The production, refinement and sale of medicinal cannabis (which is typically low in the psychoactive compound tetrahydrocannabinol, otherwise known as THC) is a high-growth industry and a lucrative emerging market. Nonetheless, the authorisation process under the NDA to lawfully manufacture a medicinal cannabis product remains complex. Medicinal cannabis in Australia is regulated under a mixture of changing international, federal and state laws. Unless manufactured or sold in accordance with the NDA or state licensing regimes, cannabis remains an illegal drug in Australia.
This article provides a general introduction to the Australian medicinal cannabis product licensing and permit application regime. In particular, it considers the basic elements of an application under the NDA for a licence to produce or manufacture medicinal cannabis products. We also consider some of the issues associated with regulatory environment for medicinal cannabis in Australia.
Australia’s medicinal cannabis industry continues to flourish. Between November 2016 and 15 January 2019, the Office of Drug Control (ODC) has granted a total of 26 medicinal cannabis (cultivation and production) and 20 manufacturing licences.
Chapter 2 of the NDA
Chapter 2 of the NDA establishes a federal licensing regime for medicinal cannabis in Australia, which is administered by the Commonwealth Office of Drug Control (ODC). There are two types of licences (Cannabis Licences) available to prospective medicinal cannabis producers under the NDA:
- a medicinal cannabis licence, which authorises the growing and production of cannabis and cannabis resin and related processes; and
- a manufacturer licence, which authorises the extraction of cannabis and cannabis resin and related processes, including refinement, processing, concentration and transformation into other drugs.
In addition to a licence, a prospective medicinal cannabis producer will also require a medicinal cannabis permit. Educational institutions, pharmaceutical companies and other scientific organisations can obtain, separately, a cannabis research licence.
As a threshold requirement before commencing an application for a Cannabis Licence, an applicant must be able to demonstrate to the ODC that the medicinal cannabis product will be produced for the purpose of either:
- research into medicinal cannabis products;
- clinical trials;
- supply as an unregistered medicine under the Therapeutic Goods Act 1989 (Cth) (TGA); or
- supply as a registered good subject to the TGA.
Consequently, applicants seeking to produce medicinal cannabis products for sale into the general consumer market will also need to consider registering their product under the TGA.
Fit and proper person obligation
In an effort to combat organized crime and/or the abuse of medicinal cannabis crops, the NDA imposes an exacting character test on prospective applicants. Applicants (including corporate applicants) will need to satisfy the ODC that:
- they are a “fit and proper person” to possess a Cannabis Licence; and
- they have not engaged in conduct (or in the case of corporate applicants, the directors have not engaged in conduct) “that constitutes a serious offense during the 10 years immediately before the date of the application”.
The fit and proper person obligation extends not only to the applicant but also to “relevant business associates”, who are required to demonstrate they are fit and proper persons “to be associated with the holder of a medicinal cannabis license”. Although no definition of “fit and proper” is provided in the NDA, the phrase has a well-established meaning at general law that involves a consideration of the honesty, good character and integrity of a person – including an assessment of any fraudulent and criminal behavior or disregard for the law.
The ODC has broad discretion to investigate any business associates of an applicant whom it is “reasonable” to take into account in the course of an application. An applicant’s relevant business associates may include:
- persons who have the ability to influence the conduct of your enterprise, either due to having a financial interest or through other means;
- immediate family, including parents, siblings, partner and children over 18; and/or
- any other connections who have the ability to influence the applicant’s business decisions.
Therefore, both corporate and individual applicants will need to give serious consideration as to the reputation and standing of any persons to be involved in the enterprise that will be the subject of the Cannabis Licence.
As the industry’s demand for investment grows investors looking to capitalise on medicinal cannabis licences and/or invest in licensees should be wary that the Narcotic Drugs Act 1967 (Cth) (NDA) imposes demanding obligations on “business associates” of licensees – a wide-ranging qualification that potentially includes shareholders, directors and other entities or arrangements which might profit from corporate medicinal cannabis licensees.
Investors who are deemed business associates of a medicinal cannabis licensee may need to satisfy the ODC that they are a “fit and proper person” to be associated with a license. In this regard, the ODC has the discretion to consider investors:
- criminal history;
- financial background;
- character and associates; and
- their reputation, business experience, and integrity.
Failure to satisfy these criteria can result in the alteration or revocation of the relevant license, which may be fatal to the business.
Who are “business associates” of a medicinal cannabis licensee?
To determine whether they are subject to the fit and proper person obligations of the NDA, an investor must first determine whether they are a business associate of the medicinal cannabis licensee for the purposes of the NDA.
Section 4 of the NDA provides “two or more persons are business associates in relation to a business” if both of these people:
- hold a “relevant financial interest”, or are entitled to exercise a “relevant power” in the business; and
- are able to exercise a “significant influence” over, or with respect to, the management or operation of the business because of that interest or power.
A “relevant financial interest” in relation to a business is defined under the NDA as “any share” in the capital of a business and/or “any entitlement to receive income derived from the business.” A “relevant power” in relation to a business, “means any power, whether exercisable by voting or otherwise and whether exercisable alone or in association with others to participate in any directorial, managerial or executive decision of the business; or to elect or appoint any person to any relevant position in relation to the business.”
Although there is presently no case law on these particular sections of the NDA, equivalent provisions under the Corporations Act 2001 (Cth) and other legislation have been interpreted broadly by courts to reflect the spirit of the law in regulating informal agreements, understandings and arrangements whereby parties obtain direct or indirect control over a company’s affairs.
Investors should thus adopt a conservative approach in determining whether their involvement with a medicinal cannabis licensee may result in being deemed a business associate of the licensee (within the meaning of the NDA).
Fit and proper person criteria
Should an investor be deemed a business associate of a medicinal cannabis licensee, sections 8A and 8B of the NDA prescribe the “fit and proper person” criteria they will need to satisfy to avoid disciplinary action from the ODC (including license revocation).
In determining whether a corporate entity is a fit and proper person for the purposes of being associated with a medicinal cannabis licensee, the ODC can have regard to (amongst other things):
- the connections and associations that the body corporate, its directors and officers, have with other persons (including but not limited to relatives of directors and officers);
- the previous business experience of the directors and officers of the body corporate, and of the shareholders of the body corporate who is presently in a position to influence the management of the body corporate;
- whether the body corporate has a sound and stable financial background or is in financial circumstances that may significantly limit the capacity of the body corporate to comply with its obligations under a license; and
- whether the directors and officers of the body corporate are of good repute, having regard to matters going to their character, honesty and professional and personal integrity.
For natural persons, the ODC can similarly have regard to:
- any criminal convictions or civil penalties;
- financial background or financial circumstances;
- reputation, honesty, and professional and personal integrity; and
- the person’s history of compliance with the NDA.
The fit and proper person obligations imposed by the NDA are ongoing, and any development which might result in an investor no longer satisfying the criteria must be brought to the ODC’s attention. A prospective investor and any associated medicinal cannabis licensee should consider whether the investor’s reputation, associates and financial or criminal history could present a risk to the licensee’s license and the ongoing operation of the enterprise. Specialist advice may be required before any association arises to avoid the risk that the involvement of a particular investor will result in the ODC limiting or revoking the relevant medicinal cannabis license.
The NDA also requires an applicant to satisfy the ODC, that they will secure and closely regulate any cannabis in their possession under the Cannabis Licence. This includes demonstrating there are reasonable grounds for the ODC to be satisfied that the applicant will:
- take “all reasonable measures” to ensure the physical security of cannabis in the applicant’s possession/control, or obtained, cultivated or produced under the license; and
- employ suitable facilities and proposed security arrangements at the land or premises where the licensed cannabis manufacture or production is to take place.
Accordingly, any applicant should have a comprehensive risk management strategy and/or appropriately planned and monitored facilities to mitigate security risks before commencing an application. The ODC expects applicants demonstrate that they have given thorough consideration to:
- physical/site security of any production or manufacturing plant, facility, and equipment;
- information security, including proper record management and bookkeeping; and
- personnel security, concerning staff and contractors (including criminal background checks).
Each form of security should be demonstrated as an “end-to-end process”, including storage, handling, transport and engagement in third-party controlled processes (such as analytical testing of extracts and/or products).
Medicinal cannabis permit
Any Cannabis Licence applicant will also need to obtain a medicinal cannabis permit. A medicinal cannabis permit specifies the amount of cannabis-derived drugs that the applicant can manufacture and hold in stock, and the period in which they may do so.
Finally, an applicant may also be subject to state-based laws and regulations depending on the jurisdictions in which they intend to operate. These obligations can be in addition to the requirements imposed by the Commonwealth through the NDA and the TGA. Although Victoria is presently the only state with legislation governing the manufacture, sale, and distribution of medicinal cannabis, other states will likely follow suit in legislating their own regimes in the near future.
The issues discussed above provide only a general summary of the license application process and do not address the nuances or complexity likely to arise in an individual application.
Cannabis Licence applications can be a costly and demanding undertaking and sophisticated legal and pharmaceutical advice is recommended before any prospective applicant commences the process.
The association provisions and the fit and proper person criteria of the NDA are broadly drafted and may potentially encompass a variety of business relationships between investors and medicinal cannabis licensees.
Given the relative novelty of Australia’s medicinal cannabis licensing regime, it could be some time before the scope and depth of the ODC’s inquiries into investors (and in particular, shareholders) who qualify as business associates concerning a medicinal cannabis licensee’s business, become apparent.
To avoid potential complications and the risk of license revocation, investors should obtain proper legal advice before planning any prospective involvement, investment or arrangement with a medicinal cannabis licensee.