Canadian companies are racing to get an edge in the new frontier of the cannabis industry -- which does not involve the leafy green plant at all.

An increasing number of licensed producers and biotechnology firms are moving towards synthetic production of THC and other cannabinoids in a lab, using ingredients such as sugar and yeast, eyeing the potential to produce these active compounds more cheaply than traditional cultivation and extraction.

CannTrust Holdings Inc.'s (TRST.TO) chief executive Peter Aceto said the Vaughan, Ont.-based licensed producer has a short list of biosynthesis companies that it is in active conversations with, which could result in either a partnership or acquisition.

"We do believe that cannabinoids will be created through biosynthesis, whether it's yeast or sugar or other compounds, at scale at an extremely low cost... And do expect to be investing in that space in the not-too-distant future," he said.

Canada is on the verge of legalizing the next-generation of cannabis products such as edibles and topicals in the coming months, which will allow the industry to tap a broader range of consumers who aren't interested in smoking dried flower.

In turn, the demand for cannabinoids and isolates for use as an ingredient in consumer products is expected to grow "exponentially in the coming years," said AltaCorp analyst David Kideckel.

Synthetic cannabinoid production has the potential to disrupt the cannabis industry supply chain, he added in a recent note.

"We believe that cannabis LP's will begin to pay much closer attention to these companies' technology and its application to their industry, as it offers the potential for significant advantages on an operational and cost basis, as well as product quality and purity."

Other Canadian cannabis companies have already made moves in this space. Moncton-based Organigram Inc. (OGI.V) in September closed a $10-million investment deal with Hyasynth Biologicals, in a bid to boost its access to the Montreal-based company's proprietary methods involving fermentation of yeast.

Also last September, licensed producer Cronos Group Inc. (CRON.TO) announced a strategic partnership with Boston-based Ginkgo Bioworks Inc., also focusing on cannabinoid production via fermentation at commercial scale, in a deal worth roughly US$22-million.

Cronos' chief executive Michael Gorenstein said during a recent conference call that this partnership is key to its strategy of focusing on developing branded products and intellectual property, rather than the capital-intensive process of cultivation and production. He added that Cronos and Ginkgo will focus on synthetic production of THC, the compound which produces a high, and CBD, the non-impairing compound believed to have anti-inflammatory properties. The two companies through the partnership will also target six other rare cannabinoids, which are "economically impractical" to produce with high purity at scale through traditional cultivation and extraction," he added.

"We at Cronos believe that rare cannabinoids are key to product differentiation, but today are nearly impossible to produce commercially," Gorenstein told analysts.

Rather than using a solvent, carbon dioxide or another method to remove extracts from the cannabis or hemp plant, synthetic production of cannabinoids involves using a controlled chemical reaction to produce these coveted compounds. Synthetic production is already commonly used in the pharmaceutical industry, such as the use of yeast fermentation to biosynthesize insulin.

One method of synthetic production is called biosynthesis, in which a biological organism such as bacteria, fungus or algae are used as agents to yield cannabinoids, AltaCorp said.

It's similar to brewing beer, where water, yeast and malted grain are combined and fermented to produce an alcoholic beverage. However, the yeast is instead genetically engineered to produce the necessary enzymes to yield cannabinoids instead.

"We'll remove the genes that tell it to produce ethanol, and then we'll put in a new set of genes that will give it the machinery to produce THC," said Kevin Chen, the chief executive and co-founder of Hyasynth.

Biosynthesis has the potential to produce large quantities of cannabinoids, consistently, with a high level of purity and precision, according to AltaCorp. As well, at roughly less than $1,000 per kilogram, it is much cheaper than growing cannabis or hemp and extracting it, Kideckel wrote in a recent note.

That's a particularly attractive prospect as Canadian producers increasingly look at ways to reduce costs, such as outdoor growing in the warmer climes of B.C., as dried cannabis becomes a commodity.

Lab-generated cannabinoids via synthesis will not replace plant-based extraction, but will be an added tool in companies' arsenals, Kideckel added.

Still, biosynthesis and other methods of synthetic cannabinoid production are still in the "early stages" and could take "years of research and development to perfect," he added.

In February, UC Berkeley synthetic biologists published a study in the journal Nature demonstrating how they used engineered brewer's yeast to produce THC, CBD and other cannabinoids.

Meanwhile, there has been a flurry of companies flooding into the biosynthesis space within the last six months, said Chen, who co-founded Hyasynth in 2014.

"Everybody is jumping into this stuff now," he said. "It went from us and two other companies to 20 companies."

Competitors include Vancouver-based InMed Pharmaceuticals and California-based Amyris Inc.

The race is on, and Hyasynth is aiming to establish its own small-scale facility and be able to sell a product by the end of the year. The company is aiming to become an ingredient supplier, he added.

However, Chen said there is "a lot to be nailed down, and it will be an ongoing process of improvement."

"We're already pretty confident that we'll get there."