As states grapple with flagging tax revenues and soaring unemployment as a result of the pandemic, governors and state legislators are facing a quandary. Either cut back on programs that voters like, or increase taxes to keep them funded. According to a recent assessment by iUNU, many legislatures will look to the booming business of legal cannabis as a revenue source.
“For those states that have only made incremental steps towards legalization within their jurisdiction… there’s going to be pressure to initiate, whether it’s through medical marijuana programs or the expansion into recreational,” says Martin Glass, a partner at Jenner & Block who specializes in mergers & acquisitions and securities transactions.
In recent months, the average per-store retail sale of cannabis increased in legalized states – a telling change given the current state of the economy. Other facts – a loyal consumer base, proven health benefits and strong external investment – all point to a dependable industry. Mr. Glass saw this as a sign that cannabis is more stable than most believe: “The industry has proven to be quite resilient… it has absorbed the COVID-19 shock very well.”
Not only is cannabis a dependable industry, it’s also an expanding one. In 2019, global revenue rose to $15 billion, a 48% increase from the prior year. By 2020, economists expect that number to reach $20 billion. Kristin Baldwin, executive director of the Cannabis Alliance, added some perspective: “Right now, we’re at about 240,000 people employed according to the latest numbers I have. Maybe even 250,000. In King County, which is the largest county in Washington and where Seattle is, we had a 22% increase in sales in March alone.”
In the United States, the revenue from annual sales increased by nearly 40% from 2018 to 2019, rising 3.3 billion over the course of the year. This growth is expected to continue at a similar rate in the coming years, forecasted to hit $29.7 billion in revenue by 2025. These growth statistics are impressive and especially attractive as state legislatures and governors search for options to balance their budgets.
The industry also is logging similarly impressive growth on the employment side. The cannabis industry was recently dubbed “the fastest growing job market in the country” by CNBC, leaping an estimated 110% from 2017 to 2019 and hitting six figures in real numbers during that three-year period. The industry turned in those impressive numbers while constrained to 33 states (11, if evaluated from a recreational standpoint), leaving plenty of room for growth.
Baldwin agreed. “I think employment will grow along with the sales just because you are going to need budtenders, delivery drivers, and farmers,” says Baldwin. “For example, in California, Oregon, and Washington – highly regulated systems – there’s still going to be a significant amount of growth because there’s a significant amount of demand.”
Heading into budget negotiations in 2021, states are facing huge revenue gaps. Right now, those dismissing cannabis are, as Glass says, “leaving a lot of money on the table” by failing to take advantage of a major economic resource. Not only does the industry produce tax revenue to expedite states’ recoveries, as legalization expands, the cannabis industry has the ability to provide thousands of jobs.
Still dubious? Baldwin shared this fascinating piece of information: “It’s a generational shift that’s occurring as we speak. The fastest growing consumer group in cannabis right now is women over the age of 40.”
The Canadian-German market connection has been a “thing” ever since the middle of the last decade. But this is not the only international cannabis connection. Indeed, firms in multiple countries have been developing international partnerships for quite some time – and not just deals involving the plant or its extracts, but on the cannabis technology front.
This year and going forward expect these to bear fruit, and in interesting ways.
What are the trends? And who is doing what?
Europe The entire European cannabis market has slowly been developing momentum since 2017 when Germany kicked off its first attempt at a domestic cultivation bid. The first German-grown cannabis is expected to hit pharmacies this fall, and further at a price that will keep everyone else hopping (€3.20 a gram from BfArM to distributors). However, because domestic cultivation was never expected to keep up with patient demand, Germany has become one of the hottest destination markets on the planet.
While there is clearly product still coming in from Canada, the big importer into Germany is actually from Holland (Bedrocan), right across a common border.
But Holland is not the only game in town anymore. Europe has long had promise as one of the most international cannabis markets in the world, simply because of relatively open, cross-border trade. Cannabis from Denmark, Portugal and Spain as well as Australia and South Africa have already made it into the German market. Greece, Italy and Poland are all moving into position as major sources of at minimum, floss if not extracts, along with growing interest in Eastern European entries (and not only the Czech Republic).
The intra-European market for cannabis is well underway, in other words, and this is likely to be an increasing trend, particularly as cannabis continues to make waves on the medical front as well as continually mounting evidence that the drug treats difficult to treat conditions including neurological disorders, cancer and the ever-present chronic pain.
Then of course, there is Israel, which is expected to be a big contender now that the country is finally in the export game.
Beyond the direct imports, however, there are also multiple country hops in play (such as Uruguay to Portugal to Germany). Malta is also increasingly shaping up to be an intriguing pass through port, if nothing else.
But of course, Europe is not the only international game in town.
The UK Despite all of the problems that British patients face in obtaining high quality medical cannabis at a price that is affordable, the UK has actually led the world in cannabis exports (benefitting so far only GW Pharmaceuticals). However many firms have also been cooperating to bring cannabis into the country (from Canada and Holland in particular so far). The biotech partnerships set up by firms like Canopy Growth are also expected to bear fruit as cannabinoid research begins to truly come into its own in the coming decade.
The Americas Despite the fact that exporting from the U.S. is still difficult (although some firms have managed to export hemp to Europe), there is a lot of cross border cooperation going on throughout the hemisphere (including investment and all kinds of creative partnerships). Canada of course, got its export game going early. Yet one of the more intriguing cross border stories of the last 18-24 months is the amount of South American cultivated cannabis ending up “north of the border.” Changing laws in the region make Latin America a major export location as well as a source for product bound elsewhere including Europe (see Columbia, Uruguay and Jamaica in particular). Mexico is expected to be a power player globally going forward too.
There are also many American firms who have developed strategic partnerships globally beyond the actual plant (including in Israel).
Israel The country is absolutely in the export market, but that is not the whole story. Earlier in the year, the country received its first import from Uganda. There are also multiple U.S. companies in partnership with Israeli firms, and this will increasingly play out in terms of both product and cannabis technology as the market continues to open internationally. American firms, in other words, are still largely prohibited from shipping from the U.S., but they can now do so from Israel, and further, anywhere in the world.
South Africa Another newcomer, South African firms are partnering internationally (including with American firms) to develop not only product but extraction technology. Cannabis firms here have also already shipped product to Canada and Europe.
Australia Agricultural exports generally are a major part of the Aussie economy, and cannabis is shaping up to be no exception. Domestic firms are increasingly exporting to Europe (in particular), but partnerships here will be intriguing to watch, particularly as the Chinese market comes into its own. And there are already plenty of firms with partnerships now established or in the last phases of inking out deals with Israeli firms. Canada has been the largest source of imports into the country since 2017.
For the second time in two years, the United Nations Commission on Narcotic Drugs (CND) has delayed a critical vote on the reclassification of cannabis. The CND met in Vienna, Austria from March 2-6. The vote is now expected to happen in December 2020. The discussion about reclassification of the plant, however, has been going on for a little longer than that.
There are several recommendations that are on the table (even if far from perfect). See the full text of the recommendation here.
Delta 9 Tetrahydrocannabinol should be added to Schedule I of the 1961 Single Convention on Narcotic Drugs.
Delta 9 Tetrahydrocannabinol should be removed from the 1971 Convention on Psychotropic Substances.
The six isomers of tetrahydrocannabinol chemically similar to Delta 9 THC should be classified similarly to Delta 9.
Extracts and tinctures made from cannabis should be removed from Schedule I of the 1961 Single Convention but that they should also be classified per the act. In other words, extracts with THC should be considered narcotics with medical purpose and all dealt with per a single rule.
Cannabidiol products containing no more than 0.2% of Delta 9 THC should not be under international control.
Preparations with THC that are made as pharmaceutical products should be reclassified as Schedule III drugs per the 1961 Convention. (Note – Dronabinol is already classified this way in the United States and has been since 2010).
What Does This Really Mean?
Given the impending lockdown of whole industries right now, but a wartime footing for certain pharmaceutical drugs and medical equipment makers, on one hand, this seems like the obvious and safest thing to do. The world needs a vaccine and direct treatments and to focus research, manpower and money in that direction.
Further, and this should hopefully galvanize the industry internationally, what this also does is keep the consumption of the plant itself basically illegal while putting the focus on professionally prepared pharmaceutical drugs.
This is short-sighted. Cannabis is unlike other medications. Further, the high cost of pharmaceutical drugs makes wider treatment policy options extremely expensive to implement.
Further, this approach continues to define cannabis – specifically Delta 9 and THC – as a narcotic.
While it is undeniably true that for recreational users, there are narcotic effects, most long term patients do not react to the drug this way – particularly if they suffer from chronic pain due to neurological issues (including movement disorders), inflammatory diseases like rheumatoid arthritis and those that destroy the body’s immune response, like HIV.
There is a need for regulation, normalization of supply chains globally and of course, medical trials.The definitions of this plant, in other words, need to change. And not just for the benefit of pharmaceutical companies, but for patients as well.
Further, in a world that is quickly headed for a global recession unseen since the Great Depression, highly priced medications are not the best Rx.
As the German government responded to President Donald Trump recently, as he tried to offer a German company a billion dollars to only develop a vaccine for use on Americans, there are clearly limits to capitalism.
The Good News
It is highly unlikely by December, nine months into a global public health crisis which is widely expected to last for at least the next two years, that the UN will delay the vote again come December. There is a need for regulation, normalization of supply chains globally and of course, medical trials.
Beyond that, recreational reform also looms at a federal level in many countries and regions.
However, given the discussions so far, it is also clear that beyond the redefinition of cannabis, there will be greater legal opportunities to expand an industry too long stigmatized by old fashioned understandings and definitions of what cannabinoids are.
On March 5, 2020, the U.S. Food and Drug Administration (FDA) issued a press release to the public about their work on devising a regulatory framework for cannabidiol (CBD) products. The FDA also submitted a report to Congress on their rulemaking progress.
The main theme of the report is the same story we’ve been hearing from the FDA for a while now: They are still working on figuring out how to regulate CBD products and wants to do more research before they tackle the rulemaking.
The most intriguing new development from this report is the FDA’s newfound interest in regulating CBD products like dietary supplements:
“FDA is actively considering potential pathways for certain CBD products to be marketed as dietary supplements. Under current law, CBD products cannot lawfully be marketed as dietary supplements, but FDA has the authority to create an exemption through notice-and-comment rulemaking that would allow products containing CBD to be sold legally as dietary supplements.”
If you’ve been living under a rock for the past couple years, here’s a recap: In June of 2018, the FDA approved GW Pharma’s drug, Epidiolex, for the treatment of rare forms of epilepsy. This allowed a drug containing CBD to go to market, but only through the agency’s drug approval process. When the 2018 Farm Bill (Agricultural Improvement Act of 2018) was signed into law in December later that year, the federal government removed cannabis (hemp) with less than 0.3% THC from the Controlled Substances Act, essentially legalizing it on a federal level. Congress tasked the FDA with figuring out how to regulate the market. Without any FDA guidance in the early days, the subsequent market growth created mass confusion for the industry and consumers alike, with no one really knowing if selling CBD products is legal or not. In May of 2019, the agency held a comment period and public hearing on CBD, which included a lot of discussion around the benefits, the risks and further research on CBD. Throughout 2019, the FDA sent a large number of warning letters to companies marketing CBD products with unsubstantiated health claims. Towards the end of 2019, Congress passed a bill mandating that the FDA update them on their progress to regulate the market within 60 days. That deadline came and went, and then the FDA issued the public update and submitted the report mentioned above to Congress last week.
The FDA says they intend to take a number of steps towards providing some market clarity, while still protecting the public from unknown risks. Firstly, they want to educate the public more about potential risks associated with CBD. “We remain focused on educating the public about the number of questions that remain regarding CBD’s safety,” reads the update. “There may be risks that need to be considered before using CBD products outside of the monitored setting of a prescription from your health care provider.” Those concerns mentioned above include potential liver injury, drug interactions, reproductive toxicity and more benign side effects like drowsiness.
The agency also wants to try and close knowledge gaps in the areas of safety and potential benefits. In this section of the update, the agency asks industry stakeholders for help. “We’re seeking reliable and high-quality data.” The agency is requesting data on sedative effects, impacts of long-term use, pharmacokinetics, safety of various drug delivery mechanisms, safety for animals, different processes for full or broad spectrum or isolate derivation, among other areas of interest. They plan to re-open the public docket from the public hearing back in May 2019, extending the comment period indefinitely as a tool for stakeholders to share information with the FDA.
As far as enforcement actions go, the agency wants to take a risk-based approach to it. While there is still no official enforcement policy, the FDA is working on it. Their biggest concern is with companies marketing CBD products using drug and health claims, which could “deter consumers from seeking proven, safe medical therapies for serious illnesses – potentially endangering their health or life.” The agency is also worried about potential contamination risk and consumer exposure to things like residual solvents and heavy metals. Their last concern in this area involves truth in labeling, like making false label claims, not listing every ingredient or incorrectly stating the amount of cannabinoids in the product.
“Our ongoing efforts related to CBD, including the steps we’re announcing today, are in line with our mission to protect the public, foster innovation and promote consumer confidence. We recognize the significant public interest in CBD and we must work together with stakeholders and industry to develop high-quality data to close the substantial knowledge gaps about the science, safety and quality of many of these products. We are committed to working efficiently to further clarify our regulatory approach to these products – as always, using science as our guide and upholding our rigorous public health standards.”
Overall, the public update and the report don’t disclose anything groundbreaking. They do, however, provide some much-needed guidance for the CBD market on how stakeholders can help the FDA’s efforts. The fact that they are investigating dietary supplements as a path toward a regulatory framework is the by far the biggest take away from all this.
Europe continues to be the new frontier of medical and wellness developments in the cannabis industry, with various sources predicting that Europe will become the world’s largest legal cannabis market over the next 5 years. Key related statistics, include:
A population of over 740 million (over double US and Canada combined)
Total cannabis market estimated to be worth up to €123 billion by 2028 (€58bn medical cannabis (47%), €65bn recreational cannabis (53%))
Over €500 million has been invested in European cannabis businesses (including significant expenditure in research and development, manufacturing and distribution)
To reiterate this belief, this month, hundreds of industry experts and delegates will be attending Cannabis Europa in Madrid, to discuss the expansion of cannabis across Europe and the challenges facing the industry across the member states of the EU and the UK.
Global mainstream leans to European strength
Since late 2018, major global operators have made substantial moves into the cannabis sector. Anheuser-Busch InBev, the world’s largest beer company and maker of Budweiser, entered into a partnership to research beverages infused with two types of cannabis. Constellation, owner of Corona beer, announced a commitment for $4 billion investment in Canadian cannabis company Canopy Growth. BlackRock Inc, through five actively managed BlackRock funds, has invested into Curaleaf Holdings Inc, a dispensary operator, for a not too insignificant investment sum of $11 million (as at March 2019). Such international investments prove that cannabis has moved from the fringes and into the mainstream.
When considering the impact of mainstream cannabis, it should be recognised that major European countries have approved or are planning on implementing, legalisation of medicinal cannabis. The UK, Germany, Italy and the Netherlands already have legal systems in place for medicinal cannabis and France and Spain are currently reviewing key legislative reform to align themselves with international practices. At present the German market is the third largest cannabis market (in terms of size) behind the US and Canada.
In addition to medicinal cannabis, several key European countries have systems in place, or are developing systems, or considering the reform of existing systems, to approve cannabis with THC content at a recreational level. The Netherlands already has a system and Luxembourg’s health minister in August 2019 announced the intention to legalise cannabis for Luxembourg residents. The Luxembourg government is lobbying EU member states to follow suit.
Whilst the EU has a labyrinth of laws in relation to edible CBD (as a novel food) which make the regulatory landscape complex, there has been an explosion of CBD products for vaping and cosmetics. Of course, with each of these products being subject to different local laws (some aligned between EU members states) in relation to vaping and cosmetic related regulations. The Brightfield Group has predicted a 400% increase in the European CBD market (including vaping liquid) from $318m in 2018 to $1.7 billion by 2023. There is also an expansion into applications for CBD with animals with many US manufacturers of CBD-infused pet food.
The European Parliament’s health committee has been calling for properly funded scientific research and there are motions to establish policies to seek to incentivise member states to advance the studies of medical cannabis, with a priority on scientific research and clinical studies – the first step necessary to drafting legislation, designed to better support the industry.
Where does the UK sit within cannabis?
Medicinal cannabis famously saw a legalisation, of sorts, by the then Secretary of State, Sajid Javid, who provided the authorisations for prescriptions for the high profile cases of Billy Caldwell and Alfie Dingley. Subsequently, on 1 November 2018, this was codified into law by an amendment to Schedule 2 of the 2001 Misuse of Drugs Regulations. This allows clinicians to prescribe cannabis as an unlicensed medicine.
There have, of course, been some high profile licensed medicines. The UK company, GW Pharmaceuticals, is the largest exporter of legal medical cannabis in the world, cultivating medical cannabis for production of cannabis-based medicines (e.g. Epidiolex & Sativex). Epidiolex (manufactured by subsidiary Greenwich Biosciences) became the first cannabis-derived medicine approved for use in the US for treatment of seizures caused by Lennox-Gastaut and Dravet syndromes (both severe forms of epilepsy).
When considering the level of research development and investment in the medicinal field, it is no surprise that the UK is the world’s largest producer and exporter of medical cannabis. Research published by the International Narcotics Control Board indicates that the UK produces over 100,000kg a year of medicinal cannabis.
Previous guidance from the National Institute for Health and Care Excellence (NICE) indicated that further research is required to demonstrate the benefit of medicinal cannabis, citing its cost versus evidenced benefit. However, there is now renewed confidence in the UK following NICE’s approval of two cannabis-based medicines produced by GW Pharmaceuticals, Epidiolex (cannabidiol) oral solution and Sativex (nabiximols), for routine reimbursement through the NHS.
Following the re-categorisation of medicinal cannabis in November 2018, a number of clinics have been established where specialised clinicians can start the process of prescribing cannabis based medicinal products (CBMPs). Whilst this route is not fast, and challenges are well documented as to the satisfaction of prescriptions made in the UK, there is momentum behind the development of this as a means for providing genuine and established medical care. A significant step in October 2019, was the CQC registration of one such cannabis clinic, Sapphire Medical Clinics Limited.
The UK medicinal cannabis sector is establishing a research-based approach to expand usage in the UK and across Europe.
How North America compares to Europe
Canada, as a first mover within the cannabis sector, has a multitude of large companies which are well-capitalised and have substantial international footprints. The Canadian exchanges have large listed companies looking to Europe with the intention of acquiring or investing into European operations. As of the date of writing, the 10 largest cannabis companies in Canada have an aggregate market cap of over $23.5 billion (and all registered cannabis companies in Canada having an aggregate market cap of over $46.5 billion).
Listed companies have had a tough time over the last 6-12 months with a slowdown in the market as a natural re-balancing occurs – part of which is due to rapid expansion and heavy investment into cultivation by all the major participants in the market. Over the next 6 -12 months we can expect to see management changes (some of which will be voluntary and some of which will be imposed by institutional pressure) to introduce different skill sets at board and senior management level to facilitate the oversight and leadership necessary for large pharmaceutical companies. Many operations have expanded into highly regulated products and complex supply chains whilst still operating with fundamentally the same team that established the operations with entrepreneurial efforts but, perhaps, a lack of experience in these sectors. The recent announcements by Aurora Cannabis and Tilray demonstrate that these restructurings and costs reductions have already commenced. However, with increased experience at board level and an improvement of profitability focused on sustainable business practices, should come new opportunities on a global scale for these North American operations.
The US market, because of the complexity of state and federal laws not being fully aligned, is closer to its infancy than the Canadian market. This is not too dissimilar to the European market. That said, there are a number of well-funded and quite large US enterprises. A limited number of these, such as Tilray, are looking to expand into Europe.
Many of the companies in the US have, and continue to, expand quickly so we can expect to see a number of mergers and acquisitions. We are likely to witness Canadian and US entities merging with one another with the potential for acquisitions for operations within Europe. It is unlikely that the North American companies will risk their capital through organic growth so would be expected to be identifying “turnkey” solutions.
One of the major challenges facing US companies is the complexity of supply and distribution. This is largely a result of the complexities for state and federal laws interacting with one another as well as international importation and exportation with US states.
How you can invest within the UK and Europe
Developments in the fields of research and development are anticipated to add further weight to the lobbying of government and regulatory bodies across Europe.The UK remains, despite the events of Brexit, a major financial hub for Europe. The London market has seen the growth of several investment and operation cannabis companies. This includes private companies such as; EMMAC Life Sciences Limited and the operations formerly trading as European Cannabis Holdings (now demerged into several new entities including NOBL and LYPHE) as well as publicly listed companies; including Sativa Group PLC (the first publically listed cannabis specific company in the UK) and World High Life Plc, both operating on the NEX Exchange.
The Medical Cannabis and Wellness Ucits ETF (CBDX), Europe’s first medical cannabis ETF fund, domiciled in Ireland, and which has been passported for sale in the UK and Italy, has also caused a renewed stir within the market with a further platform for listed investment.
As the regulatory framework evolves further there is an anticipation that more medicinal cannabis and CBD related enterprises should have the opportunity to list on public exchanges, whether in the UK or in European countries.
Despite a period of slow down following the natural rebalancing of the fast-growing North American markets for the cannabis sector, there is renewed confidence in the expansion of the industry. Developments in the fields of research and development are anticipated to add further weight to the lobbying of government and regulatory bodies across Europe.
There is an increased push for a public dialogue and consultation in relation to medicinal and recreational cannabis in the UK, backed by several mainstream media platforms. This is likely to be shaped in some parts by national debates in Luxembourg and other European countries as they consider their own domestic laws.
With European parliaments across the EU (including the UK) hopefully having time freed up to discuss other political matters now that Brexit is progressing, the next 18 months should prove an exciting time within the European cannabis sector.
With recent changes in federal and state law, and growing consumer awareness, the long-dormant hemp industry may finally be able to take heed of George Washington’s advice, “Make the most you can of [India Hemp] … The Hemp may be sown anywhere.”1
Hemp has a long and varied history in the United States. Throughout his lifetime, George Washington cultivated hemp at his Mount Vernon Estate, and, for a time, Washington even considered replacing tobacco with hemp as the Estate’s primary cash crop.2 Like Washington, Thomas Jefferson grew hemp at Monticello and his lesser-known Poplar Forest plantation.3 Both Founding Fathers primarily used the hemp cultivated on their property for making household items like clothing, rope, and fishing nets.
From the colonial era until 1970, hemp was routinely cultivated across the United States for industrial use. But, with the passage of the Controlled Substances Act (“CSA”) in 1970, U.S. hemp production ceased.4 The CSA banned cannabis of any kind, eliminating any distinction between hemp and other types of cannabis. As a result, hemp production became illegal in the United States.
More recently, the U.S. government finally began to ease restrictions on hemp cultivation and production. The 2014 Farm Bill introduced the USDA Hemp Production Program.5 Under the Program, universities and state departments of agriculture are allowed to cultivate hemp if:
The industrial hemp is grown or cultivated for purposes of research conducted under an agricultural pilot program or other agricultural or academic research; and
The growing or cultivating of industrial hemp is allowed under the laws of the state in which such institution of higher education or state department of agriculture is located and such research occurs.
The 2014 Farm Bill did not remove hemp from the auspices of the CSA, nor did it address the continuing application of federal drug control statutes to the growth, cultivation, manufacture, and distribution of hemp products.
The 2018 Farm Bill built upon the deregulation that began in 2014.6 Although both the 2014 and 2018 bills define hemp as the plant Cannabis sativa L. and any part of that plant that has a delta-9 THC concentration of 0.3% or less by dry weight,7 the 2018 Farm Bill took the additional step of removing hemp from the federal list of controlled substances and categorized it as an agricultural product. As a result, the production of hemp is now subject to USDA licensure and regulation. However, until the USDA completes its rulemaking process for implementing hemp regulation, hemp production remains illegal unless done in compliance with the terms of the earlier 2014 bill.8 For the time being, legal cultivation of hemp still must occur in a state that has authorized hemp research9 and the researcher must be either an institute of higher education or a state department of agriculture (or its designee).
With the increasingly favorable changes to federal and state law allowing for the expanded cultivation and production of hemp in the United States, the market is expected to grow significantly in the coming years. In 2014, the U.S. industrial hemp market was estimated at approximately $504 million.10 In only one year after the passage of the 2014 Farm Bill, the industrial hemp market was estimated to have increased by over $95 million to almost $600 million. By 2017, the worldwide market for industrial hemp was estimated to be $3.9 billion and growing at a compound annual growth rate (CAGR) of 14%.
In addition to favorable changes in U.S. law, the hemp market is benefiting from growing consumer awareness and demand for hemp-based food products.11 High in omega-3 and omega-6, amino acids and protein, hemp is growing in popularity as a cooking oil, dairy substitute, flour source and bakery ingredient. Among other things, hemp is considered by some to provide positive health effects for those seeking help with insulin balance, cardiac function, mood stability, and skin and joint health.
Although hemp cultivation is now allowed in the U.S.—at least for research purposes—and the market is forecasted to rise steadily under growing demand for hemp-based products, broad access to viable, legal seeds continues to present a challenge for researchers and commercial growers. In order to legally implement authorized cultivation programs and take economic advantage of a swiftly growing market, farmers must have access to seeds that can be guaranteed to consistently produce plants that fall under the legal definition of hemp. In an attempt to alleviate the problem, several states, including California, Indiana, Maine and Oregon, have implemented programs to license or certify compliant seed distributors and producers.
The importance of hemp seed availability and development has also been recognized on the federal level. On April 24, 2019, the USDA Agricultural Marketing Service published a Notice to Trade announcing that the USDA’s Plant Variety Protection Office (“PVPO”) is now accepting applications of seed-propagated hemp for protection under the Plant Variety Protection Act (“PVPA”). Among other things, the PVPA provides intellectual property protection to breeders who have developed new varieties of seed-propagated plants. Under the new guidance, breeders of new hemp varieties can now secure protection pursuant to the PVPA. Those holding a certificate of protection from the PVPO can exclude others from marketing or selling a registered hemp variety and manage how other breeders and growers use their protected variety.
The process for requesting protection under the PVPA is fairly straightforward. Breeders, or their attorneys, must complete all application forms, pay the required fees,12 submit a distinct plant variety name, and provide a deposit of at least 3,000 viable and untreated seeds of the variety (or 3,000 seeds of each parent variety for a hybrid). One required form for a completed PVPA application is the Objective Description of Variety form.13 This form provides a series of questions that identify the distinct aspects of the variety in question, including, among other things, plant and leaf characteristics, seed properties and anticipated uses. Upon receipt of the completed application and fees, the PVPO examines the application to determine whether the listed plant variety is new, distinct, uniform, and stable. If the PVPO determines that the requirements are satisfied, it will issue a certificate of protection granting the owner exclusive rights to the registered variety for a period of 20 years.Now is the time for farmers, researchers, and hobbyists alike to take advantage of the expanded opportunities available for protecting intellectual property for proprietary hemp varieties.
Although hemp has traditionally been used in the textile and fiber industries, the estimated 17.1% CAGR in the hemp seed segment is being driven by the increase in demand for hemp oil, seedcakes, and other food and nutraceutical products. These products are primarily derived from the hemp seed as opposed to its fibers. Presently, hemp seeds contain approximately 30-35% oil, of which approximately 80% is essential fatty acids, and 25% crude protein.14 Under the new PVPA guidelines, if a breeder is able to cultivate a sustainable plant that increases the plant’s production of the desirable compounds, he or she could achieve a significant position in the growing market.
The protection provided by the newly expanded PVPA builds upon other avenues of intellectual property protection now available to hemp breeders and growers. In addition to the PVPA, plants meeting certain criteria may also be protectable under a plant patent or a utility patent, both of which are administered by the U.S. Patent and Trademark office. Generally speaking, PVPA protection may be available for seeds and tubers, plant patent protection applies to asexually propagated plants, and utility patent protection may be available for genes, traits, methods, plant parts and varieties.15
With a market that is expected to grow substantially in the near future, and with the passing of increasingly friendly federal and state legislation, the hemp industry is on the cusp of significant expansion. Now is the time for farmers, researchers, and hobbyists alike to take advantage of the expanded opportunities available for protecting intellectual property for proprietary hemp varieties.
George Washington to William Pearce, 24 February 1794.
To date, at least 41 states have passed legislation authorizing hemp cultivation and production programs consistent with federal law. As of the date of this article, those states that have not enacted legislation allowing the cultivation of hemp for commercial, research, or pilot purposes include: Connecticut, Georgia, Idaho, Iowa, Louisiana, Mississippi, Ohio, South Dakota, Texas, and the District of Columbia.
Currently, the Food and Drug Administration prohibits hemp-based CBD in food and beverages. However, the FDA has set a public hearing to discussing the legalization of CBD in food and beverages for May 31, 2019.
The PVPA application fee is currently $4,382 with an additional fee of $768 due upon issuance of a certificate of registration.
Hemp Seed (Cannabis sativa L.) Proteins: Composition, Structure, Enzymatic Modification, and Functional or Bioactive Properties,Sustainable Protein Sources (Ch. 7), R.E. Aluko (2017).
Regulations are currently under consideration that could expand or otherwise modify the scope of protection available under each of the enumerated intellectual property protection schemes. Consult a licensed attorney for questions regarding the specific program that may apply to a particular set of circumstances.
Last week, the United States Patent and Trademark Office (USPTO) published an Examination Guide to provide further clarity for how they assess the legitimacy of trademarks for cannabis products. For the uninitiated, the 2018 Farm Bill, which President Trump signed into law on December 20, 2018, removed hemp-derived cannabidiol (CBD) from the Controlled Substances Act. In order to register a trademark in the United States, the mark must be used in a lawful setting, meaning that the USPTO does not register trademarks for products that violate federal law- even if it is legal under state law.
In their guidance document, the USPTO identifies the distinction between hemp and other cannabis varieties as the basis for either issuing or refusing a trademark registration. This means that in the trademark application, companies need to specify that the cannabis product is derived from hemp, or cannabis with less than 0.3% THC in dry weight.
The USPTO clarifies that applications for trademarks that involve CBD filed before December 20, 2018 will be refused, but if they amend the filing date to after that date, the registration will be examined. Below is a direct quote from their examination guide clarifying this:
For applications filed before December 20, 2018 that identify goods encompassing CBD or other cannabis products, registration will be refused due to the unlawful use or lack of bona fide intent to use in lawful commerce under the CSA. Such applications did not have a valid basis to support registration at the time of filing because the goods violated federal law. However, because of the enactment of the 2018 Farm Bill, the goods are now potentially lawful if they are derived from “hemp” (i.e., contain less than 0.3% THC). Therefore, the examining attorney will provide such applicants the option of amending the filing date and filing basis of the application to overcome the CSA as a ground of refusal.
Under the Federal Food Drug and Cosmetic Act (FDCA), using a drug in a food or dietary supplement that is currently undergoing clinical trials is illegal (as is the case here- see Epidiolex for an example of CBD being used as an active ingredient in an FDA-approved clinical trial). According to the USPTO, this means that “registration of marks for foods, beverages, dietary supplements, or pet treats containing CBD will still be refused as unlawful under the FDCA, even if derived from hemp, as such goods may not be introduced lawfully into interstate commerce.”
Regarding trademarks for services involving “cannabis and cannabis production,” the USPTO also issued guidance. This section of the Examination Guide pertains to companies applying for a trademark that fall in the category of ancillary services, such as growing supply companies, lighting, nutrients, pest control and packaging, among other service providers. Basically, this section boils down to the same distinction the Farm Bill made between hemp and other varieties of cannabis. An applicant for a trademark needs to make clear their identification of services offered as involving cannabis containing less than 0.3% THC.
If you have wondered over the past several years, why the big Canadian companies (in particular) are following the global strategy they are, there is actually a fairly simple answer: Newly implementing trade agreements, particularly between Europe and North America.
In fact, look at the schedule of the MRA agreements signed between the U.S. and individual EU countries over the last several years, and it also looks like a map of the countries that have not only legalized at least medical cannabis, but where the big Canadian companies (in particular) have begun to establish operations outside of their home country.
But what is going on is actually more than just CETA-related and also will affect cannabis firms south of the Canadian-U.S. border.
All of these swirling currents are also why the most recent MRA to come into full force in July this year, between the U.S. and Europe, is so interesting from the cannabis perspective. Even before federal reform in the U.S. If this sounds like a confusing disconnect, read on.
What Are MRAs?
MRAs are actually a form of highly specialized trade agreement that allow trading countries to be certain that the pharmaceuticals they purchase from abroad are equivalent to what is produced at home. This includes not only ingredients but processing procedures, production plant hygiene, testing, labeling and more.
When it comes to the EU-US MRA agreement, this means that individual states of the EU can now recognize the American Food and Drug Administration (or FDA) as an effective federal regulator of American pharmaceutical production that is equal to the procedures in Europe. US GMP standards, in other words, will be recognized as equal to those of EU states.
This will now also, by definition, include GMP-certified medical cannabis formulations.
What is so intriguing, however, is how this development will actually place certain American (and Canadian) manufacturers in a first place position to import cannabis into Europe ahead of the rest of the American cannabis industry.
What Are Mutual Recognition Agreements All About?
One of the most important quality and consumer safety aspects of establishing a clean supply chain is tied up in the concept of GMPs (Good Manufacturing Practices). These are procedures, established by compliant producers of pharmaceuticals, to ensure seed (or source) to sale reliability of the medication they make. In the cannabis industry, particularly in the advent of Canadian-European transatlantic trade in cannabis, this has been the first high hurdle to accept and integrate on the Canadian side.
If European countries recognize a country’s GMP certifications are equivalent to its own, in other words, and cannabis is legal for export, a country can enter the international cannabis market without facing bans, in-country inspections and the like. In the interim, imported products still have to be batch tested until the agreements are fully accepted and operational.
Israel, for example, already had an MRA with the EU, and medical cannabis is legal in the country. However, Israel was prevented from selling cannabis abroad until a legislative change domestically, passed on Christmas Day.
That is why the MRA agreement between the US and EU with Canadian companies in the middle also put both Israeli and U.S. firms at an extreme disadvantage in comparison. Both in entering the market in the first place, and of course associated discussions, like the German tender bid. That is now changing- and as of this year.
A Specialized Map Of Global Medical Cannabis Exporters
Ironically, what the new US-EU MRA could also well do is create a channel for pharmaceutical cannabis from the United States to Europe (certainly on the hemp and CBD front) just as Israel is expected to enter the international cannabis export industry (later this summer or fall). It could well be also, particularly given the Trump Administration’s tendency to want to not only “put America first” if not pull off “a better deal” in general and about everything, that this is why President Trump offered the delay to Israel’s president Benjamin Netanyahu in the first place.
Regardless of the international individual developments and subtleties however, what is very clear that from the time the first bid stalled in Germany in the summer of 2017 until now, the U.S.-EU MRA has been in the room even if not named specifically as a driver.
For example, the FDA confirmed the capability of Poland and Slovenia to carry out GMP inspections in February of 2019. It was only last fall that Aurora pulled off its licensing news in the former (on the same day licensing reform was announced by the government). Denmark was recognized in November of last year during the first year of its “medical cannabis pilot progam.” Greece was recognized in March 2018. Italy, Malta, Spain and the UK came online in November of 2017.
Overlay this timetable with a map of cannabis reform (and beyond that, cannabis production) and the logic starts to look very clear.
The upshot, in other words, is that while cannabis still may be “stigmatized” if not still “illegal” in many parts of the world, more generalized, newly negotiated and implementing, specialized global trade agreements between the US, Europe and Canada in particular have been driving the development of certain segments of the cannabis industry globally and since about 2013.
The Biggest News?
As of this year, as a result, expect at least from the GMP-certified front at least, that such international trade will also include medical cannabis from the U.S.
The first German cannabis bid may have come to an end more or less, and with a whimper rather than a bang (not to mention the inevitable still-to-be-settled legal challenges). However even as the dust settles, one of the biggest “names” in cannabis and the company formerly expected to win at least a few of the tender lots is looking elsewhere.
Namely Canopy Growth, which was a finalist in the first round of the tender, has not shown up as a finalist firm in Germany this time (at least not so far).
However, it is clear the firm has other intentions afoot, namely U.S. expansion.
In an unprecedented move, Canopy announced its intent to buy the largest U.S. based producer of cannabis, a firm called Acreage Holdings, just before Easter. The conditional deal is being consummated in both cash ($300 million) plus stock swaps, and will not finally close until federal reform has come in the U.S. In fact, the deal makes the bet that the entire issue of U.S. federal reform will be solved within the next decade.
In the meantime, however, what this also does is place one of the world’s largest cannabis companies in the middle of what is largely seen as the world’s most valuable overall cannabis market. Further it does so in an environment where the company benefits from Acreage’s considerable market and political clout. Former speaker of the U.S. House of Representatives John Boehner (a fierce opponent of legalization until it was personally convenient and profitable) is on the board of Acreage.
But there are those who might still be confused about why this deal happened. Canopy after all is fond of saying that its first focus is the “more valuable” medical rather than recreational market. And the U.S. market has many challenges still, that stem from a lack of federal reform. In fact, Canopy has frequently said in the past that they would not enter the U.S. until federal reform occurs. What gives?
What The Deal Also Does…
It is not “just” entry into the U.S. recreational market, albeit still on a state level that is significant about the deal. That starts with its timing.
When trying to understand the motivations of Canadian cannabis companies, especially ones who have eschewed the U.S. market in the past (at least until federal reform passes), it is also necessary to understand that they operate in a shifting world of global strategy that is never as straightforward as one might think. And often has nothing to do with cannabis per se.
Namely, while this deal places Canopy in the middle of the U.S. state industry it also does something else. It positions Canopy as a U.S. producer just two months after a new international pharmaceutical trade deal went into force (on February 8) called an MRA.
MRA agreements, also known as Mutual Recognition Agreements, are essentially trade deals between countries to accept the equivalency of their pharmaceutical production and supply chain.
On the cannabis front, the existence of MRAs between existing countries as cannabis has become legal, has also largely dictated the new international cannabis trade (see Canada and Germany as a perfect example) although this has been held as a closely held secret by the largest cannabis company executives (some of whom have previously denied that this was driving their expansion across Europe).
However, thanks to the agreement on this MRA in February, as of July of this year, Europe and the U.S. will formally kick off a situation where the European and therefore German health authorities will formally recognize American GMP processes.
That means that on the pharma front, Canopy has also essentially re-entered the European market, albeit by a bit of a backdoor. It also means that Canopy can immediately start to import cannabis drugs at least, made in the U.S. into the European and by extension, German market.
Cannabis drugs have been going in the opposite direction across the Atlantic to the U.S. for at least a year now (see the GW Pharma’s Epidiolex adventure last year). And further over the U.S.-Canadian border if now only bound for academic research (see Tilray).
It also may mean that they can import medical cannabis itself to be used as “medicine” or processed into one in Europe.
Does This Mean That U.S. Federal Reform Is Imminent?
Not necessarily. In fact, keeping the U.S. market in general out of the global cannabis trade, while allowing the top companies to participate both in the cross-state market and the global pharmaceutical one benefits the biggest companies. Conveniently, this also allows U.S. cannabis “pharmaceutical” producers to enter the EU in force just as Israel is expected to (third quarter this year). This also puts the “deal” U.S. President Trump and Israeli President Netanyahu cut on the subject to delay Israeli sales in an entirely new light (and one that should outrage both Americans and Israelis in the industry on this front even more). Not to mention every European hopeful producer unaware of the larger game afoot.
That said, what federal U.S. legalization will do is drop the operating costs of the larger U.S. entities now engaged in multi-state operations.
Cannabis in other words is not likely to be legalized in the U.S. before the next presidential elections for reasons that have everything to do with the profits of a few – and for that reason will certainly be a major theme in the next national political race.
And in the meantime, the biggest companies, Canopy included, are not only laughing all the way to the bank (although their shareholders are another story), but setting themselves up to be at the ground floor DNA of the global cannabis business as it establishes itself in every country of the world.
The Canadian federal government is going where the U.S. (for now) is not: namely allowing provinces to channel federal agricultural funds into commercial cannabis production on the provincial level. The program is called the Canadian Agricultural Partnership (or CAP), which is a $2.2 billion annual initiative designed to support agricultural businesses across the country.
Even more intriguing of course, are other programs that tie into such agricultural subsidies (including government support for exporting product). See Europe for one.
These programs are of course nothing new, including in the United States.
What is new, different and intriguing, is that unlike the United States, for the first time such government funds are being used to support not only the domestic cultivation of cannabis, but its global export. If there ever was the beginning of a “green new deal” then this might be it.
Canadian companies are certainly seeming to benefit from this federal largesse at the production point. For example, in the first weeks of April, CannTrust Holdings Inc. announced that its entire 450,000 square foot, perpetual harvest facility in Pelham, Ontario is fully licensed and will be online by summer 2019. THC BioMed just announced that it received Health Canada’s permission to begin additional production at its flagship location in Kelowna, B.C. And Beleave has just commenced sales of cannabis oil products at licensed facilities in Hamilton, Ontario.
The Rise of Government Funding In a “Publicly Owned” Company Environment
One of the more intriguing impacts of the rise of government funding for the industry comes at a time when the industry itself, certainly coming out of Canada, is facing a bit of a zeitgeist moment.
Sure, the industry has gained legitimacy, and there might be nascent cannabis funds in the UK, Switzerland and Germany, but the entire “public cannabis company” discussion is hitting a bit of a reset at the moment.
It was after all, ostensibly “public” Wayland that just dusted much higher fliers from the stock price perspective on winning the German cultivation bid. In fact, some insiders on the ground have commented that it is precisely because Wayland is not a stock market favorite, rather focused on fundamentals that they got chosen in the first place. Starting with the old-fashioned idea of committing resources and elbow grease to create production on the ground, locally.
There are also firms who are benefitting from the first tax funds that have flowed to promote the hemp industry (those are available from state governments here).
However, it is not just Germany where this discussion is going on in Europe right now. In Spain, there is political discussion about ensuring that the nascent and valuable cannabis industry does not end up in the control of “outsiders.” Namely international firms who have more of an eye on profit than community building. The idea of the cannabis industry as an economic development tool has certainly caught on in Europe (see Greece and Macedonia). And core in that idea is that the euros generated by this still remarkably price-resilient plant, and the products produced from it, should stay local.
For now, and certainly in Canada, federal public funding looks pretty much like a fancy agricultural grant. But in the future as prices drop and the wars over strains and “medical” vs. “recreational” really begin to rage in Europe, the idea of government-funded cannabis cultivation may be an idea whose time has come.
The German automobile industry, for example, did not come from nowhere – and even today receives massive government funding. For now, certainly in Deutschland, that is not the case with cannabis, but things may be changing with the resolution of the first tender bid.
In the future, in other words, as countries across Europe begin to think about posting their own production bids and Germany contemplates additional ones, government funding of the industry and certainly incentives to help its growth will become much more widespread.
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