Weed stocks are going nuts after one of the largest marijuana companies strikes a deal for lab-made THC

Chris Wattie/Reuters

Section grower Corey Evans walks between flowering marijuana plants at the Canopy Growth Corporation facility in Smiths Falls, Ontario, Canada.

• Cronos Group, a $2.5 billion Canadian cannabis company, has struck a $122 million deal with Gingko Bioworks.
• The partnership will research ways to make cannabinoids - the active ingredient in marijuana - in a lab instead of from plants.
• Cronos and other weed stocks were up up as much as 17% following the news.
• Watch Cronos trade in real time here.

Cronos Group, one of the largest publicly traded medical-marijuana companies, on Tuesday announced a $122 million deal with Ginkgo Bioworks to genetically engineer THC, the active ingredient in cannabis - and it's leading the entire industry higher.

Here's how weed stocks reacted to news of the deal:

• Cronos: +11%
• Canopy Growth: +10%
• Tilray: +17%

Ginkgo, which is based in Boston and counts mega-producers like Bayer and Cargill among its partners, got its start engineering scents for perfumes, Bloomberg reported. The company's scientists can replicate the THC molecules found in marijuana plants in a lab, especially those of specialized compounds like THCV - which can alleviate the "munchies" triggered by weed.

"Many pharmaceutically relevant cannabinoids are present only at very low quantities in the cannabis plant, making them economically impractical, difficult or impossible to extract at high purity and scale," Cronos said in a press release.

"The landmark partnership between Cronos and Ginkgo will leverage the expertise of both organizations to solve this challenge and make more accessible the benefits of cannabinoids in an economically sustainable way."

Lab-engineered cannabis can help companies like Cronos increase their margins by requiring less cultivation of actual plants, which require human tending, light, water, and climate control in order to flourish. Consumers also appear to be favoring non-flower ways of getting high. When Colorado's legal sales began in 2014, dried marijuana accounted for 65% of sales. Today that number hass fallen to 40%. Edibles and vaporizer oils can also provide more regularity in terms of dosage and effect.

Cronos has seen explosive growth in recent months, mostly thanks to Canada's vote to legalize marijuana nationwide beginning this fall, and shares are up 45% since their March initial public offering. But the company has come under fire for growing too quickly - as evidenced in its price-to-earnings ratio of 364 - from short sellers like Citron Research.

Still, Wall Street analysts say Cronos' many partnerships are proof the company clearly has something going for it.

"Cronos stands out as having partnered with high profile companies including MedMenEnterprises, Cura Cannabis Solutions, Mucci Farms, and Pohl-Boskamp GmbH," Martin Landry, an analyst at GMP Securities in Toronto, said in a recent note to clients.

"These third party endorsements are telling and, in our view, representative of the high quality operations and management team that Cronos has assembled."

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