More than a few iconic technology companies were launched in Silicon Valley garages by scrappy tech geeks with a vision and some science and engineering know-how. Apple, HP, and Google are only a few.
In the cannabis and hemp industries, entrepreneurs have launched makeshift operations in urban warehouses and rural farms over the past few decades, but as the industry matures companies increasingly rely on technology innovation and sound science to secure their future in a hypercompetitive and global market.
Stephen Mueller, a young engineer with a background in physics and electronics, is relatively new to the cannabis industry—specifically, the hemp side of the business. His journey began almost by accident in 2016 at a neighbor’s backyard barbeque in Loveland, Colorado. That’s where he smelled a dank and enticing odor wafting across the yard from a nearby greenhouse and started asking questions.
“Oh, this is going to be big,” Mueller recalled thinking. When he started researching hemp, he quickly realized that, while thousands of farmers already were planting crops in states across the country, very few scientists were focused on how to extract and distill a burgeoning mountain of biomass into cannabidiol (CBD). “Nobody was smoking the flower, so all of it needed to be processed,” he concluded.
Just a few years after his fortuitous brush with the plant, Mueller now finds himself at the helm of one of the largest CBD companies on the planet, Mile High Labs, which recently bought a 400,000-square-foot facility near Denver and dubbed it the “center of the CBD universe.”
Back to basics
Mile High Labs’ new facility is located in Broomfield, Colorado, a mid-sized city lodged between Denver and Boulder. Most recently owned and operated by Sandoz, a division of Switzerland-based global health care company Novartis, the mammoth complex has been home to major pharmaceutical operations since the 1970s. Mile High purchased the site, along with its manufacturing equipment, for $18.75 million earlier this year.
Sitting in his corner office, which is not as glamorous as it may sound, Mueller looked out the window and pointed to a building next door that formerly served as the headquarters for Novartis executives—the “ivory tower” of the pharmaceutical world, he said. Mueller scoffed at the idea of creating personnel divisions like this, and moreover sees benefits in putting C-level and lower-level employees in the same office area to promote interaction and collaboration.
“We have good people here, and everyone is excited to work here and is excited about the company and the industry,” he said. “It’s cool to see the reaction of people from pharma companies, where it’s a totally different culture, and they love it. They’ve never felt this kind of energy.”
Prior to founding Mile High, Mueller worked as a field applications engineer for Agilent Technologies and Teledyne LeCroy, traveling around the United States and testing electronics equipment, analyzing products ranging from iPhones to missile-guidance systems. The experience gave him a broad perspective on product design and scale that came in handy when he set out to build his first extraction lab, which he did with $250,000 contributed by family and friends. The operation became profitable within three months.
The quick first-stage success convinced some private investors to stake Mueller $35 million in a Series A funding round. He was off and running.
“When I got in, I realized none of the obvious stuff was done already, so [I decided to] do that and do it really well,” he said very matter-of-factly. “In the early days people would have some crazy idea, and I’d say, ‘Just simplify it. Nobody is doing the basic version of this yet.’”
In an industry that’s taken off like a rocket over the past few years—Brightfield Group estimates CBD sales will reach $22 billion by 2022—it’s perhaps fitting the chief executive officer for one of the biggest companies in the world is a young, down-to-earth engineer who initially looked at the market as a science problem in need of engineering solutions.
And that’s when he began sketching out plans for the “Mile High Monster.”
“If this takes off like I think,” Mueller recalled thinking, “there will be huge quantities of hemp, and none of the equipment out there can handle it. The CO2 machines were more expensive and complicated to build big, and butane is problematic to scale up, so alcohol was a good fit. But there weren’t any large-scale operations at the time, so that’s what we set out to build.”
Just a few years ago, he explained, there weren’t many hemp extraction facilities in the U.S. and most were small-scale operations designed for the medical cannabis industry’s different priorities and end-products. Initially, Mueller planned to build a pilot plant that used a miniature, scaled-down version of industrial equipment and prove the Mile High process worked before building a heavy-duty version. “If you try to build a big one right off the bat, you can make some really expensive mistakes,” he said. “And we’ve seen people do that.”
Mueller wasn’t keen on making mistakes, but he also knew the window was closing fast in an industry attracting more and more well-funded operations, along with more scientists and engineers like himself.
‘The Mile High Monster’
The Mile High Monster arguably was the first industrial-scale hemp extraction machine that could be installed directly on a farm. It’s able to process about fifty acres of hemp daily into full-spectrum oil, the baseline ingredient from which CBD products are made. One of the machines currently operates in Eastern Colorado; another has yet to be deployed.
Extracted oils are sent to the company’s Loveland and Broomfield facilities, where some of the material is distilled and crystallized into isolate. While CBD isolate has been the foundation of Mile High’s business thus far, the company has expanded its production capabilities and now produces water-soluble distillates, THC-free distillates, and water-soluble isolates.
“As ingredients get commoditized and get more differentiated and quality becomes an important aspect, [expansion production has] been our strategy,” Mueller said. “I’m excited to have this building now and have it come to life, and we’re starting to see big companies signing contracts through private-label production for finished products. The transformation from just the engineering extraction business to the finished products, all the way from the plant to the shelf.”
In 2019, Mueller identified another critical problem causing headaches for operators large and small: locking down a steady supply of high-grade biomass. In order to address the supply problem and lay groundwork for the industrial-scale extraction operation he envisioned, Mile High secured a loan for $65 million from MGG Capital in New York in one of the largest non-dilutive capital raises in the sector to date. The deal was a game-changer for the company and the industry as a whole. Mile High Labs used the cash infusion to buy several million pounds of high-quality hemp, in what Mueller called “the largest cannabis purchase in the history of the world.”
In October, Mile High Labs estimated it supplies about 25 percent of the wholesale CBD market in the U.S., with hundreds of different brands incorporating its isolate. The new facility will allow the company to ramp up its wholesale extract production and produce a wider variety of private-label products including tinctures, capsules, tablets, topicals, and gummies.
Building a corporate culture
Mueller’s deep knowledge of science and engineering has been a fundamental part of his success thus far, enabling him to design customized machines for extraction and purification and troubleshoot problems along the way. But as CEO of a company with 230 employees worldwide, he’s beginning to realize prioritizing and delegating tasks is now the name of the game. “I’ve been reading tons of books on performance management lately, and my goal is to make sure we have the best people in the right positions and we have the structure and processes in place where good decisions get made,” he said.
Fortunately for Mueller and Mile High, there is no shortage of talented scientists and engineers in the Denver area, and some of them already know their way around the new facility. Mile High hired a number of employees from the Novartis operation and expects to add about 100 more employees at the Broomfield facility by the end of 2019.
“It’s gotten a lot easier to get good people—top-notch engineers who are super conservative guys,” Mueller said. One of his most prized hires is Brad Stone, a chemical engineer who spent sixteen years at nearby Boulder Scientific. Now, Stone is Mile High Labs’ vice president of engineering.
“I’m not a chemical engineer, but I can learn this stuff because it’s similar to physics,” Mueller said. “But then I would have these really difficult problems and was up late at night trying to solve them and thinking Brad Stone!” He laughed and shook his fist in the air. “I knew I had to hire this guy [Stone], and it took me six months to do it. Good engineers are not motivated by money but by interesting work.”
Mueller explained the development of new technology in the industry—whether it’s solvent-free extraction or a new technique for purifying chemical compounds—is driven by market demand and new products. As new regulations and market forces come into play, manufacturing processes will come under increasing scrutiny and consumers will develop stronger opinions about how products are sourced and produced.
“It’s a weird situation, because [CBD is] a natural product and that’s why people like it,” he said. “So, they want this natural product, but they also want it extracted, and that’s a chemical process to do that. And then they want the THC taken out. So now you’re getting into some physical chemistry purification, but people don’t want that. So, you end up with a paradox.”
While Mile High Labs bills itself as the “center of the CBD universe,” it may have to modify that moniker to “cannabinoid universe” going forward. As CBG, CBN, THCV, and other non-psychotropic cannabinoids are recognized for their medical and therapeutic benefits, Mile High and other extraction companies surely will add these compounds to their business operations to meet market demand.
“We are really excited about all these other cannabinoids, and CBG is super exciting,” said Mueller. “It’s going to take a long time before we have good scientific data about the medical benefits. You have THC as most psychoactive and CBD as the least, but they’re all psychoactive. So, these other cannabinoids fall somewhere in the middle, and some of them will get you high a little bit, which will make it interesting as this industry develops. The [2018] Farm Bill made it so simple, but it will turn out to be a lot more complicated than we thought in terms of how to classify all these compounds.”
Ahead of the regulatory curve
One of the biggest clouds looming over CBD in 2019 is the regulations and oversight due in 2020. Agencies including the Food and Drug Administration and U.S. Department of Agriculture are preparing to weigh in on everything from hemp production standards to new rules for dietary supplements.
Mueller believes when the FDA weighs in on manufacturing standards, many extraction facilities will have a hard time meeting the minimum requirements. The environment will favor large, well-funded facilities like Mile High, which has the expertise, personnel, and equipment to implement good manufacturing practices (GMP) at a very high level. Mueller said the company already has high standards for quality assurance (QA) that mimic those found at pharmaceutical and biotech companies.
“[CBD] is a dietary supplement, and there are rules for this stuff,” he said. “The companies need to understand how this works, but a lot of companies don’t have that experience. The FDA guidelines are generic, so it’s up to you to interpret those and apply them to your process and product.”
At the Broomfield facility’s grand opening in October, Director of Compliance and Regulation Wendi Young explained the company is pursuing International Organization for Standardization (ISO) certifications and will become one of very few labs in the country with that level of QA, standardization, and consistency. Young previously served as senior director of quality control at Tolmar Inc., a pharmaceutical company based in Fort Collins, Colorado. She spent the past seventeen years interpreting FDA regulations and participated in more than twenty audits by various regulatory agencies.
“I was talking to a guy who runs a synthetic cannabinoid company that sells to pharmaceutical companies, and their specs on CBD are way looser than ours,” said Mueller. “Our customers are holding us to standards that are higher, and our residual solvent limits are a tenth of theirs, our purity levels are way higher, our THC level spec is lower. It’s really interesting.”
Mueller testified at an FDA hearing earlier this year and predicts federal regulations will set dosage thresholds such that products containing more than a certain number of milligrams will be labeled “pharmaceuticals.” Products with cannabinoid content below the threshold will be classified food products. “I don’t think they will open the can of worms about full-spectrum oil or isolate, because if you go into that they are more likely to allow only isolate.”
He said one of the problems from a regulatory standpoint is very little is documented or understood about cannabinoids beyond CBD and THC.
“From a regulatory standpoint, the [CBD] isolate is easier for them to deal with, and they are getting pressure to do something with CBD so they will set those limits,” he said. “And then when the flood of CBG hits the market this year, it will throw a wrench into the process.”
Eyes on the prize
When he looks at markets across the U.S., Mueller sees different specialties and skillsets in each region. In Oregon, for instance, he talks about the heritage of the cannabis industry in Southern Oregon, just north of California’s storied Emerald Triangle, where smaller farms in remote areas are developing high-quality plants with superior potency and genetics. In Kentucky and other southern states, on the other hand, he sees the legacy of big agriculture and industrial-sized farms that grow lower-potency, lower-quality hemp but on a larger scale.
Colorado occupies a unique place, emphasizing the manufacturing side of the industry because of the prevalence of high-tech and pharmaceutical companies and people with expertise in engineering, QA, and operations.
“It’s hard to recruit someone from a pharma company if you’re in Kentucky because there aren’t many out there,” Mueller said. “You see a big difference in the focuses of the companies and the culture of the companies and the industries in the different states.”
In many ways, he expects hemp and CBD to mimic what has happened in the marijuana industry over the past five to ten years: As margins on raw products shrank, companies differentiated themselves by the quality and uniqueness of their products as well as marketing and branding.
“You certainly saw a lot of exuberance early on and then a green rush, with a lot of money pouring in, and then stuff got overbuilt,” Mueller said. “You position the company so that when the excitement dies down and becomes more realistic, [the company] will survive. For us, focusing on quality and driving scale will be our differentiation.”
Mueller explained Mile High isn’t planning to build its own brands, but instead is focused on producing ingredients along with private-label and white-label products. By next year, he wants to have the core business divided between private-label and ingredients—mainly CBD isolate, but also THC-free oil and CBG.
“Part of what is helping us be successful here is focus,” he said. “There are so many opportunities in the cannabis industry. Every time we hire someone from outside the industry, they have this two-month freak-out frenzy and they want to do everything. We have to say, ‘Okay, calm down. This is what we want to be focused on.’”
His advice to people and companies considering the market? “If you missed the scale, there are a lot of other opportunities,” he said. “Find a niche and be differentiated somehow… Have a product focused on the plant, the terroir, the whole story.”
As for Mile High Labs, Mueller’s vision moving forward is to become a one-stop shop for entrepreneurs who want to build quality brands.
“A lot of companies making CBD products are trying to put it all together and buying CBD from us and different co-packers and managing all of these different components,” he said. “And that’s what we’re trying to do here. So just come to one place and work with us on what you want, and we’ll do all that for you and deliver the product.”
