Cannabis legalisation in Mexico brings the promise of new markets
Julio Prieto and Carlos Gomez of Goodrich examine how the legalisation of cannabis in Mexico would change the country’s business and legal terrain
With the announcement in January 2020 of reforms proposed by the Mexican Congress to the legal framework for the production, commercialisation and consumption of cannabis, the traditional prohibitionist policy that has been in force since the 1920s seems to be coming to an end. The imminent changes bode well for the opening of new markets focused primarily on sectors such as healthcare, food, cosmetic, industrial products and products for recreational purposes made from cannabis and its derivatives. Once the congress approves the reforms, Mexico will become a high-potential market for national and foreign company investments in cannabis sectors, enabling it to keep up with the world's great economic powers, such as the United States and Canada.
Regulation of cannabis and derivative products
Last January 18, an unofficial version of the amended draft Law for the Cannabis Regulation prepared by the United Commissions of Justice, Health and Legislative Studies became public. The document establishes procedures and guidelines by which activities that are part of the production and supply chain of cannabis and derivative products will be regulated by the Mexican Institute of Cannabis. This agency will set the rules for those interested in the following pursuits connected to cannabis: planting, cultivation, harvest production, transformation, labelling, packaging, promotion, advertising, sponsorship, transportation, distribution, sale, commercialisation, carrying and consumption of cannabis and its derivatives for personal use, and scientific and/or commercial purposes. It will define the scope of this new industry and allow the development of a new economic sector that will cover activities from obtaining the raw material through to its commercialisation and consumption.
The main objective that the Mexican state must seek to achieve with the legalisation of cannabis is to develop a regulatory framework that applies to all industrial sectors related to these activities, including the recreational sector, in an attempt to achieve an optimum balance among commercial interests, economic development and public health. The Mexican state must also prevent the growth of monopolies, and at the same time promote economic and industrial development in the country. While the announcement has undoubtedly piqued the interest of many companies, it should be noted that the Senate is still debating the bill, which must be approved no later than April 30 2020. According to the legalisation deadline extension granted by the Mexican Supreme Court, this deadline cannot be re-extended.
The market for potential cannabis and derivative products
At present, there are at least 10,000 known industrial applications of cannabis within the food, cosmetics, nutritional supplements, pharmaceuticals, construction, and other sectors. The overall market is expected to reach a global growth of $10.6 billion dollars by 2025 according to a report by the Grand View Research firm. The report explains that Canada and the United States have positioned themselves as the leading markets in which to sell cannabis, derivative products and raw materials. However, it is estimated that Mexico could position itself on par with these countries in the short to medium term, since Mexico has twice the population of Canada and is considered the second largest producer of cannabis in the world.
According to estimates made by the Mexican Association of the Cannabis Industry (ANICANN), there are 7.2 million recreational cannabis users, which could generate profits of up to $5 billion dollars. The present bill contemplates the legal carrying of up to 28 grams of cannabis for personal consumption. However, there are other uses in a potential market of approximately 40 million people who could consume cannabis products or cannabis derivatives via cosmetics and medicines. There are also other indirect uses, for example, in the textile and automotive sectors. It offers great opportunities for the cannabis industry to expand into countries where regulation allows for production and commercialisation of cannabis and derivative products.
Taking as a reference point the development and economic growth of cannabis sectors in countries that have authorised its use and consumption, such as the Netherlands, United States and Canada, we can assume that Mexico will maintain a similar growth trend, since the estimated number of possible direct and indirect consumers is significantly higher; herein lies the true importance of more flexible and less restrictive regulation that will translate into concrete action to benefit the domestic economy and will ensure that Mexico is a good option for investment and profit.
In one example, according to Brightfield Group last year, the Canabidiol (CBD) medicine market in Mexico generated $18 million and is expected to generate $258 million by 2023. Also according to the study Entering the Fold: CBD and Cannabis in Latin America Report 2019, sales in Latin America by 2023 are expected to reach $448 million.
With respect to the use of cannabis in the pharmaceutical sector, there is increased scientific evidence that cannabis can be used as an analgesic, antimicrobial, anxiolytic, neuroprotective and antidiabetic, and specifically addressed to treat or prevent conditions such as cancer, diabetes mellitus, glaucoma, epilepsy, anxiety, depression, sleep disorder, chronic pain, multiple sclerosis, nausea and vomiting, bronchial asthma, cerebral ischemia and Tourette syndrome. A considerable percentage of the Mexican population suffers from many of these diseases and cannabis-based medications constitute an alternative for patients who no longer respond to conventional medicines.
The major challenge facing companies that intend to venture into the Mexican pharmaceutical market will be to provide reliable scientific evidence demonstrating the benefit of the product and the corresponding laboratory tests and clinical trials to prove the safety, efficacy, and quality of the medicines. There is a real probability that cannabis-based medicines will have stricter regulations than conventional medicines; however, they will certainly be regulated on a similar legal basis to the requirements that conventional medicines must meet. In this sense, it is essential for companies to schedule any laboratory tests that may be necessary to demonstrate the mentioned parameters prior to initiating the process for obtaining the corresponding marketing authorisations.
On the other hand, cannabis-based products for personal, alimentary and other industrial uses such as cosmetics, nutritional supplements etc. will certainly have more lenient regulations than cannabis-based medicines. However, the controls will probably be more rigorous than those currently applied to products in the same category that do not contain cannabis or its derivates. These controls will be established once the legalisation of cannabis is approved and the corresponding regulations are issued.
This will be an exhaustive process due to the impact on public health which might result from the use of cannabis-based products. For this reason, companies should seek legal expertise to avoid complications during the authorisation process.
In the global context, a large number of companies that commercialise cannabis-based products have demonstrated in different international forums and congresses their interest in venturing into new markets, particularly in countries where the approval of cannabis-based products is relatively recent or just starting to show signs of legalisation. In this regard, once the free marketing legalisation of cannabis-based products in Mexico is approved, a challenge for companies will be compliance with the regulatory requirements established for commercial operations in Mexico, which may constitute a problem of delayed entrance into the Mexican market. In addition to wasted time and financial resources, this could result in a brand and product lagging behind competitors. For this reason, detailed implementation of a solid commercial strategy, in addition to a legal-regulatory strategy, is of key importance.
Strategies for entering the Mexican cannabis market
National and/or foreign companies that produce and distribute cannabis-based products should take into account in their business strategies the evaluation of future scenarios for alliances with strategic partners, mergers, and correspondent firms as part of the legal-regulatory area.
Working with strategic partners can help to facilitate the processes involved in the supply chain of cannabis-based products so that the company is able to reach different market segments in the expected times at an accelerated growth rate. The processes involved in the chain supply include planting, cultivation, harvesting production, processing, labelling, packaging, promotion, advertising, sponsorship, transportation, distribution, and the final product commercialisation. While companies are free to enter the market individually, the election of specific suppliers, intermediaries, warehouses and distributors who are willing to share objectives, benefits and costs should be fundamental.
Regardless of the elected business model, national and/or foreign companies that intend to enter into the Mexican cannabis market will need legal-regulatory assistance prior to starting commercial operations. Firms that assist and provide expertise in this process will be managed within a legal framework established by the authorities. Building these relationships can help avoid reduced profitability, business losses, penalties (such as the suspension of activities), product seizure, possible fines, and, in the worst case, criminal penalties.
One of the many advantages of hiring a legal firm that is familiar with the Mexican legal market is assistance with contacting commercial and logistic partners in Mexico based on a specific business model to generate a supply chain with value-added benefits for the parties involved, which is essential for the development of a new emerging market for recently approved products.
Although companies are faced with uncertainties regarding the current rules on the commercialisation of cannabis-based products, the imminent legalisation of these products and the opening up of new markets is expected. The primary goals for companies looking to position themselves in this new and emerging market should be to:
accelerate the marketing authorisation process;
build relationships with local business partners and legal firms for the development of a legal strategy that will avoid possible delays derived from legal and/or regulatory complications;
generate alliances with companies in the field in order to acquire support and market knowledge about compliance with the requirements established by the authorities that might facilitate the process in the supply chains.
Julio Prieto is a junior partner at GRA specialised in intellectual property and regulatory affairs. He has extensive experience in trademark filing and prosecution, intellectual property rights, intellectual property protection, IP acquisitions, due diligence, trademark advice, trademark filing, prosecution and enforcement, non-traditional trademark protection and enforcement, trademark and patent licensing and assignment, trademark infringement, trademark oppositions, copyright protection, copyrights licensing and infringement, software protection and licensing, development of franchises, franchise agreements, NDA agreements, distribution agreements, commercial agreements, general data and image protection, co-branding agreements, appellations of origin, authorisations of use, regulatory law, regulatory advice, official standards certifications, products labelling, marketing authorisations, importation permits, marketing authorisation modifications.
Carlos Gomez is an associate at GRA specialised in healthcare and life sciences and intellectual property. He has extensive experience in regulatory affairs, pharmaceutical and medical devices law, pesticides and fertilisers regulation, cosmetics, food and dietary supplements, alcohol and tobacco. He has worked in the public sector at COFEPRIS. His practice focuses on internal audit visits for standards compliance verification in manufacturing sites, drafting, submission and monitoring of operation licence applications, good manufacture practices (GMP) certificates, marketing authorisation applications, free sale certifications, labelling, import and export permits, product registration, advertising authorisations, administrative proceedings, pharmacovigilance, sanitary responsible services, filing patents and defending patent infringement and cancellation actions concerning marketing authorisations.