepreneurs, their business, the technologies, and the investors that led to this deal and its aftermath. Here are the themes that will emerge:

  • Global enterprise companies need to transform their old lines of business to new ones to retain value. One player was successful (DSM) and one was not (DuPont).
  • Entrepreneurs launching their ventures into visionary businesses are guided by values, mindsets, and motivations that are different from those launching ventures based on existing paradigms. We will delve into the founders’ backgrounds and actions.
  • Science and technology play a more foundational role in these new ventures. We will look at these in-depth.
  • A new class of investors, who anticipate the future conditions of the world, are underwriting these ventures. We will also look at this new class of “impact investors.”

The technology learnings in this case study are highly pertinent to a hot industry today: cannabis. We will conclude by making the connections to cannabis.

1) A global enterprise in transition, and the strategic opportunity

In the late 1990s, DuPont, a 200-year-old global chemical conglomerate with US$ 28 billion in revenue was transforming into a new global enterprise for the 21st century.

DuPont’s core businesses sold polymer materials. Memorable brand names including Kevlar, Tyvek, Teflon, Lycra, Mylar were sold B2B. These were essential “ingredients” used by factories to make products across almost all manufacturing sectors, from food packaging and consumer products to durable goods in transportation and construction.

However, these materials were becoming commoditized. DuPont had to transform to remain relevant and to avoid corporate decline.

DuPont jettisoned its wholly owned subsidiary, oil company Conoco. Conoco was part of DuPont’s integrated supply chain model. It supplied important petrochemical feedstock to make DuPont’s polymer materials. However, the oil shocks of the 1970’s had long worn off, and an integrated supply chain was no longer necessary as global supply chains were becoming more interconnected.

Simultaneously, DuPont made a big entry into life sciences. It acquired Pioneer Hi-Bred, one of the world’s four big agricultural seed companies. Important seeds include corn and soy. Pioneer’s corn had higher levels of the healthy “omega-6” oils. Its soy, an important protein source, had higher yields.

It also acquired Protein Technologies, one of the word’s four largest manufacturers of soy protein. Soy protein was sold primarily for animal feed. However, it was increasingly being used as a high value ingredient and source of protein in consumer foods.

These two acquisitions and additional adjacent deals became a new business group within DuPont called Nutrition and Health.

A strategic asset in the Protein Technologies acquisition was that in 1999, FDA approved an authorized health claim for soy protein:

25 grams of soy protein a day, as part of a diet low in saturated fat and cholesterol, may reduce the risk of heart disease. A serving of [name of food] supplies [x] grams of soy protein.”

Only 12 health claims have been authorized by FDA to date. Being able to use health claims would be a boon to the marketing and sales of soy protein. Soy had become a higher value food ingredient.

Though the DuPont enterprise was under transition, its paradigm for value creation did not change.

The old model was an integrated supply chain: petrochemical feedstock to make high value polymer materials that were sold B2B as essential “ingredients” to industrial manufacturers.

The new model was still an integrated supply chain: agricultural seeds creating feedstock to make high value food ingredients to be sold B2B to food manufacturers.

I was starting the business trajectory of my career at DuPont at the time. We identified a three-year-old company from Bedford, Nova Scotia called Ocean Nutrition Canada (ONC) that could be an acquisition or bolt-on deal to the growing Nutrition and Health business.

ONC was a manufacturer of omega-3 oils from fish.

By early 1990, the scientific evidence had surpassed an inflection point of linking the dietary consumption of omega-3 oil (an ingredient which comes from fish) to reduced risk of cardiovascular disease. (Figure 1)

Figure 1: number of scientific publications investigating the effect of omega-3 fatty acids and cardiovascular health, published from 1965 to 2000 (and continued trajectory to 2005).

ONC produced and sold this ingredient in the form of soft gel capsules.

ONC was also advancing a new concept: fortifying conventional foods with omega-3 oils.

To do this, ONC had a technology to microencapsulate micron-sized droplets of omega-3 oil with a protective edible coating. This would allow omega-3 oils to be formulated into food recipes without presenting a fishy taste and to remain stable during food processing and storage. (Figure 2)

A key part of our strategic interest in ONC was their microencapsulated omega-3 oils. It fit the paradigm of high value nutritional products that can be sold by DuPont’s Nutrition and Health business B2B to food manufacturers, just like protein from soy and omega-6 oil from corn.

Figure 2: examples of ONC products. Left panel: omega-3 oil soft gel capsules. Centre panel: micron-sized droplets of omega-3 oil microencapsulated with an edible protective shell coating. Right panel: free flowing powder of microencapsulated omega-3 oil.

2) The cofounders of ONC

In July 2000, I sat in a board room at DuPont Canada’s head office in Mississauga Ontario along with a senior manager and a DuPont vice president. We were meeting with the two co-founders of ONC: John Risley and Robert Orr.

John Risley’s life arc had all the hallmarks of founders from the old world of Canadian business.

His mother arrived in Canada after the end of the Second World War to be reunited with his father, a Canadian military officer. She arrived in 1946 at Pier 21, an ocean liner terminal in Halifax, Nova Scotia. Pier 21 was also an immigration processing facility. From 1928 to 1971 it processed over 1 million immigrants. It has been compared to Ellis Island of U.S.A.

John Risley was born in Halifax in 1948. Making money seemed to have been a motivator of his early life. He went to work right after high school. Years later, he said “I just couldn’t see how university was going to make me rich.” He credits his mother for teaching him his values of “determination, pluck, perseverance and thrift.” (1, 2)

In 1976, with limited funds, he started a lobster shop. He persuaded his brother-in-law, Colin MacDonald, to quit medical school and join him. Colin would later write, “We started with an image of a retail lobster shop, coupled with enormous dedication, perseverance and desperation and an unbridled sense of optimism, and dreams of endless possibilities…” (3)

That shop became Clearwater Fine Foods, which harvests, processes, and sells shellfish all over the world.

The business strategy was consolidation. They bought up fishing licenses to become the largest holder of quotas or rights in Canada for almost all the shellfish species they sell: lobster, scallops, clams, shrimp, and crab. (4)

Like the characteristic businesses of the old Canadian establishment – from beaver fur to forestry to mining to oil and gas – this was essentially a resource extraction business.

By the time we met John in 2000, he was CEO of privately held Clearwater Fine Foods, on the list of richest Canadians, and had received the Order of Canada in 1998.

John was understated in talking about Clearwater producing premium shellfish.

However, he was proud talking about their fleet of high-tech ocean trawler factories and about their use of science to produce fresh product. They pioneered the long-term storage of live lobsters in cold water, allowing them to be shipped fresh to customers around the world.

He said his reason for co-founding ONC, his second company, in 1997 was that he wanted to create a new science-based company, using technology to deliver premium products. Via Clearwater, John was the principal investor in ONC.

As the discussion veered from Clearwater to ONC, John became more outspoken. He was laying the boundaries of his beliefs and expectations of ONCs potential. That was the bold and forceful negotiator speaking.

Robert Orr was ONC’s founding CEO.

Robert was detail-oriented in his discussion of ONC. He recited long answers to questions by averting his eyes down as if recalling encyclopedic facts about the business and operations. I thought it was shyness. I think this is his style.

He was friendly and even modest, but in all the time we spent with him, Robert was very private. All he talked about, all the time, was ONC and the omega-3 industry. To this day, there are no details reported anywhere about his life prior to ONC. I remember him talking about his family in personal terms for just one moment.

They were complementary co-founders: hard-nosed investor representative of the Canadian business establishment from the front end of the baby boom generation, and the all-business operations executive from the tail end of the baby boom generation.

3) The “startup” company

ONC had revenues of about $10 million. This was promising validation for a three-year-old company.

The majority of these sales were from omega-3 oil in soft gel capsules. A smaller product line was glucosamine in hard gel capsules.

These were natural health products in Canada (dietary supplements in U.S.A.) that can be purchased over-the-counter, without a prescription.

There was also an R&D pipeline of marine extracts that could have potential therapeutic or health benefits. This was a very early stage drug / health products discovery operation. Though any products would be speculative and far into the future, they treated this as an ambitious operation with 30 scientists in a brand-new lab with the latest equipment.

Of major interest to us was their microencapsulation technology. Omega-3 oil cannot be mixed into food recipes. It is an oil. It also oxidizes in air, becoming rancid and losing its beneficial health effects. Microencapsulating droplets of the oil inside a solid shell of food-grade material would protect it from degradation. Microencapsulated oil is a solid, free flowing powder. This form allows it to be used in food recipes like breads and dairy products.

There were only a few patented technologies in the world at the time that were able to microencapsulate omega-3 oil. They had secured exclusive rights to two of these, which they claimed were the best available ones.

The rest of the operation was very staff-efficient. They had one supply chain person sourcing omega-3 oil. The manufacturing team was lean and efficient. The oil was processed and packaged in-house with their own soft gel encapsulation line.

Soft gel encapsulation (to make soft gel capsules, which is different from the microencapsulation described above) requires expensive encapsulation equipment. They knew where the value capture points were in the production and invested accordingly.

For $10 million in sales, they only had one sales person. The sales staff of ONC’s parent company, Clearwater Fine Foods, assisted in co-selling to relevant customer segments. This was the benefit of having a strategically-aligned investor.

They had one regulatory affairs person. This was essential to selling such products. The senior experience of this person was indicative of their seriousness of accessing the food ingredients channel.

They and their industry peer companies (aka competitors) were in the process of filing a petition with FDA to get a health claim on the benefits of omega-3 oils in reducing the risk of heart disease. This fit the same paradigm of soy protein having a health claim to support marketing and sales.

They were raising their next round of financing. They were operating at a significant loss. They had increasing costs, and they still needed more capital expenditures for their oil processing, packaging, and microencapsulation lines. With this financial outlook, having conviction to the business plan was critical to the survival of any start-up company, which they had. It also helped that ONC had a committed investor.

Clearwater was the majority investor. A single customer and distributor was responsible for a majority of their sales. This customer also had an equity position in ONC through an earlier investment.

John made it clear that they believed in the future of ONC and that Clearwater would never hold less than 51% equity, unless a buyer was offering a significant premium.

We had estimated a risk-adjusted Net Present Value (NPV) of ONC in the eight figures. NPV was not the ideal way to value a company at this stage. This was 2000, when early stage financings had not evolved to where they are today, and it was the standard accounting method of an old economy company when it came to M&A.

We never mentioned our NPV estimate, but John likely did a similar calculation. He stated an example of what “significant premium” meant to him. It was 50% higher than our estimated NPV.

4) Analysis of the industry and the company

What is the opportunity here, what deal can be made, and what are the risks?

4.1 Product analysis

Omega-3 oil from fish is comprised of a mixture of many fatty acids. Two of these fatty acids are responsible for the pharmacological effects of fish oil: eicosapentaenoic acid (EPA) and docosahexaenoic acid (DHA).

The proportion of EPA and DHA varies by the source of the fish used to make the fish oil.

Omega-3 oil grades are designated by the weight percent of EPA and DHA in the oil. For example, an industry standard commodity product is a refined fish oil containing approximately 18 wt.% EPA and 12 wt.% DHA. The rest comprise other unimportant fatty acids. This product is called 18/12.

The white space in the chart on Figure 3 shows all possible ranges of EPA and DHA in omega-3 oil. The two most common commercial products at the time were 18/12 and 12/8, shown as large green circles.

The dashed grey line shows the upper limit of what can be obtained from fish. It is rare to find a fish source that has EPA and DHA higher than any point to the upper right of this dashed line.

Figure 3 (click to expand): commercial omega-3 oils on the market circa 1990s, according to weight percent DHA and EPA in the oil. Size of circles approximate market size.

To obtain products to the upper right of this dashed line, the fish oil is concentrated. This provides a better quality product. By concentrating the oil and getting rid of most of these other nonessential fats, consumers do not need to take as much oil to get the desired amount of EPA and DHA. However, the process of concentration also adds significant cost.

ONC’s philosophy was to provide premium products. They invested in the equipment to provide these concentrated oils. The blue circles are examples of the products they made.

These concentrates are also important for microencapsulation. To fortify food with EPA and DHA, concentrated oil is needed to maximize the load of these two fatty acids in the encapsulated powder, reducing the amount needed in any food recipe.

The yellow circle shows another form of omega-3 oil on the market: 35% DHA. This product is not obtained from fish. It is obtained by the fermentation of microalgae. Oil from this source has no EPA.

Essentially pure EPA or DHA are the red circles. These are very expensive to make and were not commercial at the time, except for research use.

4.2 Production process

Understanding the manufacturing process is needed to determine the competition.

Figure 4 is a schematic of a fish oil manufacturing process. Fish are caught and sorted on ocean vessels. They are unloaded at a rendering plant. The rendering plant separates the oil from the fish. Solid fish meal is one product, crude fish oil is the other product.

Figure 4 (click to enlarge): omega-3 oil production process from fishery to final concentrate. Rendering plant products in purple. Refined oil and oil concentrate in blue.

The crude oil is processed at a refinery. The refined oil is known as R-B-D-W oil, which stands for refined, bleached, deodorized, and winterized. This is a common set of processes used for all oils of plant or animal origin. The order may be different, and some steps may be omitted depending on product requirements.

Distillation may be included within the R-B-D-W process to remove lower molecular weight impurities. This is expensive to do. It was done rarely with fish oil. However, to achieve better quality products, distillation removes the more volatile impurities before concentration.

All fatty acids in fish oils are in the triglyceride form. This is a high molecular weight form that cannot be concentrated. A transesterification reaction of the refined fish oil with ethanol converts it to the ethyl ester form. This is a lower molecular form that allows the oil to be concentrated. The most common and cheapest method to concentrate EPA and DHA ethyl esters at this stage is molecular distillation.

Molecular distillation equipment is expensive. The process is energy intensive. ONC invested in this process to enable the production of these concentrated omega-3 oils. This was one way ONC differentiated from the competition.

All of the above should not be overwhelming in the science or engineering. In fact, it should be underwhelming, and it should raise new questions. Understanding operations is essential to a company’s success. Robert Orr did not volunteer any information freely, but when asked, he was able to discuss anything in detail.

When it comes to innovation, continuous improvement, root cause analysis, or project management, knowing these details makes all the difference between success and failure and between mediocre and exceptional results.

In all the very successful early stage companies I can recall, the CEO or managing director knew all the details in breadth and depth. Any who were unable to go into such details, or who delegated others to provide answers, usually raised some concerns.

For example, I recall a managing director taking me on a plant tour in Europe. As we walked past a pilot reactor, I asked him about the reaction time. There was an engineer and an operator nearby, but he did not need to ask them. Without missing a beat, he told me the process they used, the in-process quantities they measured, the target range, and their process’ current benchmark. He was a Ph.D. economist by training, yet he knew all of the critical operating details. That company was the leader in its field.

Robert Orr’s knowledge of all the operating and technological details of his company had these same characteristics of top quality management.

4.3 Supply chain

Today, the trend in startup company pitches is to present their competitive advantage using a 2 x 2 matrix. There are four quadrants. The competitive companies are dispersed among three of these quadrants. The founders position their company in the fourth quadrant, claiming that they address both of the selected strategic dimensions best.

While this demonstrates awareness of the competition, and it is a simple framework to show, this information is not helpful.

Potential investors and partners examine the company through their own thesis.

ONC did not use a 2 x 2 matrix. Their position was simply that they had premium quality products. Here is another way to consider the company.

Figure 5 was the global supply chain for fish oil circa 1990s. Note how interconnected global supply chains were (and still are).

Crude fish oil, processed in different ways, travels into the industry verticals up to the top of the chart.

Multiple companies in different countries perform the various processes. Some of these companies specialize in one operation, while others integrate several operations along a vertical.

Figure 5 (click to enlarge): simplified global supply chain of omega-3 fish oils, circa 1990s.

The core business of ONC was about executing along the red arrows to create omega-3 fish oil capsules.

Evaluating their business was about our perspective of their future revenue and profit in operating along this part of the value chain against the competition.

4.4 Technology platform and market size

Technology platform in the context of a tech company is slightly different from that of a materials or biotech company. Apple iOS or the iPhone and App Store can be considered a platform in tech.

For a company like ONC, their microencapsulation technology may be considered a platform.

Their microencapsulation technology was of importance to us (the dotted red arrows in Figure 5). We learned that it was still in development at the time, so this was a speculative platform.

A common method used by early stage companies to define the market opportunity is to treat their technology as a platform that can be used to develop many different products. Their stated value is the sum of all these possible uses.

For example, ONC’s microencapsulation technology would enable omega-3 oils to be formulated into clinical nutrition products, infant formula, pet food, meal replacement products, health bars, frozen desserts, milk, yoghurt, beverages, dressings and sauces, etc.

Using a platform framework to define valuation is not realistic. Its full premise never turns out to be true. Only one or a few products ever become possible. This may be due to different technological requirements of each product, or regulatory constraints, or patent issues, or the high cost of developing any one product, to name a few.

For example, entering the infant formula segment is not possible with ONC’s products, because EPA cannot be added to infant formula. The reason goes beyond the scope of this post, other than to note that this is why the 35% DHA oil in Figure 3 exists, and it is manufactured by a company that holds a near monopoly in the infant formula application.

High growth businesses should target Total Available Markets (TAM) of over $1 billion. Since we are looking at food, the TAM would be large. What is more important are the Serviceable Available Market (SAM) and the Serviceable Obtainable Market (SOM).

Proper diligence would be to see performance data of ONC’s encapsulated powders in various foods: in-process, organoleptic, stability, shelf life, product load, bioavailability, and cost.

The performance data of trial samples would have allowed us to construct a revenue model for each suitable segment. This would be the SAM.

If the performance data was not available, a scientific expert (that would have been me) would provide an educated guess of expected performance, from which the revenue model was constructed.

All of DuPont’s enterprise businesses had revenues over $1 billion. Hence, our revenue criteria would not have been different from a current day VC investor. Alternatively, there would be a thesis of how this product platform would add to the top line of the Nutrition and Health business.

5) Deal options and outcome

Clearwater was not willing to sell without a significant premium, and the microencapsulation technology was premature.

We contemplated a joint venture or equity investment on the operations defined by the dotted red arrows in Figure 5. This was not of interest to DuPont Nutrition and Health. The business was focused on integrating ingredients that came from the seeds developed by Pioneer. Also, our revenue models did not add up to a SAM that would make it appealing to add ONC’s product platform to the business.

So we walked away.

ONC went on to execute brilliantly.

  • They raised financing from James Richardson & Sons, who became 25% owner of ONC. This $5 billion conglomerate is owned by the fifth generation Richardson family of Winnipeg, the very exemplar of the old world Canadian business establishment. (5)
  • They were key participants in a consortium of omega-3 producers created to establish quality standards for commercial grades of omega-3 fish oils. This helped to provide product credibility to customers. The first monograph was released in 2002. This organization now includes over 180 members. (6)
  • In 2004, FDA allowed a qualified health claim for omega-3 oils.
  • They succeeded in developing a better microencapsulation technology and launched it in 2005. This product is now used to fortify yoghurt, orange juice, breads, nutrition bars, and candy.
  • For the next few years, ONC became one of the largest producers of omega-3 fish oil with dominant market share in North America.
  • In 2010, DSM N.V. acquired Martek for US$ 1.1 billion. Martek was the company that made the 35% DHA oil noted above, and which had a near monopoly in supplying this to the infant formula industry.
  • In 2012, DSM N.V. acquired ONC for C$ 540 million. John Risley and the Richardson family cashed out at a market high.

The published net sales of ONC for 2012 was $190 million with an EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) of $55-60 million. These financials turned out to be well within the range we projected earlier, validating our conclusions.

For DSM, the deal was accretive to its earnings, and ONC’s assets were a proper fit to DSM’s particular enterprise strategy. 

6) Epilogue

DuPont did not succeed in its transformation. It remained trapped in the old world. In 2017, it merged with another chemical giant, Dow Chemical. The combined companies are now engaged in breaking up their various businesses.

Clearwater Fine Foods became Clearwater Seafoods. It went public in 2002 with a business model that is still grounded in the old world of resource extraction.

DSM, a Dutch specialty chemicals conglomerate, acquired the two important omega-3 oil producers, Martek and ONC, to create a leading business. Along with other transactions, DSM made the successful transformation into a nutrition and health and high value materials enterprise.

As for the investors, Richardson and Sons also remained in the old world. Founded in 1857 as a grain business, they did diversify from commodity seeds into agriculture, energy, real estate, and financial services. These are still traditional infrastructure businesses.

It is Robert Orr who is navigating forth into this new world. He is now CEO and managing partner of a venture firm focused on investing in environmentally sustainable aquaculture.

The fund, Cuna del Mar, is a family office fund based in USA, financed by Christy Walton, billionaire daughter-in-law of the founder of Walmart, another old world business.

Previous posts described two new forms of venture investing, where the fund engages in active company creation or acts as a specialized accelerator.

Here is another type of venture investing: Cuna del Mar is an “impact-based fund” with a long term view. It has a 50-year horizon to allow companies to execute on truly transformational visions to improve the world. (7)

While 50 years sounds long, Robert points to the Duke of Westminster. His investment group, Grosvenor, among the wealthiest fortunes in Britain, has a 300-year horizon investing on behalf of the Grosvenor estate, founded in 1677.

For example, Grosvenor’s property portfolio may be traditional infrastructure, but their investment approach is focused on a “living cities” philosophy where they invest in properties that aim to enhance the neighbourhood or community for social benefit over generations.

The sustainable financing or impact investing asset class has grown to $12 trillion in assets today, but most of these are “short term” private equity funds. The truly long term subset are aligned with pension funds that have generational time frames, as exemplified with Cuna del Mar and Grosvenor.

It takes long investing horizons to create outstanding sustainable visions.

We are still charting the early journey into a new world to create companies that can build a better world.

For example, investing in sustainability seems laudable, but it is not ambitious enough.

Why even harvest fish? In the many years since I analyzed the fish oil industry, a consciousness has been growing in myself about the implications of the data I saw. Tons of fish are dragged from their environment, scalded and shredded apart every year, to separate out their oil for industrial uses and for human consumption. What remained was sent to farm feed. The image of this is brutal and disheartening.

New ventures, “cellular agriculture” companies, have a vision of developing new, non-animal sources of protein and oil. I will cover this in future posts.

7) Lessons learned and the application to cannabis

This case study offers excellent lessons. Its relevance today can be illustrated with the emerging cannabis market.

Fish oil and Cannabis are natural products.

The two pharmacologically active compounds in fish oil are EPA and DHA, both oils.

The two known pharmacologically active compounds from the Cannabis plant are delta(9)-tetrahydrocannabinol (THC) and cannabidiol (CBD). Both of these are also oils.

7.1 Timing of getting into the market

In the late 1980s to early 2000’s, there was a lot of hype and confusion about omega-3 fatty acids and essential fatty acids. Alternative health information suggested using these for many conditions: neurological, psychological, gastrointestinal, immune disorders, cardiovascular, and others.

Today, the information about omega-3 oils, and its promotion, are much more subdued.

What changed over this time was scientific understanding (Figure 1). The hype started when knowledge and awareness reached a tipping point. This state lasted for about a decade. As scientific knowledge continued to grow, an inflection point was reached where the hype died down and product usage converged to medically validated applications.

ONC was founded just before this point of inflection. This gave it time to build a lead on subsequent competitors.

The cannabis market today has the characteristic hype of an idea that has passed a tipping point. There are many claims of CBD’s pharmacologic effects without scientific verification.

This field has yet to reach the point of inflection. Like ONC’s timing, the eventual industry leaders will likely come from among the companies that are operating now.

It will take much more time for scientific knowledge of cannabis to grow, because of the legal hurdles in many parts of the world in accessing Cannabis products for research.

The growth of scientific knowledge of cannabis is critical to the growth of its market opportunity.

Cannabis companies need to make a strategic decision on whether to advance the science on their own, or jointly as a consortium, or with a certain combination of both approaches, or let other parties do it all.

7.2 Pivoting on product selection and business model, starting with industry standards

ONC started as a supplier of omega-3 oils to pet food. It quickly pivoted to the larger market of human health.

It also dropped their glucosamine product line, focusing the business from marine products broadly to omega-3 oils specifically.

It had many choices for product selection (Figure 3): refined oil or concentrated oil, and what amount of EPA and DHA?

ONC chose concentrates, because they wanted to focus on premium products. Concentrates were also required to make the microencapsulated products to sell to the fortified food channel.

As for the amounts of EPA and DHA to provide as a product, the state of medical evidence led US FDA to allow this qualified health claim in 2002:

Supportive but not conclusive research shows that consumption of EPA and DHA omega-3 fatty acids may reduce the risk of coronary heart disease.  One serving of [Name of the food] provides [  ] gram of EPA and DHA omega-3 fatty acids.

There is no set standard for the amounts of EPA or DHA consumed daily as a supplement.

Most products on the shelf today are the refined 18/12 form. This grade is the most affordable. The labeling says “fish oil” which is the most recognizable.

Consumer awareness is about fish oil, not omega-3 oil, and certainly less about EPA and DHA.

Did ONC make the wrong choice? Their production process (Figure 4) allowed both refined and concentrates to be made. This gave them flexibility to pivot back to the refined grade if necessary.

Their choice to invest in the microencapsulation technology created a product line for fortified food. Access to that channel was a key reason that ONC was an appealing company for DSM to acquire.

The lesson here is that there is often more value and greater competitive advantage in moving closer to the consumer. The microencapsulation asset turned out to add value to ONC. Fortuitously, its production process opened up the option to pivot back to the refined grade.

In the case of cannabis, its products can take many forms. When it comes to the oil, would it be THC, CBD, or some combination? Present knowledge is as follows:

  • THC is the psychoactive component in cannabis. As such, this is not legal in many countries.
  • CBD products have been allowed in various jurisdictions, because CBD does not cause the psychoactive “high” of THC.
  • CBD is of interest for its sedative and anxiolytic (anxiety reducing) effects and possibly other effects.
  • 113 other cannabinoids and over 140 terpenes have been identified so far in cannabis. Their pharmacological effects, if any, are unknown.
  • The ratios of THC, CBD and other cannabinoids depend on the plant strain and the growing conditions.

In Canada, where recreational use of cannabis is now legal, cannabis companies have emphasized the unique profiles of their products. This type of promotion is like the sensory appreciation of a complex wine or of single origin chocolates, or the simple consumer preference for different coffees. This is just one possible strategy.

The state of scientific knowledge and the current product landscape show that it is still early days in the development of cannabis products.

Better business strategies will come from having better product quality and design. It will take science and technology to enable this.

Because the products can vary greatly, industry standards need to be set to establish credibility. The lesson from ONC and omega-3 oils is that they created a global industry consortium providing monographs to set standards.

7.3 Pharmaceutical products

In the late 1990’s, DHA and EPA were known to have different pharmacological effects.

DHA was correlated to beneficial effects in nervous tissues while EPA was correlated to blood lipid control. The synergistic effect of having both acting together was speculative.

It wasn’t until 2004 that a concentrate of EPA and DHA, (46.5 wt.% EPA / 37.5 wt.% DHA) was demonstrated to have clinical benefit in treating hypertriglyceridemia (high triglyceride levels in blood). This product was approved as a prescription drug.

If DHA has no efficacy on lipid control, removing it would reduce the amount of omega-3 oil one would need to take. This is an expensive manufacturing process. In 2012, a pharmaceutical company did do this and showed the beneficial results in a clinical study.

However, it was only this year that a clinical study demonstrated superior cardiovascular benefits of taking an omega-3 oil containing 98% EPA.

In the case of cannabis, clinical knowledge is still nascent.

One product, a CBD oil, has been approved last year as a prescription pharmaceutical to treat seizures. The dose is 2.5 to 10 mg/kg of body weight taken twice a day.

Another product, a THC/CBD formulation as a mouth spray has been approved in a few countries as a prescription pharmaceutical to treat refractory spasticity due to multiple sclerosis.

Outside of these indications (prescribed uses), how much CBD or THC/CBD does a medical user take? The present guidance in Canada is to “start low and go slow.” Leaving customers on their own is antithetical from a UX (user experience) design perspective.

Cannabis companies are still at the stage where there is a need to increase medical knowledge and to create product solutions and a business model relevant to the current state of the industry.

The lesson from the ONC case study was that by taking the higher quality production route, they enabled a vast range of products to be made, adaptable to the evolving market need.

Also, ONC never set out to be supplier of pharmaceutical grade omega-3 oil, but they were equipped to do so, particularly when certain drug patents expired.

The implication here is that cannabis products need to improve on may dimensions and definitions of quality.

7.4 Microencapsulation technology and market size

Just as microencapsulation proved to be pivotal for ONC, microencapsulation of cannabis oils will be the big game changer for cannabis companies.

For one, technology is needed to increase the concentration range possible with food and beverage products. Cannabis infused beverages contain 6 to 13 mg of some cannabinoid(s) per bottle. It is low because of the low solubility of oil in water. Compare this to the dosage of prescribed CBD oil listed above. For an 80 kg human, this is 200 to 800 mg per dose. This is a pharmaceutical dose. A casual anxiolytic beverage dose would be lower than 200 mg, but certainly higher than 6 mg. This cannot be achieved by infusion, but by microencapsulation or with a nanotechnology.

For another, in food products, the microencapsulated oil needs to withstand heat and shear forces during food processing, and also be in a form that allows uniform blending into a recipe. 

Microencapsulation technology exemplifies the progress of applied science and its impact on product capabilities.

In late 1990s, the best microencapsulation method for omega-3 oil was coextrusion of a melt onto a spinning disk.

Since then, spray drying and coacervation technologies have advanced beyond the spinning disk technology to become the two commercial methods used today to microencapsulate omega-3 oil.

The present state-of-the-art method for omega-3 microencapsulation is complex coacervation using gelatin. The gelatin shell is then cross-linked with transglutaminase (an enzyme) to create a very robust coating that can withstand high shear food processing and high temperature cooking.

Many other microencapulation methods have been developed. Some of these would be best suitable for microencapsulating cannabis oil to allow it to be formulated into food.

However, all of the above are not suitable for formulating high loads of cannabis into transparent solutions such as clear mixed drinks. A different and newer technology is required for this application, which is beyond the scope of this post.

All of these methods are covered with patents. It will take expert science to claim leadership, just as ONC did.

The point of these explanations is to illustrate that modern day companies will need the latest technologies to be competitive.

Unless a cannabis company has a monopoly on supply, its value will be in its product pipeline. Dried leaves and vape pens will only go so far. The edible and beverage product pipeline — and hence the company’s SAM and SOM — will be derived from its microencapsulation technology platform.

7.5 Global supply chain

Figure 5 shows the interconnected nature of global supply chains.

In the case of Cannabis, the legal controls over licenses and importing cannabis seeds and products limits the ability to import. The growth and defensive strategies of cannabis companies will rely in large part on their strategy around these legal frameworks.

Looking back at previous projects is helpful in learning. This improves experience and wisdom. In the case of ONC, I failed to grasp the importance of the global supply chain to ONC’s long term outlook.

In Figure 5, ONC is the only North American company among omega-3 producers. I overlooked this point that was clearly on the chart. What happened was that this location gave it access to the North American market faster than its European competitors. This geographic market share was the other major reason cited by DSM when it acquired ONC.

A key theme of this blog is about the rise of economic nationalism and the increasing economic rivalries between countries in a post-globalization world, and how these affect the future of business. This final example is a simple illustration of this in practice.


(1) The northern Rockefeller, ROB magazine, August 25, 2006

(2) John Risley shows his personal side, The Chronicle Herald, Nov 14, 2018

(3) Chairman’s message, Clearwater Seafoods’ website, Mar 2019

(4) Clearwater Seafoods Income Fund Annual Information Forms

(5) Quiet fortune makes noise in oil, Globe and Mail, Oct 8, 2007

(6) Fish oil kingfish Robert Orr resigns, New Hope Network News, Aug 23, 2011

(7) Aquaculture – an investment opportunity, Aquaculture North America, Mar 3, 2016

The Nova Scotia “start-up” that was acquired for $540 million, and lessons for cannabis
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