I traveled to Berlin, Germany, a few weeks back to attend the second annual International Cannabis Business Conference. If turnout at the conference was any indication, interest is running very high among entrepreneurs and cannabis-business owners looking to capitalize on the prospect of an expanded European cannabis market.
There’s good reason for the excitement. Europe is home to more than 740 million people, a population more than double the roughly 360 million people that live in the United States and Canada—the two largest cannabis markets today. If we accept that legal cannabis sales in the United States could reach $75 billion by 2030—a recent estimate from Cowen, an investment banking and research firm that covers the cannabis industry—then extrapolating that number to account for Europe’s much larger population offers a crystal-clear reason why established cannabis companies in Canada and the United States are now turning their attention to Europe.
The companies that secure significant market share in Europe—once the market opens up—will likely become the largest cannabis companies in the world. However, while the opportunity is real, cannabis businesses, especially those in the United States, are going to discover that expansion into Europe poses a unique set of challenges—from navigating foreign bureaucracies to ensuring compliance with UN treaties—that few have encountered in their business lives to date.
The European Market Today
Today there is barely a European cannabis market to speak of. Outside of the Netherlands, where cannabis sales are ”tolerated” but not fully legal, all the legal European cannabis markets exist firmly within a medical context.
But it isn’t like the medical-cannabis market we’re used to seeing in the United States or Canada. Across Europe, laws require medical-cannabis products to be sold in pharmacies to patients who obtain a doctor’s prescription. In most countries, doctors must specify what strain of cannabis they are prescribing, so patients are unable to experiment with new strains and products and shop for one that may best fit their needs, as they do in an American dispensary. European pharmacies are generally prohibited from displaying or advertising prescribed medications, meaning that patients must know which varieties a pharmacy carries before they decide where to shop. This also makes it impossible for a business to establish a “marijuana pharmacy” fashioned after an American-style retail dispensary.
These restrictive policies have understandably limited the growth of patient populations in Europe. Many of the European countries that allow for the use of medical cannabis only have a few hundred patients; some have even fewer. Sweden only had two as of 2017.
That said, there are signs that Europe’s market may open soon. For example, look no further than Germany, where the Supreme Court in 2016 made it much easier for patients to qualify for prescriptions for medical cannabis. Since that time, the patient population has swelled from a couple hundred to more than 13,000 by the end of 2017, according to Marijuana Business Daily, with tens of thousands more patients predicted to obtain prescriptions in 2018. It’s quite possible that there are more medical cannabis patients in Germany than the rest of Europe combined. And with Germany holding its place as the business leader within the European Union, it stands to reason that other countries on the continent are closely following these developments in Germany.
Despite the rapid rise in patients and growing market, Germany’s medical marijuana program has not been without its challenges. The state accepted applications last year to license six companies to cultivate cannabis in Berlin. But that process has been beset by bureaucratic delays and lawsuits, leading to the government halting the licensing process earlier this year, before any licenses were awarded.
Patients have also had a hard time accessing legal medical cannabis. Germany has a mix of public and private health insurance, but private insurers have largely rejected reimbursement for medical cannabis. It is estimated by Deutscher Hanfverband, the leading advocate for legal medical and adult-use cannabis in Germany, that 80,000 patients to date have been prescribed medical cannabis but rejected for reimbursement by their insurance companies.
The European Challenges
Operating a cannabis business in Europe carries challenges that you won’t face here in North America. For one, the continent is made up of more than 40 sovereign countries. If cannabis-business owners think it’s hard navigating the state-by-state patchwork of laws and regulations in the United States, wait until they need to start figuring out how best to cultivate in Bulgaria, produce infused products in the Czech Republic, and get those products to market in Germany. Even within the open-border European Union, companies will have to navigate entirely new regulatory agencies, foreign bureaucracies, distribution companies, and even languages. Earning substantial market share in Europe will not be for the faint of heart or, sadly, the shallow-pocketed.
Plus, while it is likely that cannabis legalization is coming in Canada, Latin America, and states across the United States, there is still no guarantee that the European market will greatly expand in the near term, making it a risky play today, albeit with a potentially substantial long-term payoff.
American companies in particular may find it especially challenging to enter the European market, at least while cannabis prohibition remains federal policy. In Germany’s aforementioned license-application process, applicants needed to demonstrate experience cultivating above a weight threshold of cannabis over a number of years. This sounds great for a company that’s been growing at scale in Colorado or California since 2010—except for the fact that cultivation experience wouldn’t be eligible for consideration by regulators. In order to qualify, a company must be in compliance with the Single Convention on Narcotics and Dangerous Drugs, a United Nations treaty that allows countries to legalize the production and sale of prohibited drugs for medical purposes. The treaty does not, however, account for individual states with medical marijuana laws that are in violation of federal policy—which means no U.S. company is in compliance with the treaty. It is unclear if other countries in Europe may adopt similar restrictions as they roll out their own medical marijuana programs, but with Germany largely seen as the pace setter, this represents a real risk to Americans looking to expand into Europe.
This may only get more challenging in the near future, since the UN treaty does not make any exemptions for full legalization. In fact, there’s already discussion in Germany about banning imports from Canada once that country implements full legalization as expected later this year. Should this happen, it would force some difficult decisions on the part of Canadian companies who, to date, comprise most of the major producers for the European medical cannabis market.
Further complicating American businesses’ entry into Europe is the complicated compliance processes necessary to produce in Europe or export into a European country. Since medical cannabis is considered a pharmaceutical product in Europe, all products must be fully GMP and ISO certified both in the country in which it is produced as well as from a European Union authority. Companies in producer countries outside of the EU are already cultivating product, fully GMP compliant in their home countries, that have been unable to receive GMP certification in Europe needed to import. Even if they get these approvals, they still need to receive an import license from every country they plan to ship product into. They may even need an import license for each specific product, SKU, or strain that they hope to import. Even then, unlike in the United States where cultivators and producers sell directly to dispensaries, the only way to get your product in a European pharmacy is to sell it to a pharmaceutical wholesaler. Competition for distributor relationships can be tough, with only a handful of distributors operating in any country. In order to ensure their distribution channels, Canopy Growth, the largest Canadian cannabis company, recently purchased wholesale distribution companies in Germany and in the Czech Republic. This level acquisition is simply unattainable for any company without a multi-billion dollar market cap, which has provided the large Canadian companies with an early-mover advantage.
However, let me end on a positive note. The European market is not all doom and gloom. The expansion of Germany’s medical cannabis program, the investments being made by Canadian companies, and the level of interest being show by investors in Europe and North America are encouraging and likely foreshadow Europe becoming the next frontier in the cannabis industry. Those companies that demonstrate an ability to navigate challenging regulatory environments and weather growing pains could emerge as the largest players in the European market—which will likely mean they’ll also be among the largest cannabis companies in the world.