Looking back to March 2017, the global cannabis industry was f ixated on Germany. The ‘Cannabis as Medicine’ law came into force and the forecast of 800,000 potential cannabis patients in Germany was circulating. This led to Canadian cannabis companies, already in a stock frenzy, sensing their opportunity in the German market. More than seven years later, some of those former dreams have shattered, as economic reality did not meet the ambitious expectations. But since 1 April 2024, hopes are high once again and this time the signs are completely different. Many cannabis companies have now learned their lessons from previous years and are already preparing for profitability.
Ten years ago, hardly anyone would have envisaged that the rather conservative Germany at the heart of the European Union (EU) would initiate a paradigm shift in the regulation of cannabis. While the advent of the era of medical cannabis was forced through legal means in 2017, the new change is of a political nature, democratically mandated by the people. Additionally, even if the main goal, the legalised and commercial value chain for adult-use cannabis, has not materialised, the signs still point towards growth. This is also due to the last few years of the growing medical cannabis market.
Capital has become scarce everywhere. Not just in the case of cannabis. However, the German cannabis industry has suffered significantly from the collapse of the capital and venture capital (VC) markets since the end of 2022, and especially so in 2023. In the case of cannabis, many of the hopes of 2017 turned out to be a daydream rather than a realistic forecast. The Germany of 1 April 2024 was still a far cry from the 800,000 cannabis patients previously forecasted (though numbers are increasing rapidly). Prices have fallen radically due to the intense competition from around 100 competing wholesalers, where in some cases self-payers pay less than five euro for one gram of medical cannabis in a pharmacy. Whilst there was an immense shortage on the supply side in the early days of the medical market, too much cannabis is now being 3 produced worldwide. In the first two years, medical cannabis came exclusively from Canada or the Netherlands, but now producers from all over the world supply the German market. Medical cannabis was imported from 23 different countries to Germany in 2023. The country has become one of the top export destinations globally.
Around 31.4 tonnes of medical cannabis was imported to Germany in 2023, according to the Federal Institute for Drugs and Medical Devices (BfArM). In addition to this, 1.7 tonnes was produced by the three cultivators selected by BfArM. An estimated 19 tonnes have been delivered to pharmacies. It isn’t clear what happened to the additional 40% (12.5 tonnes), which have never been received by any pharmacy. Some of it might have been re-exported, some of it used scientifically, or wasted. There was certainly no lack of supply during the last years.
This analysis is part or “The German Cannabis Report” by Prohibition Partners. The Report will be published in September 2024 and can be pre-ordered via this link. Our readers get discount with the code: KRAUTINVEST10. The German Cannabis Report provides an in-depth analysis of Germany’s evolving cannabis market. The report examines the regulatory landscape, market potential, products and pricing, and future outlook.
If prices fall due to supply and competition in a business model focused on import and distribution, then margins and, generally, market shares also fall. Only a few wholesalers have managed to f ind a unique selling point (USP) that sets them apart from the crowd through genetics, sourcing or product innovations. Too many products and brands in Germany are more likely to confuse than create ‘added value’ for doctors or patients. Only a few players have managed to launch and scale digital business models and initiate reliable complex and innovative services and products.
What makes matters worse is that the mood has also deteriorated elsewhere. Many Canadian companies are a long way from their former billion-dollar valuations of around six years ago. While in 2017 almost €200 million and in 2018 more than €100 million was spent on mergers and acquisitions (M&A) activities, no precise amount related to M&A was communicated in 2023. Furthermore, according to Atomico’s State of European Tech, European VC markets in general fell by 45 % in 2023 when compared to the previous year. In any case, only a handful of European VCs have invested in cannabis. The traffic light government’s cautious stance in Germany, since the coalition agreement was announced in November 2021, had also further unsettled entrepreneurs and investors until 1st of April 2024. The government scrapped the first Key Issues Paper and the fully legal commercial adult-use value chain out of fear of the European Court of Justice (ECJ), with several dates being postponed. The conservative opposition continued to oppose the decriminalisation of cannabis and the reclassification of medical cannabis throughout the whole process. It’s actually a surprise that, according to the BfArM, the number of companies distributing medical cannabis has increased slightly in recent years (from 88 in 2020 to 100 in 2023). Despite the great relief that the Cannabis Act (CanG) came into force on 1 April 2024, the purse strings are still nowhere near as loose as they were a few years ago. In 2021 and 2022 around €55 million was invested each year. In 2023, the volume dropped to below €20 million. While there were twelve deals in 2022, the number declined to seven in 2023. Importantly, despite CanG, not all investors seem to trust the new cannabis era; fundamentally, the situation on the capital markets remains tense. After a first acquisition period that was driven by Canadian corporates and an investment era, from a capital perspective, hesitation is still dominating. But times are changing again. The opportunities available are all the greater for those who invest and act entrepreneurially. We should not forget; in 2023 the volume of imports was around 18 times higher than in 2017 (the legal market starting in March), and 19 times more medical cannabis was provided to pharmacies. In the second quarter 2024, the first quarter after CanG, imports increase to 11.7 tonnes, a plus of 44% compared to the average volumes of last year. While there was speculation about future opportunities in 2017, there are now real operations doing real business with real products helping real patients. However, there are debates regarding stricter regulations of prescribing medical cannabis over telehealth services, which have become increasingly popular among self-payers following the MedCanG Act.
The medical industry might be the first winner of the CanG Act as it simplifies access to medical cannabis. In recent years, the industry has become increasingly convinced that doctors are the bottleneck. Due to the reclassification of medical cannabis, which became apparent in the first few days after the CanG came into force, the number of cannabis patients, especially self-payers, is increasing rapidly. Furthermore, in July, the Federal Joint Committee (G-BA) agreed to lower the burden for various doctors to prescribe medical cannabis with costs covered by public insurance. In the long term, if regulations do not change, market volumes are bound to multiply.
However, there will definitely not be any bottlenecks in the medium and long term. It will be particularly interesting to see how well the German producers respond. To date, they have hardly been able to produce competitively given the limited quantities, as the lack of economies of scale means that fixed costs are too significant at low production quantities. It remains to be seen whether Germany will be able to compete with Canado or countries in southern and eastern Europe in the future. After all, they can now ramp up their production, largely according to their own business calculations. It has recently been announced that Aurora, Tilray’s daughter company Aphria and Demecan have already received licences from the German authority BfArM to wramp up production.
The biggest questions lie behind the business models in the adultuse market. When it comes to clubs, legislation seems to be very restrictive with regard to all scalable service and franchise solutions. On the other hand, if clubs have to report to the authorities via basic solutions such as Excel, they will sink into complete chaos. Without specific but affordable software solutions, the clubs will hardly be able to effectively meet the administrative requirements. The question is whether they can even afford larger expenses given their very limited ability to raise capital as a non-profit. Beyond this, all statements about future volumes that will arise in the clubs are more speculative than a serious forecast. In Germany there have been approximately 300 submitted applications as of August 2024. With first approvals in a couple of states, especially in lower saxony. It looks like the first clubs in Germany will start cultivating at the end of this year, beginning of next. A timeline which would be way faster compared to Malta, the first EU country with a club model – where it took around 2 years before the first clubs distributed the first few kilos to their members. The big question in Germany is related to volumes and scale. Despite the burdens of regulations club managers are also facing tricky access to capital. As non-profit associations they will be mostly depending on membership fees. From what is understood, Germany will probably have legal business with seeds and cuttings. And who knows, maybe the first genetics of a might-be-adult-use-market in the future will have their early days soon? This is merely speculation however.
Many rumours have surrounded the pilot projects. The following would need to take place; the Government would need to draft a law for the Parliament to then pass, and then the Federal Committee would need to agree on a law. It’s highly unlikely that this policy process would be finalized before the next election 2025. But Karl Lauterbach, in April this year (2024), surprised everyone with a proposal to initiate the pilot projects by adapting the CanG instead of introducing his own law. Though, not all pilot projects are the same. While all adults in the Netherlands can purchase legally produced cannabis, in Switzerland only a few thousand citizens are able to do so. In August 2024, the German Federal Ministry of Food and Agriculture, officially confirmed that the pilots will start via an comparable easy adoption of the already existing CanG without an additional vote in the federal committee being necessary. With Wiesbaden a first German city announcing to be part of a federal pilot project. All adult citizens of Wiesbaden could be able to register in this pilot and access adult-use cannabis via a pharmacy, while dispensed sales should happen elsewhere. Still these announcements need to be put into action.
Even though the debate has already started whether a potentially conservative-led German government might be in favour of a restrictive cannabis policy, it is very unlikely that the wheel will be turned back. The conservatives have themselves already expressed their wish for smoother medical cannabis access, the clubs are licensed for seven years and even a conservative led government would need to partner with one of the parties which has been fighting for the CanG since 2021.
Thanks to the CanG, the German markets for cannabis as a recreational product and as a medicine are once again enjoying global attention. Currently, we have no single European VC specialising in cannabis. The last IPO happened in 2022, only 3 German cannabis entities are listed. Even though opportunities have increased dramatically as a result of the CanG and it is possible that we might one day see global acting cannabis unicorns, nobody can tell when and where exactly. The Overarching goal for many players remains the legalised value chain for recreational cannabis. Whether this will then be set up by the current club operators, by the medical companies or by the initiators of the pilot projects is anyone’s guess. One of the major lessons of the German debate around the CanG is also that changing cannabis policy takes time. Things get even more complicated as adjusted regulations in the pillars of clubs, pilots and medicine might directly affect each other’s developments. One thing is clear: after the turbulence, the signs point to growth again.
This analysis is part or “The German Cannabis Report” by Prohibition Partners. The Report can be pre-ordered via this link. Our readers get discount with the code: KRAUTINVEST10. The German Cannabis Report provides an in-depth analysis of Germany’s evolving cannabis market. The report examines the regulatory landscape, market potential, products and pricing, and future outlook.