Your latest cannabis business info from Europe

Your latest cannabis business info from Europe

2024-07-26

Sassano: Why future EU medical cannabis branding is essential

Sassano: Why future EU medical cannabis branding is essential

Michael Sassano is a CEO and Chairman of the Board for SOMAÍ Pharmaceuticals, a leading EU-GMP European pharmaceutical and biotech company. Bringing with him his expertise in product development from the American market, SOMAÍ is the biggest and most sophisticated cannabis production plant in the legal European markets, creating medicinal products and registered active ingredients. He has been sharing enthusiasm about SOMAÍ’s developments last year. Now Michael Sassano shares his views regarding branding in the medical cannabis market in below article.

Why future EU medical cannabis branding is essential?

Increasingly, global medical cannabis markets are advancing rapidly. However, regarding branding, the same top brands continuously occupy the top sales positions in the United Kingdom, Germany and Australia. Additionally, smaller labels that are distributors and clinics keep growing in numbers and less in volume than the major global brands.

As United States and Canadian brands like Cookies start flexing their product lines overseas, this trend will further uproot the European Union models of branding white-label clinic and distributor brands as large and trusted global corporations and global brands reach larger demographics quicker.

The state of EU medical cannabis brand distribution

The largest global brands are vertical operators that own cultivation, manufacturing, and sales arms in individual countries. Curaleaf, Tilray, Aurora Cannabis, Little Green Pharma, and SOMAÍ Pharmaceuticals are the top names you see in most countries now.

How advanced your distribution is depends on how you control margin and drive prescriptions. Most operators have their own sales teams driving the prescriptions and sales in each country. Some have warehousing in specific countries. However, as warehousing has become plentiful and increasingly cost-effective, it doesn’t pay to own the distribution unless country volumes top over 10 million euros in sales. Some groups like Curaleaf even own branded clinics.

Rather than owning cultivation and production, some notable clinics and distributors have large selections of white-label products. Cannatrek and Montu are the best examples of global brands that have succeeded in reaching out past their local markets and are stretching to different countries. Others are trying to complete their verticals since the future means reduced prices and better control of their margins.

How do medical cannabis brands turn a profit in the EU?

The economics are fairly simple. You can sell your product to wholesalers if you own a cultivation and/or manufacturing facility. Those wholesalers will most likely sell to pharmacies at 25% to 100% the price, with retail sales again 25% to 100% increasing in price from there. This means there is a 2X to 4X difference between the wholesale and final patient sale prices. Clearly, much margin is left on the table.

The same groups that own a cultivation and/or manufacturing facility can invest in their own sales teams to sell directly to pharmacies and use third-party warehouses to pick up that extra 25% to 100%margin since pharmacies all want an additional 25% to 100% margin, depending on the country. In this example, the extra cost of sales teams should more than offset the margin gained if volumes are decent. Notably, as time passes, the pharmacy margin and warehousing costs will decrease.

Suppose the same cultivators and manufacturers own clinics or even clinics and pharmacies. In that case, they can drive the prescriptions through the clinic and pick up the entire value chain margin through the pharmacy. These margin issues may be relatively minor when prices are high. However, as margins decrease, cultivators and/or manufacturers must own, at minimum, sales teams and, at maximum, the clinic and pharmacy combination.

How do EU white-label medical cannabis brands turn profit?

Another interesting paradigm when margins squeeze is what happens to white labelers and local clinics and distributors acting like a brand. The basic economics of a white label is roughly 60-70% to the buyer and 30-40% to the cultivator or manufacturer. Already, white labels have squeezed cultivators and manufacturers to the insolvency levels of cheapest pricing. There is not much further they can go down. So the buyer, who is the white-label brand, starts to lose margin.

Already, these white-label brands are barely profitable, so any drop, little or big, will cause them financial stress. Since they already own their distribution or clinic and pharmacy, there is little they can do except buy the cultivation facility they are white labeling, like Curaleaf recently did. Curaleaf — already owners of grows and manufacturing — recently purchased a cultivation operation in Canada that was supplying their German and U.K. entities with flower. So, when these reverse buys happen, most sales organizations must be more skilled in managing cultivation or manufacturing facilities to capture margin, as Curaleaf did. The more likely scenario is that these branded white labels go out of business slowly unless they can extend to other countries and capture more margin by growth outside a singular local market.

How does an EU medical cannabis company become a successful global brand?

Companies with hopes of being big brands often are following the trend of hundreds of pop-up white-label local brands that own clinics and distributors. Most rarely go global to develop that true brand recognition. Although local players and brands will always exist, their combined market shares will likely never reach the larger groups with the capital from owning more of the margin in a vertical model.

On one side, these clinics need to create margin buffers by selling products to survive, but despite the burdens of prescribing, there is an inherent distrust with clinics prescribing their own brand. Most will also only be local players, and they will have to compete against large names with large portfolios of products. If they cannot spread to be a global brand, they will still occupy a good part of local markets until larger groups spread throughout growing countries. An organization simply needs capital, time, and market growth to encourage strongly capitalized companies to reach out further and invest more.

How does the future global cannabis brand landscape look?

Many local EU brands are waking up to big brand power, and although some will make it, most smaller brands will remain just that: smaller brands — larger players with capital dominate U.S. and Canadian markets to innovate and expand the product. There are many craft and local players in all markets. In time, brands will merge or be bought by bigger groups that see the significance in acquiring rather than building. In the end — just like large beer companies or any industry — there will be large owners of many brands that will capture large market shares and craft brands that have their smaller combined market share.

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