What I noticed is if I share the file from O365 E3 license to another O365 E3 license and the recipient can authenticate an "Edit in Word" button is displayed. The same button is not displayed to an external user (Microsoft Personal Account or Gmail) when OTP is used to authenticate. Meaning the document is unable to be opened as IRM restricts it from opening online and there is not option for the external user to download or open in the Native application. Therefore made me think the issue is the external user not being able to validated 100%.