The global cannabis market continues to grow at a rapid pace, driven by factors including increased consumer demand for legal marijuana, eased government regulations, new and innovative technologies, a significant shift in public perception, and an urgent need for alternative treatment options for various health conditions.
All this, coupled with a more informed understanding of the plant’s medicinal value, has led to increased regulatory adoption, allowing for further research and development into the plant’s potential benefits. As a result, investors are becoming increasingly aware of new opportunities and regulatory environments in different geographic markets.
Presently, investors should consider looking toward the EU cannabis industry. While cannabis remains illegal at the federal level in the United States, Europe is on its way to across-the-board legalization. The European market is poised to surpass the American market for a number of reasons—primarily, a regulatory framework that rewards quality, efficiency, and innovation, instead of a state-by-state regulatory nightmare.
The U.S. situation
Over the past decade, the U.S. has seen a trend of decriminalization and legalization at the state level, with forty-eight states to date allowing some form of medical cannabis and eighteen states passing bills that include recreational use. This independent process of state-by-state legislation has led to a regulatory patchwork—indicating a federal cannabis bureaucracy could hinder growth and prosperity.
Despite regulation in the states, federal prohibition continues to limit companies that try to operate within them. It would be inaccurate to say there is full legalization in any U.S. state, because federal law still applies both theoretically and practically. This creates an awkward gray area.
As of right now, with a deadlock in the U.S. Senate, the country does not appear to have a clear path forward for federal legalization. The implications of federal non-approval are devastating to the market for a number of reasons.
State-by-state operations: Growth opportunities are local by nature, and cannabis products cannot be sold across state lines. For example, a cultivation operation in California is not able to sell its products in Washington state, even if it meets the cultivation and marketing rules in both states. This increases the investment required to operate on a large scale in the already restricted U.S. market.
Standards: As long as cannabis is not regulated at the federal level, it is not possible to obtain Food and Drug Administration approval for medical use. Thus, there are no federally defined standards for cultivation, manufacturing, usage, and application of medical cannabis. This may negatively influence product quality.
Institutional difficulties: Lack of regulation prevents the institutionalized use of cannabis at hospitals, clinics, and other public facilities, further limiting the ability to conduct medical and scientific research. This also impedes the continued development of cannabis-related treatments and medications.
Economic difficulties: In a federally illegal market, the banking sector is not authorized to provide cannabis companies with financial support in the form of financing or loans; many banks won’t even provide checking accounts. Investments from U.S. institutions and large companies also are blocked, meaning most of the U.S. cannabis industry is cash-based. This creates cash-flow management difficulties and vulnerability to crime, burglary, theft, and financial imbalances.
As a result of these barriers, the cannabis market is open only to companies capable of making large investments and meeting the high costs of operation dictated by regulatory encumbrance.
Europe’s upper hand
On the other hand, most of Europe treats cannabis cultivation like manufacturing any other medicine. Operators must meet the requirements of a pharmaceutical factory that handles narcotics. This is regulated in European Union procedures through the uniform standard known as Good Manufacturing Practice (EU GMP), which is obtainable from the European Medicines Agency (EMA), the European equivalent to the FDA.
The regulation presents all the minimum standard conditions cannabis manufacturers must comply with in production processes—from plant cultivation all the way to packaging, security, transportation, and delivery—ultimately fostering an environment of uniform product quality. Every manufacturer wanting to enter the European market must comply with the same requirements, and every importer is responsible for ensuring the manufacturers from which they buy comply with the requirements, as well.
Regulation in the EU, while still in its infancy, shows much greater promise and standardization than the current regulatory framework in the U.S. Germany, Spain, Portugal, and Denmark allow cannabis cultivation with nascent medicalization programs, and most countries have decriminalized personal consumption.
In Spain, for example, personal use is permitted, but not in public places. This has led to the establishment of dedicated clubs similar to the famous “coffee shops” in the Netherlands. Countries that permit medical use include Germany (which is considered the most progressive), the Czech Republic, Italy, the Netherlands, Denmark, Luxembourg, and France.
Regulation across the EU has many benefits.
Transportation: Any country that permits the use of medical cannabis may import it from anywhere that complies with the European standard. In Europe, there is no need for a separate operation for each location. This forms a situation where a cannabis cultivation farm in Portugal, for example, where conditions are particularly favorable, can export the product to Germany or any other country that permits cannabis commerce, allowing for reduced costs and greater efficiency (unlike the state-by-state situation in the U.S.).
Standards: The EMA allows interstate cannabis sales, with products having an air of uniformity in minimum quality standards. As a result, hospitals, clinics, and official institutions can use the products for vital medical and scientific research, furthering our understanding of important medicines.
Capital investments: Thanks to the existence of a uniform regulatory framework, banks, institutions, and large companies are not prevented from investing in, financing, and providing loans to the cannabis market. This promotes the creation of new companies and a better environment for competition and innovation.
Medical insurance and reimbursement: The existence of a regulatory framework also allows insurance companies to enter the market and reimburse prescriptions for the use of medical cannabis, exactly as is done with any other medication. Germany already allows this practice, and the process is expected to develop in more countries in the coming years.
Business attention: Europe allows companies engaged in cannabis cultivation to focus on the quality of the product, the production process, distribution, and service. In the U.S., much of the work behind operating a cannabis company involves dealing with transportation and regulatory barriers.
Market size: The sheer population of the EU, at about 446 million people, dwarfs the 328 million people in the U.S.
High business potential: In the whole of Europe, there are presently only 150,000 medical cannabis prescription-holders, signifying a penetration rate of around 0.0003 percent. Compare this to Israel’s 1-percent penetration rate, where there are about 100,000 cannabis prescriptions in a market of nine million people.
Awareness of medical cannabis benefits is evolving. Considering the relatively little competition, the existence of a comprehensive regulatory framework, and a market consisting of half a billion people, Europe is a fertile ground for market development, with significant business potential for industry newcomers.
Differences in barriers to entry
The most significant barrier to entry for a European cannabis company is obtaining the European standard, a long process that takes up to two years and includes dealings at both federal and state levels (if they exist).
The regulation is applied to cultivation, processing, distribution, and marketing, each with its own Good Practices certification: GMP for manufacturing, GDP for distribution, GSP for storage and security, and so on. Another challenge facing companies seeking to operate in Europe is securing a reliable supply of quality products that consistently meet the European standard and distribution needs. Meeting this regulatory challenge requires experience working with regulation, which is sometimes rigid and complex.
Given this high barrier to entry, it is no surprise that only a few companies have come to operate in the full value chain in Europe. The few pioneers who have built the right infrastructure are positioned to reap the benefits in the world’s largest federally legal cannabis market.
Investors looking to diversify their portfolios from the CapEx-intense U.S. multi-county operators would do well to look east and invest in the players now positioned to gain leadership of the European cannabis economy.
Oren Shuster is CEO of IM Cannabis, a publicly traded entity operating in the medical and adult-use sectors in Israel, Germany, and Canada. Shuster possesses more than two decades of experience founding and growing companies in the med-tech and technology/software industries. He also has held executive positions at companies within the telecom and digital media industries.
