Tag Archives: agreement

August 2, 2023

Is the Cannabis Industry Sitting On An Untouched Gold Mine Of Innovation?

By Pam Chmiel

Universities across the country are working in all areas of research and development to advance cannabis cultivation, medicine, drug delivery and technology. But these innovations are collecting dust because the universities are not in the business of commercializing products in the marketplace.

In 1980, the federal government passed a law that said universities that receive federal funding, which most of them do, will have the option to own whatever intellectual property or invention they develop from that federal funding. Initially, universities resisted the idea feeling they were selling their souls to the private sector and corporate America. But opinions have changed, and the marriage between universities and industries is a common and rewarding business strategy for both sides.

I interviewed Lance Anderson, a partner at the law firm Dickinson Wright who is uniquely positioned to play matchmaker to research universities, entrepreneurs and VCs to help them uncover cannabis innovations and create partnerships. Lance is also educated in life sciences, including proprietary plants, genetics and plant-derived products, and served as in-house counsel and lead IP attorney for a large public research university system and an early-stage venture capital company.

Pam Chmiel: What led you to play matchmaker to universities and cannabis businesses?

Lance Anderson: I learned that universities are interested in commercially benefiting from some of their innovations when I worked in the technology commercialization office at Texas Tech University right out of law school.

The concept of “technology transfer for commercialization” already exists in universities and presents a vast opportunity for cannabis businesses to commercialize their innovations.

Lance Anderson, an attorney at Dickinson Wright

“Technology Transfer” agreements refer to moving technology, knowledge or innovations from one organization, such as a research university, to another entity, such as a cannabis company, through licensing agreements that grant permission to use intellectual property (IP), patents or proprietary technology for commercial purposes.

Even though legalization is sweeping the country, I’m finding that academic institutions and their administrators are concerned they will lose all federal funding and are hesitant to take the chance on a cannabis research project. They are still getting comfortable with the opportunities to work with the industry, and the farm bill act of 2018 gave them the push to do so.

And why not tap into these universities, which receive millions and millions of dollars in funding? You’re not out a lot if you properly structure your relationship with them. You do not have to pay them millions and millions of dollars to get this technology. Knowing what the university wants and how to structure that relationship is key.

Pam: What are some of the benefits a business can gain by forging a partnership with a university?

Lance:

Cannabis companies benefit by gaining access to cutting-edge research, expertise and resources that can accelerate and elevate their product development and market entry.
The association with academic institutions can help build trust among consumers, investors, and lawmakers.
Working with university research students may create a pipeline of qualified employees who may want to work for the company.
Submitting a joint proposal with a university seeking government grants may lead to additional funding for the research project.

Pam: What types of partnerships do you currently see in development?

Lance: Pharmaceutical companies have collaborated with research universities for years on drug development and undoubtedly have their eye on the cannabis industry. Federal agencies like the USDA lean on academic partnerships to develop unique plant traits to improve crop production. You’ve got institutions developing new mind-blowing genetics, like polyploid species, that allow you to fine-tune the plant traits you’re interested in. There are always advances going on.

Clemson and Cornell Universities are leading the charge in cultivation by partnering with farms to develop techniques to grow better crops and increase profitability. And interestingly, many of the land grant institutions that receive federal grants, like Mississippi State, Michigan State and Texas A&M, are now diving into plant trait development. And it’s not unrealistic to think they will transition into plant-touching technologies ripe for the cannabis industry to come in and run with it from there.

“Researchers are now getting more access to cannabis strains that are more like what we’re seeing on the market, but it’s still not where we need to be”

But the research desperately needed to move the industry forward is medical research because lawmakers want proof that cannabis has medicinal benefits before they are confident in pushing for legalization. Unfortunately, the US government has been part of the problem in making it hard to conduct research, whether clinical trials, clinical research or simple preclinical studies on cannabis. Until recently, the University of Mississippi was the only university allowed to cultivate for research. So the researchers are now getting more access to cannabis strains that are more like what we’re seeing on the market, but it’s still not where we need to be. Not even close.

Academic partnerships are not a new concept, but the cannabis industry has yet to embrace it fully. Opportunities are beginning to develop where government agencies will participate and or fund the work in cannabis from the university standpoint. The National Institute of Health has a program that’s getting kicked off for cannabis research. And they all understand and recognize that the fact we don’t have enough clinical data available is a major hindrance to the advancement of this industry.

Pam: What is legally involved in a technology transfer partnership?

Lance: Collaboration between cannabis companies and research universities can take various forms, such as research partnerships, sponsored research agreements, joint ventures, or licensing arrangements. The specific model depends on the goals, resources, and intellectual property involved in the collaboration. An attorney can structure an agreement in a manner that lets everyone slowly advance into the relationship and get satisfied with the milestones they want and at which point this thing begins to take shape.

Cannabis businesses are no strangers to utilizing multiple entities in their corporate structuring. They may have a holding company that owns the real estate, a staffing company that manages the HR for the flower-touching operations, and another that holds the intellectual property. You’re seeing an entire industry familiar with IP licensing for the first time in a long time, and universities want in by licensing their intellectual property.

The university may require a licensee to have a product in the marketplace and a first sale within two years. So that introduces the concept of perishable intellectual property rights where you can default or don’t meet the licensing requirements. That perishable concept sometimes makes it hard to raise money because the investors prefer a guarantee that you have the license and will not default.

The takeaway is universities are thirsty for partnering and looking for strategic initiatives. Universities have access to patient populations, and the cannabis industry has the business know-how to take their innovations to market. It will take some culturing of both sides to understand the opportunities. But once everyone’s on the same page, the deals will look like the licenses and joint venture deals we see now with multi-state operators.

Pam: Lance, do you have any closing thoughts for our audience?

Lance: I’ve thought about this potential synergy for years as I’ve watched these two areas I practice in often. Academic partnerships are the catalyst to move the cannabis industry forward and are right in front of us. The time is now, and I’d love to be there.

September 1, 2022

As More Opportunity Arises in the Cannabis Industry, Potential Business Pitfalls Also Increase

By Jonathan Storper

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Benjamin Franklin famously advised fire-threatened Philadelphians in 1736 that “an ounce of prevention is worth a pound of cure.”

With industry growth and maturation comes increased opportunities and challenges. As the cannabis business matures and spreads into new geographic regions, the industry can take advantage of larger markets; however, it also faces increased risk and litigation across a myriad of its operations. This article identifies some of those growing pains along with suggesting how to avoid the more obvious and typical types of issues before they become a problem.

Contracts/Commercial Agreements

One source of emerging trends in cannabis litigation notes that about 1/3 of litigation in 2022 could be classified broadly as commercial disputes. As the various state laws allow for expansion of legal cannabis operations into more states, operators will enter into more commercial agreements to grow and scale operations across the United States.

I am surprised by how many companies do not adequately document their commercial agreements. A host of issues too numerous to discuss in depth here should be addressed in a commercial agreement depending on the type of transaction. In short, make sure agreements are in writing, signed and include an effective date. They should be complete and unambiguous, allocating responsibilities and risk as intended.

Fundraising

When fundraising, whether as debt or equity, a company must comply with complicated and technical U.S. and applicable state securities laws. These laws and regulations require either the registration of the securities offering, which is very expensive, or an applicable exemption from a registration. Failure to comply could lead to lawsuits filed by investors trying to recoup all their money, even if they have no damages, along with possible fraud claims or fines and penalties imposed by applicable federal or state agencies.

Landlord-Tenant disputes

When renting commercial real property, create agreements that address the major issues in writing in case of disputes with property owners. Understanding the lease terms and requirements, as well as tenant rights and duties under state and local law, are essential. Pay attention to lawful uses, minimum term and renewal options, operating expenses and tax requirements, tenant default issues, base rent and other rental charges, common area maintenance charges, maintenance and repair, tenant improvement requirements and allowances, sublet and assignment, and requirements for the refund of the security deposit.

Employment

A common area of misunderstanding that leads to disputes is the law governing employee relations. Companies often misclassify employees, creating valid claims for past due benefits, fines and other damages for failure to classify correctly. In California, for example, correctly classifying a worker as an independent contractor is difficult. Some common mistakes to avoid include:

Designating non-exempt workers as exempt and misclassifying employees as independent contractors.
Failure to pay required minimum wages or overtime.
Not providing required meal and rest breaks.
Failure to keep accurate time records for non-exempt workers.
Inaccurate and noncompliant payroll records (aka “wage statements”) with all the required information.
Improperly administering leaves of absence, especially for employees with medical conditions or disabilities.
Not carefully documenting performance issues by using performance reviews, or “writing up” poor performance, etc.

Failure to have a written employee handbook covering important policies such as vacation and required conduct, as well as misapplying those policies, can lead to disputes. Pay attention to state and local employment laws that apply at the different stages of development and growth.

Intellectual Property

Protecting the company’s intellectual property is important to maintain the goodwill and value of a business. Carefully evaluate the requirements for any patent, trademark, copyright, and/or trade secret protection and come up with a plan to implement and monitor the applicable intellectual property assets. Do not disclose possible patentable intellectual property and inventions before filing a provisional patent application, or the ability to obtain patent protection will be destroyed. Before using a tradename or trademark in commerce, investigate if anyone else is using a similar name for similar goods and services. Failure to do so could lead to claims for infringement and a judgement requiring the company to stop using its preferred name or logo after investing time and money in creating the brand. Consider registering at the state and federal level the name and logo to secure your rights in the brand. What and where a cannabis company can register its brand name and logo for protection are currently limited, so be advised registration can be tricky.

Trade secret protection attaches to valuable information not readily ascertainable by lawful means, such as a formula, pattern, method, device, compilation, program, technique, or process that is secret. Protection afforded to trade secrets does not expire if the information is kept secret. For instance, the Coca-Cola formula has been kept secret for over 100 years, thus maintaining its value. Companies must also implement and maintain appropriate measures to protect the inadvertent disclosure of the information in order to maintain an asset’s status as a trade secret. Before disclosing any confidential information, make sure to have a proper written confidentiality agreement in place with the recipient, or you may lose the protection afforded by trade secret law.

Hiring the right workers to develop valuable intellectual property is important to the success of any business. Make sure to have employees and contractors assign their interests and ownership rights to the work they create, and develop a written invention-assignment agreement in favor of the company to avoid ownership disputes. Interests in copyrightable works created by service providers must be assigned in a written agreement. Failure to do so could diminish the company’s value.

Taxes & Licensing

Sometimes a business unavoidably gets behind in paying its taxes. Failure to pay taxes on time leads to penalties and fines and possible expensive audits by the tax authorities. In addition, personal liability can attach to directors and officers for failure to pay employment taxes. Cannabis companies may have several licensing requirements as well that are important to track to stay in good standing.

Insurance

Adequate insurance is a must-have for every business. Conduct a periodic checkup of the company’s insurance coverage. Consider directors’ and officers’ insurance, general commercial liability and property, products liability, workers’ compensation, employment practices liability coverage, cybersecurity, and business interruption insurance. Those types of coverage are important protections for the risks related to any business that sells a product or service, has employees, deals with the public, or could lose income from unanticipated events like fire, natural disasters and civil interruptions. Discuss your particular insurance needs with a qualified insurance broker, as one size does not fit all.

Consult with Qualified Legal Counsel

Consult with legal counsel to analyze and prepare for the risks noted in this article and other common legal issues to protect the company’s assets, avoid disputes and build and maintain company value. Otherwise, you may find that, as old Ben Franklin noted, you’ll spend many pounds to try to cure problems that could have been avoided with just an “ounce of prevention.”

November 6, 2021

Canopy Growth Acquires Wana Brands: An Interview with Nancy Whiteman

By Aaron G. Biros

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On October 14, Canopy Growth announced their plans to acquire Wana Brands, the number one cannabis edibles brand based on market share in North America. The two companies entered into an agreement that gives Canopy the right to acquire 100% of the membership interests of Wana Brands (a call option to acquire 100% of each Wana entity) once a “triggering event,” such as when plant-touching companies begin trading on major US stock exchanges or full federal legalization, occurs.

As part of the agreement, Canopy Growth makes an upfront payment of $297.5 million to Wana Brands. Until the United States moves on cannabis legalization or companies can start trading on U.S. exchanges and Canopy uses the call option to acquire Wana Brands, they don’t get any voting or economic interest in Wana Brands. The two companies are essentially operating completely independently of each other until the US legalizes cannabis.

Nancy Whiteman co-founded Wana Brands in 2010 and since then the company has expanded significantly. Following the legalization of adult-use cannabis in Colorado, their sales skyrocketed. Over the next few years, Whiteman oversaw the company’s expansion into a number of new states. In 2016, they moved into Oregon’s market and quickly grew their brand presence, seemingly overnight. Then they expanded into Nevada, Arizona and Illinois in 2017. After that the company made a major East Coast push, expanding into Maryland, Florida and Massachusetts, with other major northeast markets expected to be added soon. The brand now has products available in twelve US states and nine Canadian provinces, with plans to add four additional states by the end of the year.

Nancy Whiteman, CEO & Co-Founder of Wana Brands

Shortly after the announcement, we sat down together over coffee in Las Vegas to discuss Whiteman’s journey to success, her plans for the company’s expansion and what the future might hold for Wana Brands.

Aaron G. Biros: First of all, congratulations on the acquisition. As a co-founder and CEO, it must be amazing to see the success of your company and all you’ve accomplished. How do you feel?

Nancy Whiteman: I feel ecstatic. I am so excited and so proud of what Wana has accomplished. Just all around a great feeling.

Biros: What was it like leading up to this moment? From the inception of the business, did you ever have any doubts you’d make it this far?

Whiteman: A thousand times. Absolutely. Anyone in cannabis that tells you they didn’t have any doubts is probably not being very honest. I had been thinking about partnership for a while. I felt the timing was right because of a variety of reasons, but also the possibility of federal legalization. I wanted to make sure that Wana was really going to be well positioned for future growth. One of the things that I said in our employee meeting – I quoted the old proverb of ‘If you want to go fast, go alone, but if you want to go far, go together.’ We’ve been going it alone for eleven years and we’ve gone very fast. But I want Wana to continue to be a major player in the industry and to go far. I really felt that this was the time in the industry to strike a partnership.

So that’s a little bit of the thinking behind it. I think when there is federal legalization, there is going to be a host of competitors entering the industry that are going to be unlike anything we’ve faced before. I think it’s going to be challenging for independent brands to scale as rapidly as they’re going to need to scale to compete against all of this new competition on their own. So that’s the why behind the timing of it.

In terms of why Canopy, I’ve known Canopy for quite a while. I met them when we were looking for partners about three and a half years ago. We did not end up putting together a deal at that point in time, but I did get to know the company quite a bit. Since then that company has changed significantly with leadership changes and became a very different company with the Constellation Brands investment behind them.

When I think about the future of the industry and particularly post-legalization, I have certain things that I am looking for in partners. Of course, I am looking for financial strength in a partner. I was really looking for a company that has a very long-term perspective on the industry, with both the proper resources and the proper mindset to make long-term investments for the future. And then my belief is that post-legalization, we’re going to see radical changes in the industry including where products are cultivated in a global market, more distribution outside of dispensaries – and I think liquor stores could be a likely form of distribution at some point in time, so the relationship with Constellation was very interesting and appealing to me. But all of those things wouldn’t mean as much to me if I didn’t feel we didn’t have a good fit in terms of our shared values and how we saw the industry. We spent a lot of time talking about that and I think one of the aspects that really attracted me to Canopy was that we are very aligned on how we see the future of the industry shaping up. Certainly, I think there is a wonderfully viable position for cannabis as an alcohol replacement, however we also have a lot of focus on innovation and the health and wellness aspects of cannabis. I was really looking for a partner that felt the same, and it ended up that we really were aligned on those values.

Biros: What does it look like going forward? Since you’re staying on board, how will your new role change?

Whiteman: My new role doesn’t change at all actually. I woke up last Monday—the week after the big announcement–and it felt very normal getting back to work and having my usual meetings. This was my fifteen minutes of fame and thankfully its diminishing so now it’s just back to work as usual.

But moving forward, we have big plans. Wana is launching in four new markets over the next couple of months, we’re in discussions to launch in an additional six markets, and we have very robust innovation pipeline. So, we’re just really busy right now just executing on our strategy. I am looking forward to getting to know our new colleagues at Canopy better and exploring different collaboration possibilities.

I feel very optimistic. I was thrilled our employees were delighted with the news and morale is very high. The feedback from the rest of the industry has been really positive and overall, I am feeling very good about this decision.

Biros: So you mentioned some expansion plans for four new markets in the next few months. How does the acquisition help Wana Brands expand?

Whiteman: You know we haven’t announced the new states so I can’t speak to those publicly yet. They were all in the works before this deal and are currently in the process of being onboarded. Where it will get interesting is how this deal impacts new states that we move into. Until Canopy decides to exercise the call option [to acquire 100% of membership interests in each Wana entity], we are still an independently owned and run company. So we are still going to be looking for the best partners that we can find in new markets, and the Canopy connection will certainly be helpful to us. But to your point about the plans, we’ll be announcing those new market expansions in the coming weeks.

Biros: As a woman leader with an extremely significant position in the cannabis industry, do you have any advice for young aspiring entrepreneurs, women leaders or other women in the cannabis space?

Whiteman: I do. I posted something on LinkedIn the other day and I’m going to make the same comment to you as I made in that post because I think it’s important and particularly important for young women. People have said a lot of nice things about me in the past couple of weeks and of course everybody loves to hear nice things about themselves. But the truth is, some of them are not true. And one of them that is definitely not true is that I am somehow fearless. And I guess what I would say to women and young entrepreneurs is that fearlessness is a myth.

Being an entrepreneur is hard. You’re putting your money on the line, you’re putting your time on the line, you’re putting your reputation, you’re potentially putting your family’s, your friends’ and your investors’ money on the line. Who would not be afraid against that backdrop? We all have times of feeling fearful, of feeling anxious, of having sleepless nights. So, what I would say is don’t aspire to be fearless. There are other aspirations that are much more useful. For example, aspire to be resilient, aspire to be persistent, aspire to be of service to other people, aspire to be very true to your values and your strategy. Don’t let this mythology of what a “leader” is supposed to look like make you feel bad about your emotions. It’s not about having those emotions, it’s what you do with them.

That’s what I would say to young entrepreneurs and especially to women. Because I do believe that women hold themselves to a very high standard a lot of the time and have a lot of misconceptions of what they’re supposed to be living up to when it comes to leadership.

Biros: What an incredible perspective to have. Okay, one last question for you: what are you doing to celebrate?

Whiteman: So far, I’ve been too busy to celebrate! This just happened so recently. I would like to take a great trip with my kids. I don’t really know I have not had time to figure that out. People tell me I need to go to Disney. But right now, it’s still taking a little while to let it all sink in.

Biros: Wonderful! And Nancy, thank you so much for your time I really appreciate it.

Whiteman: And thank you! So nice to see you in person.

June 17, 2020

Will Australia’s Cannabis Program Follow Canada’s Lead?

By Marguerite Arnold

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The news is intriguing in a world overwhelmed with pandemic news. THC Global, a Canadian-Aussie company now raising money and signing global deals, has just bought a “clinic network” of 30 prescribing physicians that will be able to supply up to 6,000 Australian patients this year.

In doing so, this entity is clearly beginning to establish a pattern of expansion in a new medical market not seen so far outside of Canada. Namely being able to obtain the all-important prescription for one’s brand at the doctor or prescriber’s office which is affiliated with a certain producer. Pharmacies and dispensaries downstream have no discretion for any other product to sell if the brand is written right on the prescription itself.

And this marks a new step in an industry frustrated with the high prices and high levels of red tape in other international environments where more widespread medical cannabis reform has come.

The Situation in Germany
Germany represents, so far at least, the destination market of choice for Canadian cannabis firms (for the last several years at least). This is for several very sound business reasons (at least in theory).

german flag — Photo: Ian McWilliams, Flickr

The German medical market is the largest in Europe. Health reforms which swept the country at the time of reunification also created a system that is in its own way a hybrid of the more European (and British) NHS and American healthcare. Namely, 90% of the German population is on the system, but it is tied to employment and income. Freelancers, even of the German kind, must use private healthcare as must all non-passport foreigners. If you make over a certain amount of money (about $65,000), you must also pay for private healthcare. As the cannabis revolution rolls forward, many cannabis patients are caught in changing rules and a great reluctance by public health insurers to allow fast entry of any new drug, including this one. This is based on “science” but also cost.

Bottom line? Yes, the market is lucrative and growing, and yes, cannabis is covered under public health insurance, but the ability of any producers to be able to maintain a reliable, steady market of “prescribers” is highly limited. Furthermore, unlike anywhere else in the world, pharmacists play an outsized role in the process – namely because there are no chains (more than four brick and mortar outlets are verboten). Prices and availability vary widely across the country.

There are also no “online” drug stores where patients can send prescriptions in the sense that this vertical has developed in other countries.

Hospital dispensation is, for all the obvious reasons, highly expensive and generally prohibitive for the long term, if not serving much larger numbers of patients.

The Problem in the UK
Like Germany, the UK decided to launch medical “cannabis” – or at least cannabinoid-related drugs under the purview of the NHS, but there are several issues with this.

The problems start with the fact that the system remains a monopoly for one British company, GW Pharmaceuticals. The medication produced by them, including Sativex and Epidiolex is expensive and does not work for many patients that it is produced “on label” for (such as MS or childhood epilepsy).

And then of course, the largest group of cannabis patients anywhere (chronic pain) have been explicitly excluded from the list of conditions cannabis can be prescribed for under public health guidelines in the UK. This, like Germany, has created a highly expensive system where those patients who obtain the drug on a regular (and legal basis) have to have both private healthcare and obtain help through private clinics. While there are several chain clinics now forming in the UK, this is not the same thing as “buying” patients in the thousands – the model seen in Canada from the beginning of 2014.

The market has a lot of potential, in other words, but like Germany, via very different paths to market than seen in Canada, in particular.

Why Is Canada Different?
The development of the medical market came through federal change in the law around the turn of the century. Namely, after patients won the right to grow for themselves, via Supreme Court legal challenge, patient collectives gradually formed to grow and sell cannabis that was more “professionally” cultivated. This, in turn, became the right of private companies and indeed household names in the Canadian market saw buying patient pools as their path to financing on the equity markets as of 2014.

This is not widely popular within the industry. Indeed, the last legal challenge mounted by the industry to ban non-profit patient collectives fell apart in 2016 – the year that the larger Canadian companies began to look abroad to Europe.

It is also undoubtedly why, beyond the red tape they face in Germany and the UK if not across Europe, Canadian firms are looking to hybridize a model which worked well for them at least in the early days of capitalization of the private industry. And maybe Australia will be “it.” Stay tuned.

June 9, 2020

International Cooperation: The Next Generation of Cannabis Development?

By Marguerite Arnold

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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.

December 13, 2019

Aurora Medical Cannabis Flower Unavailable In Germany Pending Review By Authorities

By Marguerite Arnold

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For now, at least, Aurora is AWOL in German pharmacies.

Sources who did not wish to be identified from apothekes here confirmed to Cannabis Industry Journal that Aurora product was currently unavailable throughout the country. The same sources also confirmed that Aurora contacted them about the suspension.

The fallout over less than quality cannabis entering at least the Danish and German markets, as reported by CIJ repeatedly this year, continues to make waves, globally. This newest development seems to be a step up in seed to sale inspections of late as a response from governments who have to deal with normalizing cannabis laws and different standards no matter what else is going on.

That this development also comes on the heels of not only the scandals at CannTrust and Hexo (both Canadians with aspirations in the EU), but many reports on the ground from distributors and pharmacies in Germany of mouldy if not pesticide tainted cannabis ever since 2017, is also significant.

Substandard product is clearly coming from somewhere.

As CIJ also reported, this issue also appears to have flared between Holland and Poland this year right before Italy also cancelled one of Aurora’s cultivation licenses lately on the grounds of GMP compliance this fall.

High Quality Supply Chain Issues Are In The Room

This newest development with Aurora is the first sign that German authorities at least, appear to be taking notice.

As Marijuana Business Daily is reporting, the review is of a “proprietary step” in the production process related to a method used to ensure the shelf life of flower cannabis. Aurora has stated in return, that their “products are sourced from an EU GMP certified facility and are safe to consume.”

Sourced or not from a certified facility, the devil, when it comes to EU GMP, is in the details at the source. Not to mention the product on the ground as it ages. And those particularities, on a global level, are still being worked out in a process known broadly as “harmonization.”

When it comes to the cannabis industry in particular, this is also very much in the room thanks to two large treaties with North America of late. Namely CETA, the broad trade agreement between Canada and the EU, which, among other things replaces the old MRA pharmaceutical agreement that existed previously. And of course, the EU-US MRA agreement, which came into full force this July.

As the discussion between Poland and Holland this year demonstrates clearly, one country’s definition of GMP even within the EU can differ.

Product grown and processed in a foreign third-party country, no matter the designation of the actual facility itself in this environment, is bound to get a review. Especially cannabis from Canada.

Put in context of the market itself, this is even more significant, especially given Aurora’s presence in the German market not only as provider as the holder of most of the licenses (5) awarded to three cultivators – a title won with lots of blood on the ground. Not to mention many casualties – including of course the first tender bid itself.

Will This Impact The German Cultivation Bid?

In the current environment, with Aurora announcing retreats on construction in progress just about everywhere, both in Europe and at home, this could easily also be a warning shot across the bow by German authorities.

While the hijinks of the cannabis industry seem to get a wink and a nod just about everywhere else cannabis reform has come, that is not true on the ground here. Further, Germany very much is a land of laws and regulations. And the average German, no matter how much they kvetch about the same, has by now more or less accepted that medical cannabis that can help very sick people get better is ok. The issue of who should pay for it is another question. Regardless, none of the cannabis in the market here is what could be termed as “cheap.” The idea that such medicine might be of less than required medical quality is one that is, as a result, indefensible.

While nobody (so far) has come forward to the press from the patient side with proof that can be validated, there have been distributors and pharmacies discussing issues surrounding the quality of product for some time now too. None want to be quoted for this story, but the noted focus on seed to sale quality issues by all of the big producers (see Aphria of late as just one example), are clearly a response to the same.

It is also unlikely that Aurora will lose its cultivation licenses in Germany – although again, this review by the German government also may be a second look into the company’s finances and ability to build a high-class facility in the country capable of producing the five lots now required.

Their inability to service this contract seems unlikely on financial grounds, no matter how retrenched Aurora has been of late.

Given the current environment, however, the events of the last six months, and the reality on the ground, this latest inspection seems to be an almost inevitable warning shot across the bow to not only Aurora but all cannabis producers at a time when the first German cultivated medical cannabis (see ICC) is now in pharmacies.

Not to mention high quality product from other parts of the world. If the Canadians can’t cut it, the message seems to be, there are others who are now stepping into the ring who can.

September 24, 2019

Polish Authorities Halt Medical Cannabis Product Registration

By Marguerite Arnold

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In early September, Polish authorities halted medical cannabis product registrations.

It is still unclear what this was caused by. However, in conversations with the Dutch Cannabis Agency, Cannabis Industry Journal learned the Dutch government ran into significant problems with Polish acceptance of documents in the February 2019 timeframe. Further, CIJ has also learned that several other Canadian companies had apparently been trying to target Bedrocan products in Poland with this knowledge.

Even before authorities halted the registration process, it is clear that the often cut-throat game-playing seen in Germany frequently over the last few years, has also clearly entered the room just a bit east.

Is Cannabis Really Coming to Poland?

There is a national election in late October in Poland. There is a great deal on the line.

Including, of course, not just the dreams of Polish entrepreneurial hopefuls, but all of the largest cannabis companies on the planet. Poland has been a strategic and often unheralded market for most of them over the last 18 months. Aurora in fact, even announced its first import into the country last fall when the government announced a loosening of restrictions. And as the last country to enter into the EU-US MRA Agreement, with a conservative approach to cannabis at least in government, the country is ostensibly a big blue ocean for all things canna reform.

However, since most of the big companies use Germany as their product breakpoint, the news of a product registration delay nationally means that companies already in the room with EU-recognized product just got a big break.

Even if it is only short selling as much as they can into the market until product registration finally occurs.

A new kind of German-Canadian canna blitzkrieg of Poland is about to get underway this fall – certainly of the cannabis kind, although anyone with already registered EU product (see Germany for starters) has a big competitive leg up.

Cannapolitics Are In Play Across Europe

If this is the temperature in the room already, look for more machinations over the apparently pending Polish bid – although perhaps by that point, reform will have progressed far enough in Europe to prevent the same kind of local market hijacking by those with a public company and a will to dominate the market.

That said, expect backlash too, now from frustrated advocacy patient groups tired of more government blather about widespread reform that is clearly not mapped to come their way any time soon.

Here is the inconvenient and certainly unsolved reality in the room that so far has remained unsolved.

There is zero way that even the largest companies in the room can provide enough product, local producers are on the rise, and there is clearly a building “green-vest” kind of uprising in the burgeoning industry itself. EU local and national sovereign producers are getting into the game and in a big way.

The reality is that this plant provides relief to pain of several kinds – from patients to locally starved municipal and state budgets.

Recreational Is On The Longer Term Horizon – But Major Hurdles Remain

While the largest companies have clearly been in the room shaping reform policy and in ways that are not necessarily in the best interests of the overall industry itself, let alone patients, there is the real potential for backlash right now. Particularly in Europe which has heard all the wonder stories about the economics if not other impacts of cannabis reform.

Europeans – even in the industry here – who venture to American state markets in particular, but also Canadian outlets – are very much in envy. However, most also realize that the market here will evolve differently.

That is why there are now starting to be all kinds of trials on the map – and of the recreational and medical kind.

The culture is in the middle of a massive, cannabis shift. The early market entry created by the political and economic clout of the early movers was important.

But as the world turns ever more green, local politics, and even more importantly, sovereign cannabis production and even export is increasingly a political issue in the room.

April 29, 2019

Why International Trade Agreements Are Shaping The Cannabis Industry

By Marguerite Arnold

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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.

More specifically, they are highly technical trade agreements that are also called Mutual Recognition Agreements, (or MRAs).

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.

Want an example of the same? First on that list if not early in the game will now undoubtedly be Canadian-based Canopy Growth, with Acreage on board, headquartered in New York.

October 3, 2018

Quality From Canada

Protecting Intellectual Property In Canada: A Practical Guide, Part 1

By Richard Naiberg

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Cannabis producers are making large investments in new technologies to improve their plant varieties, production know-how and product formulations. At the same time, producers are working hard to create and promote more compelling, top-of-mind brand identities for their improved products. The series concludes with a 9-point outline of specific steps cannabis producers need to consider taking to protect their key intellectual property assets.

The value of these investments cannot be realized if competitors are allowed to copy and exploit the producer’s successes. Canada’s intellectual property laws can and should be used to protect cannabis producers from such predation. Invoking Canada’s laws to this end is not difficult and does not have to be expensive. It does, however, require specific, deliberate and early action.

This series of articles outlines the principal means of protecting intellectual property rights in the core technologies and marketing programs of cannabis companies. The series also highlights what any cannabis company must do to ensure that its own activities do not run afoul of another’s rights. No company wants to begin a new venture only to face a lawsuit for intellectual property infringement.

The series concludes with a 9-point outline of specific steps cannabis producers need to consider taking to protect their key intellectual property assets.

Trade Secrets: Protection For Confidential Know How

A trade secret is specific, commercially valuable information and know-how that is kept confidential within the company and cannot generally be reversed-engineered by outsiders. A trade secret provides protection over any type of information or know-how and is not subject to any expiry date. Trade secret protection is lost only when the information or know-how becomes available to the public.

As a best practice, defining the trade secret in a confidential document can be useful as a way of restricting access to the secretCannabis producers generate all kinds of valuable know-how that cannot be appreciated simply from an inspection of the vended product. Examples would include methods of crossbreeding, cultivation, harvesting, extraction and processing. Customer lists and other internal business structures and information may also qualify as trade secrets.

There are no statutory pre-conditions that must be met to obtain a trade secret. A trade secret is acquired simply upon the generation of valuable information or know-how that is kept confidential. As a best practice, defining the trade secret in a confidential document can be useful as a way of restricting access to the secret, and as evidence in proceedings as to the scope of the trade secret (an issue that is frequently in dispute in such cases).

For the trade secret to be maintained, the producer will need to take steps to ensure that access to the know-how and associated documents is restricted only to those who need to know the secret for purposes of carrying out their functions at the company. All personnel with access to the trade secret will need to be bound to confidence by employment agreement and/or by separate contract. When employees leave, they ought to be reminded of their obligations of confidentiality and must be prohibited from removing any documentation regarding the trade secret from the company. All outside companies who need access to the secret must sign non-disclosure agreements. It is typical for owners of trade secrets to be vigilant in their market surveillance and to engage private investigators when they suspect a trade secret has been stolen.

A trade secret’s very confidentiality provides its principal value. A competitor cannot copy what it has no ability to discern. However, when someone with access to the secret ‘goes rogue’, such as by using the know-how for his or her own account or for that of a new employer, the owner of the trade secret must act quickly and bring the matter before the Court. The Court has a broad discretion to stop the rogue and any persons or companies who learn the secret from the rogue from further dissemination or exploitation of the trade secret. The Court also has a broad discretion to craft an appropriate remedy to compensate the trade-secret owner for the wrong. If the action is brought before the trade secret is broadly disseminated, the trade secret may be reinstated and enforceable in the future. If the owner of the secret acts too slowly and the dissemination of the trade secret becomes too broad, the trade secret may be lost forever.

Adopting the use of trade secrets to protect know-how in the cannabis business does suffer from the fragility of the right itself. One disclosure, however inadvertent, can destroy the protection. In addition, a trade secret will not protect a company from a competitor who independently derives the know-how. Further, theft of the trade secret can be difficult to spot because, by its nature, the trade secret is exploited within the walls of the competitor company and is not evident in the marketed product. The owner of the secret will need to watch its competitors for telltale shifts in business direction and product offerings, particularly when those competitors hire the ex-employees of the owner of the trade secret. It is typical for owners of trade secrets to be vigilant in their market surveillance and to engage private investigators when they suspect a trade secret has been stolen.

Editor’s Note: In part 2 of this series, which will be published next week, Richard Naiberg will take a closer look at patents and how business can protect new and inventive technology in Canada’s cannabis industry. Stay tuned for more!

June 20, 2017

Cannabis M&A: Practice Pointers and Pitfalls When Buying or Selling a Cannabis Business

By Soren Lindstrom

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The Stage is Set

According to the Marijuana Policy Group, the U.S. cannabis industry is expected to reach more than $13 billion in sales by 2020 and create more jobs than the U.S. manufacturing industry. According to Viridian Capital’s Cannabis Deal Tracker, there were close to 100 M&A transactions in the U.S. cannabis industry in 2016 and approximately $1.2 billion was raised in equity and debt. As the cannabis industry has grown more mature and businesses begin to have more capital available, the M&A activity within the industry is poised to grow significantly over the next years to assist businesses gain necessary scale and take advantage of synergies and diversification.

The Obvious Wrinkle

U.S federal law has prohibited the manufacture and distribution of cannabis since 1935. The U.S. regulates drugs through the Controlled Substances Act, which classifies cannabis as a Schedule I drug (i.e., drugs determined to have a high potential for abuse with no currently accepted medical use and a lack of accepted safety regarding their use). Yet, more than 25 states have by now legalized cannabis for medical and/or recreational purposes and, as a result, there is a clear conflict between such state laws and existing federal law. To possibly help bridge that conflict, the U.S. Attorney General’s office in 2013 issued guidance directing the federal government not to intervene with state cannabis laws except in specific, limited circumstances, but, contrarily, the DEA has shown no desire to re-classify cannabis. To add to the confusion, President Trump and the new U.S. Attorney General have provided mixed statements and signals about their positions.

All of this means that it continues to be risky to acquire cannabis businesses. The requirements to legally grow, distribute, prescribe, and use cannabis for either medical or recreational purposes vary widely by country, state, and local jurisdiction, making it tricky to determine whether such businesses can be legally combined, in particular, across state lines.

Pick the Right Team of Advisors

When preparing to sell or buy a cannabis business, it is important to pick the right team of advisors. Your regular legal counsel, accounting firm or CPA may not be the right advisors for a cannabis M&A transaction. Choose a legal counsel that not only has experience with cannabis laws and regulations, but also has cannabis M&A experience and can offer expert advice on areas like IP, employment, tax matters, etc. Similarly, verify that your accounting firm or CPA has real experience with financial and quality of earnings analysis and due diligence.

Conduct Gating Due Diligence Up Front

In any contemplated M&A transaction, it is wise to prioritize your due diligence investigations. There will always be some more prominent risks and business objectives in a particular industry or with respect to a specific target business. It will be more cost and time effective if those specific risks and business objectives are prioritized early in the due diligence process. These can dictate whether you even want to pursue the target further before you dig into a deeper and broader due diligence investigation. Conducting gating due diligence up front is even more important in an industry like cannabis that contain complex and thorny regulatory hurdles.

So, before you spend money and time on a broader legal, business and financial due diligence investigation, have your legal counsel analyze and confirm that the potential transaction is feasible from a regulatory perspective. This will include whether it is possible to obtain or transfer necessary local and/or state licenses and whether a combination or sale can occur across state lines if necessary. Early on in the process, It is also advisable to request that the target business complete a legal compliance questionnaire or discuss with the target its regulatory compliance program, policies and training. Such up front due diligence will either clear a path to negotiations and broader confirmatory due diligence or flush out “red flags” that may kill a possible deal or require the buyer to investigate further before proceeding.

Important Terms and Pitfalls in the M&A Agreement

Generally, a sale or purchase agreement for a cannabis business does not appear to vary much from a similar agreement in any other industry. However, the complex environment and the premature nature of the industry impacts certain deal terms and processes in different ways from most other developed industries.

Here are few examples to keep in mind when preparing and negotiating a sale or purchase agreement:

Third Party and Governmental Consents: Buyer’s legal due diligence must focus on the consents that may be required from seller’s suppliers, customers, landlords, licensors or other third parties under relevant contracts. Additionally, the due diligence should focus on consents and approvals required by local and state regulators as a result of the sale. The M&A agreement should contain solid seller representations and warranties about all such consents and approvals and any such material consents and approvals should, from a buyer’s perspective, be a condition precedent to closing of the transaction.
Legal Compliance: A buyer should not agree to a boilerplate seller representation about the target’s compliance with laws. Be specific and tailor seller’s legal compliance representation to relevant state and local cannabis laws, regulations and ordinances. From a seller perspective, be careful and thoughtful about any appropriate exceptions (including the federal prohibition) to be disclosed to buyer in the disclosure schedules underlying the sale or purchase agreement.
Financial statements: The cannabis industry is very fragmented and consists of many small businesses. Many of these small businesses do not have financial statements prepared in accordance with GAAP and may consist of only management prepared financials. In that scenario, a buyer should have its financial advisor do an analysis of the financials available and ask seller to provide a representation and warranty about the accuracy and good faith preparation of the provided financials.
Escrow: Typically, a buyer will request some part of the purchase price be placed with an independent financial institution for a period of time post-closing as a source of recovery for losses as a result of breaches by seller of any of the representations and warranties in the definitive sale or purchase agreement. Due to the federal cannabis and banking regulations, many of the larger commercial banks will not provide financial services to cannabis businesses, in particular if the business touches the plant. The parties must therefore consider alternatives, including local financial institutions with more relaxed compliance requirements or perhaps place the escrow in a trust account of a law firm or other independent party.
Working Capital Dispute Procedures: Similar to the escrow, larger accounting firms generally do not provide services to cannabis businesses. Due to the rapid evolution of cannabis related regulations, if the terms of the transaction include provisions for a post-closing working capital/purchase price adjustment and related dispute procedures, it is advisable to not name an arbiter in the agreement. Instead, parties should agree to mutually select the arbiter if and when a dispute should arise.
Indemnification: Because of the tricky legal environment of the cannabis industry, it may be prudent for a buyer to request, at the very least, that certain parts of seller’s legal compliance representation and warranty not be subject to the “regular” caps, deductibles and other indemnification limitations. Also, if a buyer has unearthed a significant issue in its due diligence investigation, it should consider asking seller for a special indemnity for such issue that would be indemnifiable regardless of buyer’s knowledge of the issue and not be subject to the general indemnification limitations.
R&W Insurance: If there’s a lot of competition for the purchase of a target, particularly in a bidding process, it is now common for buyer to offer to purchase a representation and warranty insurance policy (“R&W Insurance”) to possibly gain an advantage by limiting the seller’s post-closing indemnification exposure. The good news is that many of the R&W Insurance carriers do offer such insurance in connection with the sale and purchase of cannabis businesses. However, typically, R&W Insurance cannot be obtained for insured amounts of less than $5 million. Experienced M&A counsel can advise of the advantages and disadvantages of R&W Insurance and assist in the negotiation of the related terms.

The above are just some examples of what to expect in a cannabis M&A transaction. Every M&A transaction will have its unique issues that will need to be appropriately reflected in the sale or purchase agreements and good M&A practices will continue to evolve with the industry. If you are an owner of a successful cannabis business, buckle your seat belt and be prepared for an exciting ride as the industry gets closer to significant consolidation.