The Keys To Approaching Cannabis And Hemp Investing In Europe Wisely
By Roderick Stephan.
Cannabis expansion in Europe is a new frontier for future investors and business owners. While only three countries - Germany, Italy and the Netherlands - had purposeful sales in 2018, cannabis sales doubled between 2017 and 2018 due to significant demand in Germany and Italy. Today, more countries are committed to introducing legislation to move the CBD and wellness markets forward. Luxembourg recently committed to legalizing cannabis in the next two years and plans to release legislation later this fall.
Currently, less than a dozen European Union (EU) states have decriminalized cannabis in some form, and even consumers in more progressive countries such as Spain and Portugal can expect some level of punishment if caught by authorities. Overall, the legalization movement is advancing at an incremental pace.
In fact, the EU is well on its way to coordinating EU-wide rules and regulations regarding cannabis. The European Medicines Agency (EMA) coordinates the EU-Good Manufacturing Practices (GMP) and validates compliance with standards (i.e. quality, authorization, inspections). The EU also has mutual recognition agreements (MRAs) on GMP inspections with regulatory authorities outside of the EU. The EU-wide developing regulatory framework has created a pathway for harmonization across the EU and is at a comparatively advanced stage compared to North America where federal illegality stands in the way of progress
Legalization of medical cannabis will take more time to gain traction since each member state in the EU has its own distinct health systems and laws regarding cannabis cultivation and distribution. This creates a patchwork system of medical cannabis approaches with varying levels of complication. Differing regulatory and legal frameworks will remain a challenge to the straight-line growth of the industry. The full harmonization of laws will be a slow and formidable process in Europe, but the potential to monetize this opportunity is massive.
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As negative attitudes toward cannabis begin to wane in Europe, the market potential of the adult-use market is projected to be significantly larger than the Canadian market, which has been a model for countries in the EU. With a population that’s double the size of the U.S. and Canada combined, the market is primed for sustainable and ongoing growth. Current numbers are impressive:
The cannabis market in Canada has $30-40 billion equity cap, and a population of 35 million. When those figures are extrapolated to the European market, which has a population of 740 million, the equity cap is projected at $735 billion, should adult-use be legalized.
More than €500 million has been invested in the European cannabis industry to date, and six countries have announced new legislation regarding the growth, sale and/or consumption of cannabis. France, the United Kingdom and Spain are reviewing current legislation while the industry leaders are focusing on expanding existing medical programs.
As investors begin looking at the European cannabis market, it’s important to recognize the legislative and financial discrepancies between the North American and European markets.
1. Different Culturally, Deeply National
Europe’s cannabis culture is very region specific, similar to the U.S. For example, the culture in California is very different from attitudes in the Bible Belt. Cultures and attitudes toward cannabis differ from country to country in the EU, as well. There is still a long-standing mentality that cannabis is an illegal drug, and detrimental to society. Certain countries are introducing medical cannabis as a legitimate treatment option as the first step towards national legalization. Ireland and France introduced experimental medical cannabis plans this year, but its health ministers pushed back and assured that the measure would not be a gateway to recreational use. Companies building cannabis businesses throughout Europe need a strong local presence and regional understanding of different customs, languages, regulations and perspectives.
2. CBD Is The (Short-Term) Future, Not THC
Due to the varying attitudes toward cannabis use in the EU, more focus has been placed on marketing CBD as a wellness solution, which has seen remarkable success. Google Trends indicates that interest in CBD has continued to grow throughout the past two years in the five largest European countries.
U.K. pharmacies and health stores now routinely stock a wide selection of CBD oils. CBD products are also widely available in markets like Italy and Switzerland, although regulations vary within the two countries, which allow "cannabis light" products that contain as much as 0.6% THC and 1% THC, respectively. For comparison, CBD products must contain less than 0.3% THC in the U.S.
CBD is most commonly sold in Europe as topical creams, bath salts and other non-ingestibles. Recently, CBD was added to the EU’s Novel Food Catalogue, a classification given to food products that were not previously consumed in the EU, to a significant degree, prior to May 15, 1997. As a result, CBD went from a legal food additive to being a debated novel food. Novel foods may be supplements or other substance forms, such as foods that enter the market through new technology or agricultural products normally consumed and grown outside of the EU. Other foods classified as “novel” include, chia seeds, vitamin K or UV treated foods. The European Industrial Hemp Association (EIHA) has argued that CBD is a food supplement, such as ginkgo biloba, and should not be classified as a novel food. As a result, several EU member states are appealing the classification to the European Food Safety Commission (EFSA).
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Despite regulatory and classification disagreements, CBD continues to be the most attractive market in the industry. As of 2018, CBD and CBD-containing products already generated retail sales in the €750-€1 billion range across Europe. Growth can only continue, and as attitudes shift on legalizing cannabis, CBD could be the product that helps move the needle.
3. Pharmaceutical-Forward Thinking Could Change Attitudes
Most of the world’s largest pharmaceutical companies, including GSK, Novartis, Sanofi and Roche, are headquartered in Europe. Unlike the U.S., European countries work in tandem with pharmaceutical companies to develop medical wellness products. Cannabis has been studied and researched for years by these pharma companies, which gives consumers more confidence in the burgeoning industry.
EU countries place their confidence in pharmaceutical companies because they apply the same EU-GMP (Good Manufacturing Practices) requirements for all medications, including medicinal cannabis. Proving safety and efficacy is of paramount importance to regulators and a prerequisite for any drug derived from cannabis. This gold-standard mandates that all countries aiming to legalize medical use must be compliant with GMP if they want to engage with the international medicinal cannabis. A regulatory system already in place for legalization signals optimal opportunities for investors.
4. Little Competition Means Steep Evolutionary Spike
In the U.S., there are dozens, if not hundreds of legal edibles options. Beverage companies are beginning to jump on the cannabis bandwagon, and CBD kiosks can be found inside shopping malls all over the nation. But in Europe, the market has not matured to that extent. The demand for cannabinoid-based products is considerable, but the commercial evolution is 3-4 years behind the United States’ market.
With such a steep learning and valuation curve ahead, Europe can learn from the North American experience. European countries will be able to leverage advances in fields spearheaded by North American companies, such as extraction technologies, cultivation expertise, genetic banks, micropropagation, biotechnology and corporate leadership to develop their own markets.
5. Now Hiring: Seeking Experienced Cannabis Talent
As the green market continues to mature in most EU countries, there is a high demand for experienced overseas talent in the cannabis industry. European companies are actively seeking guidance from North American industry experts in fields including cultivation, supply chain management, and executive leadership.
Despite strong demand, there are still not a competitive amount of licensed cultivators operating in Europe, largely due to bureaucratic regulations. In the Netherlands, Bedrocan has been the sole supplier of medical cannabis in to the national Office of Medical Cannabis, which has a monopoly on supply to Dutch pharmacies. SCFM Firenze holds a similar position as the sole licensed cultivator in Italy. Germany continues to struggle to launch a domestic cultivation program for medical cannabis, so most of its product is imported from Canada. Over time, the home grown European market will evolve to materially replace imports.
Some Risk, All Reward
EU countries need investors who understand that there are risks, foreseeable regulatory obstacles and a lack of sufficient management teams that are equipped to navigate the nascent cannabis market. Forward-thinking investors will recognize Europe as a lucrative opportunity for those patient enough to wait for returns when the product is fully legalized.
The evolutionary pathway in the U.S. can provide a template for Europe. While the process has encountered complications on state and federal levels, the foundation for legalization has been paved and can guide European companies as they navigate the process themselves. Europe also has the opportunity to approach issues of contention differently and present a framework for comprehensive cannabis reform.
Roderick Stephan has broad experience in starting and growing investment fund management businesses over his 30-year financial career, including time at Longacre Fund Management (UK) LLP and Citadel Investment Group. Rod is a partner at Altitude Investment, PLC, a European investment company that focuses on opportunities in the emerging legal cannabis industry throughout Europe, and Altitude Investment Management, LLC, a New York-based investment firm that invests in a diverse range of early-stage to growth companies supporting the fast-growing legal cannabis industry. Rod has made multiple investments in the cannabis industry while navigating the rapidly-changing cannabis industry dynamics. AIM's portfolio includes BDS Analytics, Canndescent, SpringBig, Front Range Biosciences and more.
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
Image by Javier Hasse.
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