Critical Overview:
The recent announcement by the German government to legalize recreational cannabis during its current term has generated considerable buzz. This move has raised questions about whether adult recreational use of cannabis will become a common policy in Europe. However, it is too early to make any conclusions on this matter. To better understand the current cannabis market in Europe, several active investors in cannabis-related start-ups were interviewed. The interviews reveal that the regulatory and functional landscape in Europe is as fragmented as it is in North America. Moreover, the black market for cannabis is also a competitive factor, with Europol estimating illicit spending on cannabis in the EU at €9 billion per year.
Medical cannabis currently carries most of the momentum in the legal side of the market. According to Prohibition Partners, around €354 million worth of unlicensed medical cannabis will be sold in Europe in 2022, and this number is expected to rise to around €2.3 billion by 2026. Germany’s promised legislation is also spurring investments and mergers and acquisitions in the sector.
One significant difference in Europe’s cannabis market compared to that of the U.S. is that medical cannabis is not prohibited at the federal level across the EU. This allows companies to legally sell their products across borders, and cross-border commerce in Europe is relatively fluid.
Challenges Facing Europe’s Cannabis Industry:
Europe’s cannabis industry is primarily a medical-only market. Unlike the U.S., medical cannabis in Europe is regulated as a medicine and falls under EU and national pharmaceutical regulatory systems. As such, standards for production and distribution of medical cannabis are exceptionally high. Moreover, European doctors are generally more conservative and evidence-based, which means that it takes time to build the necessary infrastructure to get stakeholder buy-in.
Some of the key challenges facing the cannabis industry in Europe include a lack of education and buy-in from industry stakeholders such as physicians, research institutes, insurance companies, and politicians. There is also a lack of downstream infrastructure, such as research centers, specialized clinics, licensed wholesale distributors, and manufacturers.
Advising Cannabis-Related Portfolio Companies:
Investors are focused on companies that know how to navigate the European regulatory landscape and are filling key gaps in the market. Downstream parts of the value chain, including distribution companies, specialized clinics platforms, research and development centers, and companies that are accumulating patient data, are currently underserved and present investment opportunities. Ancillary businesses are also an attractive investment option.
Conclusion:
The cannabis market in Europe is still in its early stages, and the regulatory and functional landscape is as fragmented as it is in North America. However, medical cannabis carries most of the momentum in the legal side of the market, and Germany’s promised legislation is spurring investments and mergers and acquisitions in the sector. The cannabis industry in Europe faces significant challenges, including a lack of education and buy-in from industry stakeholders and a lack of downstream infrastructure. Despite these challenges, there is optimism that Europe will become a key leader on the research front for medical cannabis, which will further help lift the evidence base and general acceptance. Investors are focused on companies that know how to navigate the European regulatory landscape and are filling key gaps in the market.
