Czechia: The medicinal cannabis market is a market for audacious investors that delivers relevant profit

The market for medicinal cannabis was previously restricted. As of the beginning of the new year, the circle of growers who may apply for a license has broadened. Lukáš Havel reveals who may obtain a license, and what possible return on their investment they may expect.

Until now, the market for medicinal cannabis has been very restricted in the Czech Republic. Up until the end of last year, only one company was allowed to legally grow hemp for medicinal purposes; it had been chosen in a tender organized by the State Institute for Drug Control. As of the beginning of the new year, additional growers may seek a license. What companies have a realistic opportunity to procure a license for growing medicinal cannabis?

In the Czech Republic, such companies need to fulfill two requirements, one is technological in nature and the other has to do with personnel. The number of such undertakings itself is however no longer limited, and in this sense, the market is liberalized compared to the previous situation.

What does the acquisition of a license entail? What kind of documentation must be submitted and proven to the authorities?

Before a company may start growing cannabis, it must take three fundamental steps: 1) obtain a license; 2) even before applying for this license, build and furnish the growing facility (so as to be able to show that they are properly prepared for pursuing the licensed activity in a lawful way), and 3) obtain approval from the department for psychotropic and addictive substances at the health ministry.

Are there practical experiences as to how long it takes to obtain the license (and the official approval you mentioned)?

We’ve acted as legal advisor for one of our clients and prepared the applications for them. Our practical experience suggests that the whole endeavor can be seen through to successful completion within half a year or so. It’s definitely not something you can simply be done with within a few weeks. It is crucial to align the workstreams and procedures, ideally so that one is able to show the regulatory authority a growing facility which can launch operations the next day. This is ultimately what the regulatory authority expects from applicants.

The new law has been in force since January, but in the beginning, no new growers signed up, not least because a decree was still in the works that was supposed to prescribe practical rules for making use of the newly deregulated market. What is the situation today?

In terms of legislation, the situation is now settled, and everyone knows the rules. What happened in January was, the law made market liberalization and the application for a license possible, but the requisite secondary legislation got held up. Ultimately, more time was needed to sort out the new rules. However, those applicants who came prepared actually benefited from this: they won the time needed to complete their work on technical preparations, to train their staff, etc. I would say that, ultimately, the timing worked out quite nicely.

The new regulatory framework has been discussed for years. What took so long drafting the bill and writing it into law?

My feeling is, the lawmaker made the right choice. It opted for a preparatory period during which there existed a “market of sorts”, obviously with extremely stringent restrictions imposed by the state, which ultimately controlled the entire distribution chain (in that it bought and distributed the entire production). This allowed the state to dip its toes into the water: what does it mean to allow a new addictive substance into the legal market? Will the state be able to maintain control? Now, the next step has been taken by opening up the market for more than just one undertaking, so that the potential and the synergies of this business can be exploited in full, not only in the domestic market but also in neighboring markets.

How fundamental is this legal change really? And what will the new market for cannabis look like?

This is a very substantial change indeed. I’ve mentioned that the state is allowing several competing undertakings into the market segment, on the condition that they first obtain a license. For the rest, the state limits itself to a supervisory role. In other words, the market is suddenly wide open, with essentially unrestricted competition.

Growers of medicinal cannabis set high hopes in the new rules, expecting them to turn Czechia into the most interesting (or one of the most interesting) markets in Europe. In your view, does the amendment bill meet these expectations?

I believe it is too early to tell, considering the time shift between the liberalization of the market proper and the set-up of the technical rules under which one can actually acquire a license and pass the regulatory process. In any case, a number of undertakings showed interest in a license, which makes me believe that the growth potential for the segment is high. But it is too soon for precise numbers.

What about foreign experience which could tell us how big this market will ultimately be in Czechia?

You are probably referring to the estimates which were offered during the current debate on the legalization of cannabis for recreational use. Let’s take a look at the expected tax revenues. For Czechia, we are looking at a ballpark of 650 million to 1.8 billion crowns annually. Compare this to a national economy which has liberalized sooner. Among developed countries, Canada was among the first to do so, and the market there is said to top 78 billion dollars. As you can see, the potential is huge.

What kind of business may reasonably consider to blaze the trail in this new industry in Czechia?

One must realize that medicinal cannabis is a medicinal preparation for individual use. Companies which have prior experience in this regard certainly enjoy an advantage here: they are familiar with the procedural set-up. With that said, the barriers for entering this market are certainly not so high that business without prior experience don’t stand a chance. The language of this particular law is rather clear and neat, and if one has a professional partner by one’s side, the demands can certainly be met. (Speaking of which, the law anticipates that the licensed undertaking retains a so-called responsible representative among their staff who will be in charge of production.) As you can see, the obstacles can be overcome even by someone who has no prior experience in the pharmaceutical industry, or in crop production for that matter.

In other words, any agricultural business or farming operation could become a cannabis grower.

It’s quite possible. There is no reason why a farming business couldn’t handle the challenge, provided they properly focus on the project and e.g. hire a dedicated manager with experience.

What does one need specifically to grow cannabis in compliance with the law? Does the regulation determine what the growing facility must look like, for instance?

The regulation is in fact highly detailed when it comes to the conditions under which cannabis may be grown. As a grower, you need to comply with a host of requirements e.g. in terms of security of the facility, prevention of contamination, or the ability to back-trace essentially all steps within the production process. As I mentioned earlier, the grower produces an individual medicinal preparation (or, as the case may be, a semi-finished product used as input for the former). Under these circumstances, we are essentially talking about the operation of a pharmaceutical lab.

Will the state monitor cannabis growers?

The envisioned state supervision is in fact a two-pronged affair. On the one hand, the Institute for Drug Control will inspect the growing facility before the license is issued; it will also conduct mandatory regular operational audits at least every 18 months. Similar inspections will be conducted, with a somewhat different focus, by the ministry of health (and again, you may expect them to conduct regular follow-up checks). This means that producers face double inspections in regular intervals.

How often will the inspectors ring the buzzer or rap the door? Does the experience from other pharmaceutical market segments indicate how often the regulatory authorities will come visit for an inspection?

The frequency of checks by the authorities always depends on the categorization of the individual facility’s product. In the case of cannabis-growing facilities, we are looking either at a semi-finished product for the manufacturing of medicinal cannabis, or at medicinal cannabis itself (which is ultimately an extract from parts of the plant). This is what determines the frequency of inspections. Consequently, undertakings may expect the State Institute for Drug Control to appear on their doorstep at least once every 18 months; I’d expect the health ministry to follow a similar schedule.

The exact location of licensed hemp farms is supposed to be kept secret from the general public – why?

This is merely a reflection of the practical need to minimize the risk of burglary or theft.

Lawyers are careful to only ever use the technical term, “medicinal cannabis”. Why is this so? What’s the difference between medicinal cannabis and the “classic” cannabis which consumers usually refer to as weed?

Medicinal cannabis is a medicinal product for individual use, and as such comes into existence in a carefully controlled production environment, with painstaking safeguards e.g. against contamination. The grower seeks to reach specific levels and concentrations of the active agents, and performs checks to make sure they succeed. By contrast, weed is an illegal product traded in an illegal market. We are talking about the world of pharmaceutical science in opposition to an addictive drug used by consumers in the wild.

Do you expect weed to remain illegal under Czech law?

I believe the government office has created a working group toward the end of last year, tasked with working on a bill for the legalization of recreational use. This is a trend one notices not only here but also in our neighboring countries, and it is driven by commercial consideration. I might mention Germany – an economy which has always had determining influence on our own. If we are able to utilize the synergy that comes from tapping into their market, that will be to our great benefit. If the moment has indeed come in which this product is no longer been perceived as particularly bad by society as a whole, then it is certainly better to have a well-thought-out regulatory framework at the ready, instead of clinging to rigid restrictions.

You mentioned possible synergies. Where could they be found?

Along the production and supply chain, like in any other industry. Of course, some peculiarities stem from the fact that this is a highly regulated and monitored environment.

For now, the bill for legalization is still being drafted. Even so, would you be able to predict what the passage of such a law would mean for Czechia? What are the commercial possibilities which it would unlock?

The estimated figures in connection with the Czech market and the declared purpose of the bill vary between 650M and 1.8bn crowns in tax revenues. The overall economic potential, when synergies with a larger market (such as the German market) are being exploited, will be much larger.

Much larger? Could you give as concrete figure?

In European terms, no. All we can do is take a look at examples elsewhere in the world where a cannabis market has already been established. Canada has been a trailblazer in this respect. Among G7 countries, estimates regarding the liberalization and development of the market speak of revenues around 7-8 billion dollars. Bloomberg claims that figures on the order of 35-40 billion dollars are realistic for those states within the U.S. which have been continuing to liberalize their cannabis legislation.

Deregulating cannabis for recreational use will be driven by the expected tax revenues. Is there any idea yet how to tax the legalized product?

I’d expect something comparable to a combination of the regulatory environment for the market with alcoholic beverages and the market with tobacco products. It’s fair to say we’ll get a new, third market of this kind.

Have you been approached by clients who have questions with respect to the newly more liberal rules – be it in the realm of medicinal cannabis or the future broader market for cannabis designated for private consumption?

We had the privilege to assist our client as they were developing a growing facility for medicinal cannabis, and acquired valuable practical experience in the process. To us, cannabis cultivation appears to be an attractive topic, from the point of view of possible utilization by our clients.

Let’s talk some more about your practical experience. How straightforward was it to collate and produce the legal documents needed to commission the growing facility? Or is this a highly sophisticated process?

It certainly wasn’t child’s play! It is true that secondary legislation provides us with instructions of sorts as to how to put the documentation together and what the process entails, i.e., to a certain degree, one can get prepared. For the rest, one will have to adjust to the reality that one supervisory authority considers your business essentially equivalent to the operation of a pharmaceutical laboratory while the other supervisory authority is chiefly interested in retaining control over the market and avoiding any loosening of the reigns, let alone leaking the product outside of the predefined distribution channels.

Against this backdrop, what is your assessment as to the barriers to market entry?

As with any regulated business, the investor essentially needs to be aware of the risk that they have to develop more or less the entire operating plant ahead of time, with no guarantee that they will actually be issued a license. What is more, the license is limited to a five-year period during which the company must actually realize their business venture. Naturally, you want to perform an analysis what the investor can realistically achieve within such a limited time period.

So you’re saying this business model is rather ambitious in terms of ROI.

Not yet, actually – the number of competing undertakings in the market today is really very limited. Because of this, profitability forecasts are much more optimistic than in other industries. This is of course the reason why cannabis is so attractive to investors right now in the first place. In the future, however, much will depend on the further development. Consider that the market is being liberalized not only here but also abroad – with potential repercussions for the domestic market.

Could you try and give us an estimate how long it will take for this kind of investment to turn a profit under the current circumstances?

My take, based on the conversations we’re having with clients, is that it is realistic to expect a return on the investment within one year or so.

If this is true, then this is truly an interesting market from a business standpoint, with attractive opportunities.

Indeed. This is a market for audacious investors, and the profit margins reflect this fact.

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