Colombia's budding medical marijuana industry needs financial services fix

Colombia has been hit by 'green gold fever' since 2016, when a law was passed paving the way for medical and scientific use of cannabis and its derivatives.

In less than two years, some 33 companies have been created that have permits to produce medical products from this plant, aspiring to become players in an industry in which the South American country has everything in place to become a major power.

In addition to the country's tragic experience with the illegal cultivation of coca leaves, its geographical location makes marijuana production much more economical than in other latitudes where there is already a consolidated industry, such as Canada, where producing a gram of cannabis costs around US$2.5, compared to just 10 cents in Colombia.

As the scientific world sees in medicinal cannabis a solution to opioid-derived drugs that have triggered a public health crisis in countries like the United States due to their high potential for addiction, Colombia sees an opportunity to generate new sources of income.

Such is the optimism that the Colombian government requested a quota of 40.5t of marijuana buds, equivalent to 44% of world production in 2018, from the UN's International Narcotics Control Board (INCB) to supply the needs of the firms that work in this field.

José Manuel Restrepo, chancellor of Universidad del Rosario in Colombia, said recently in a forum held in Bogotá that, based on a study conducted by that university, production of drugs from marijuana derivatives could generate profits of US$1bn per year for the local economy in a first stage and up to US$4.3bn per annum in the long term. The academic stressed that the positive impact on GDP would be 0.2% to 0.5%, according to newspaper El Espectador.

Obviously Colombia is not alone in this business. According to financial services firm Canaccord Genuity Group, legal sales of marijuana and its derivatives (for medicinal and recreational use) in Canada will exceed US$4.5bn in 2021, while consulting firm KPMG said that this market will reach a value of US$2bn in Mexico in the coming years.

Colombia, famous as a coffee-producing nation, is a potential market of 50mn people, and companies such as Colombia's Medcann and Canada's Khiron Life Science have been "evangelizing" the medical community about the benefits of the use of marijuana-derived medicines for treatment of anxiety, depression, post-traumatic stress disorder, epilepsy, neuropathic pain, nausea and vomiting in patients undergoing chemotherapy, among other medical treatments.

Exports are also key in the strategy of the various players in this budding industry. While more countries join the wave of legalization, the target markets are currently Australia, Argentina, Chile, Mexico, Peru and Canada. The latter is the most attractive, since it is expected to approve sales of marijuana for recreational use this year. Once that happens, the country is expected to consume all of its domestic production, leaving room for imports.

For this reason, it is not surprising to find Canadian investors and experts working on the industry's most important projects. For example, Khiron and PharmaCielo are backed by Canadian capital and have a presence in both countries, while Medcann is supported by the know-how of Canadian scientists.

With an investment of around US$20mn each, Khiron and Medcann are vertically integrated, since they have their own crops, genetic development, production and sales teams. Their laboratory-grade medicines (particularly oils) will likely be available as of 2019.

Medcann CEO Jon Ruiz told BNamericas that the company has had "several rounds of financing, with a large majority of Colombian and private capital." An IPO is not currently part of the firm's plans.

Meanwhile, Khiron, established in Canada and with a subsidiary in Colombia, has local and foreign capital raised through investment rounds and it plans to go public on the Toronto Stock Exchange in May with the help of Adent Capital Corp, with whom it recently merged.

Although the expectation generated is clear in the appetite of investors, the banking sector has been cautious. Ruiz explained that the financial industry has reacted "with a great deal of conservatism. By definition, banking is conservative and in this case it has been demonstrated," he said.

"As an industry we have had some problems with being able to access international resources with Colombian banks," Ruiz said.

The founder and commercial manager of Khiron, Andrés Galofre, said that the relationship with the financial services sector is one of the industry's main challenges. "Progress has been made, but it's an issue in which all those involved must work together to demonstrate the benefits of medicinal marijuana," he told BNamericas.

Although the companies have bank accounts, some have had problems with currency monetization. "They are worried that banks won't allow the flow of funds and will delay their development plans," said Rodrigo Archila, president of the Colombian association of cannabis industries, Asocolcanna.

"We're founding partners of Asocolcanna, the association that was created to provide legitimacy to this industry," Khiron's Galofre said.

The problem with the banking sector lies in the US. Although production, distribution and consumption of medical cannabis is permitted and regulated in 29 US states, and marijuana has been decriminalized for recreational purposes in eight states, the US federal government still considers any activity involving the plant as illegal under the Controlled Substances Act.

This leads to two challenges for the industry at global level: on the one hand, it inhibits scientific research because marijuana products are not regulated by the same system as traditional pharmaceutical drugs in the US; on the other, some financial entities will  place roadblocks, particularly if parent companies are located in countries where the production and sale of marijuana are linked to money laundering.

In the case of Colombia, Archila told BNamericas that progress has been made in reaching an understanding with the financial sector.

"During the last two months we have interacted very intensively with the private banks. When the rigor of an industry that is pharmaceutical in nature becomes widely known, with the best and most demanding harvesting, production and transformation practices, we expect not to have any problems," he concluded.

In the meantime, various countries in Latin America and around the world are legislating in favor of legalizing medicinal marijuana, which would yield progress towards establishing high standards of quality and a more fluent relationship with the international financial system.