Michael Sassano is a CEO and Chairman of the Board for SOMAÍ Pharmaceuticals, a leading EU-GMP European pharmaceutical and biotech company. SOMAÍ is the largest and most advanced cannabis production plant in the legal European markets, producing therapeutic goods and registered active components.
Michael Sassano brought with him his product development skills from the American market. He has been sharing his views in our recent article about branding in medical cannabis industry. Now Michael Sassano discussed Multi-Country Operators in Europe.
New European MCOs: Multi-Country Operators
European cannabis markets are heating up, and virtually every country is buzzing about regulatory change since Germany decriminalized cannabis and removed it from their narcotics list. Now, countries must decide whether to adopt strict or loose medical regulatory frameworks.
European Multi-Country Operators, or MCOs, are becoming the dominant forces in medical cannabis markets around the globe.
MSO versus MCO
One can draw comparisons between multi-state operators in the United States and multi-country operators in the European Union, but there are significant differences between these medical cannabis distribution models.
American Multi-State Operators
The typical U.S. Multi-State Operator (MSO) is the best model for capturing and adjusting margins as prices compress over time.
In the early days of regulated cannabis in the U.S., when prices were high, most independent growers, manufacturers, and even white-labelers were able to flourish. However, prices quickly compressed, and these companies didn’t remain profitable for long.
To survive and flourish, cannabis companies vertically integrated by adding distribution and retail operations. Those that didn’t vertically integrate lived at the mercy of retailers and price compression. Today, only a few niche players still exist that are not vertically integrated.
As time went on, more states legalized medical cannabis, and due to the state-by-state cannabis laws in the U.S., products cannot legally cross borders. Each new state required new vertically integrated cultivation, manufacturing, and retail operations, which marked the start of MSOs that own the entire vertical in many states.
EU Multi-Country Operators
EU Multi-Country Operators (MCOs) are also vertically integrated; they own their own cultivation and manufacturing facilities and make extra profits on the sales side. However, a major difference between MSOs and MCOs is that MCO cultivation and manufacturing facilities can export to any country that accepts cannabis products.
EU MCOs can transport their product because medical cannabis is regulated like a medical product in the EU and carries the European Union Good Manufacturing Practices (EU-GMP) herbal pharmaceutical seal of quality. So long as an MCO’s manufacturer and cultivator are EU-GMP certified, MCOs can sell their products to pharmacies and distributors in any European country with regulated medical cannabis.
With the MCO model, one infrastructure can service many countries, which is a massive positive of MCOs versus MSOs.
Vertical sales and distribution
It’s trickier for MCOs to achieve complete vertical integration to capture the final margin.
MSOs own dispensaries because it is the easiest way to sell cannabis, even though it requires the MSOs to build and license specialty stores. In the EU, however, pharmacies sell products that MCOs produce, and delivering products to pharmacies requires either a pharmaceutical distributor or a specialized cannabis distributor. Though there are nearly 300,000 pharmacies in Europe — not to mention all those in non-European countries — there is little margin in pharmaceutical distribution or pharmacy sales.
The cost of fully vertically integrating by building or acquiring special infrastructure far exceeds the cost of using existing infrastructure. Using pharmaceutical distributors, pharmacy sales networks, and existing pharmacies may only cost the company 10-15% of the margin.
A significant challenge arises because cannabis is a narcotic in most countries and, therefore, not accepted enough to be a widespread pharmaceutical product. Accordingly, fewer distributors and pharmacies are willing to carry it.
Cannabis entrepreneurs saw this hesitancy play out in countries like Germany that legalized medical cannabis relatively early. These entrepreneurs created specialized large distributors and pharmacies that only serviced the cannabis industry. Although this strategy primarily concerns flower products, these groups buy from independent growers and resell to specialized pharmacies.
The uneven impact of specialized cannabis distribution organizations
Specialized cannabis distributors take 50 to 100% profit, or more, on these transactions. Pharmacies then take almost 50-100% profit in addition to that wholesale price. To illustrate, the cultivator might sell cannabis flower to the distributor for 3 euros/gram. The distributor sells the product to pharmacies for 6 euros/gram, and the pharmacy sells it for 12 euros/gram. The cultivator is already at the bottom of the pyramid, so any price compression causes more stress to their business models than distributors or pharmacies.
MCOs pursuing direct sales
Seeing this margin issue and being unable to reach the broader networks with lower sales margins, vertically integrated MCOs developed sales teams that communicate with doctors, pharmacists and other sales avenues.
These salespeople can reach out directly to pharmacies and drive prescriptions through doctors’ interactions with patients. Pharmacists are typically more knowledgeable about cannabis, especially when it comes to flower. However, the doctor is ultimately the one who writes the prescriptions for extracts.
To be a vertically integrated medical cannabis company that offers both flower and extract products, MCOs need to engage doctors and educate pharmacists to capture the margin of cannabis distributors.
Sales teams are very expensive, and not all cultivators can invest in going directly to the end buyer. With this framework, MCOs also need local inventory management staff, sales employees and managerial sales support teams for each country since they also need a local pharmaceutical distributor willing to work for lower-than-standard pharmaceutical margins. However, investing in sales teams allows MCOs to become as close to vertically integrated as they need to be.
Medical cannabis clinics and direct sales
Another avenue driving sales is the medical cannabis clinic. Specialized medical cannabis clinics are one of the fastest-growing ways for patients to get cannabis prescriptions, as they can advertise their services and provide a relatively simple avenue for access.
However, the price a patient is willing to pay for a prescription has now hit 1 euro since clinics are fighting for patient acquisition. This is not surprising since, in the early days of medical cannabis legalization, the U.S. and Canada also saw prescription prices drop to zero. Doctors won’t work for free, so clinics must still pay in-network doctors between 50 and 100 euros for their time and consultations; having in-house doctors is very expensive.
Cannabis clinic business models for maximum profitability
So, how can clinics make money?
As one option, they can forge deals with manufacturers and cultivators for bulk discounts of around 25%.
Alternatively, they can own the manufacturing and cultivation, like Curaleaf, and bring in profit by selling products through a clinic. In this situation, the clinic becomes an extension of the sales team.
Finally, some clinics may own their own pharmacy. This setup gives them the closest possible thing to true vertical integration, where they control the margin from seed to sale. When the clinic owns its own pharmacy, it can generate prescriptions and dispense them in the same location — or even by delivery.
The future of European MCOs
As more regulated cannabis markets emerge in the EU, MCOs will be required to conform to each country’s laws. They will also have to make country-by-country decisions on capturing the entire margin and determining which investments make sense for that country’s volume.
Merger activity, new medical cannabis companies, and structures will emerge as MCOs lead. Europe’s MCOs are the new MSOs. Though not without drawbacks, capturing margin by vertically integrating with sales or clinics will continue as the trend in the future.
The EU and global cannabis markets don’t have dispensaries, but they have existing massive pharmacy networks. Either way, spreading products around the globe and getting them into patients’ hands requires creativity.