First mover advantage: It’s a phrase long-used by Canadian cannabis companies that have spent billions of dollars accelerating their international expansion since legalization in 2018. But as Germany moves to open up the adult use market, it remains unclear to what degree Canada early on will help. Start their companies to succeed abroad.
German Finance Minister Christian Lindner said Friday that his government intends to legalize cannabis next year, and confirmed its plans to publish a draft of its law this fall.
While medical cannabis has been legal since 2017, Germany will be the first country in the European Union to legalize the drug for recreational use. As Europe’s largest economy with nearly twice the population of Canada, the German entertainment market is expected to quickly outpace domestic demand.
With the prospect of a new source of cash on hand, Canadian companies are vying to position themselves to take advantage of the new opportunity. But several barriers stand in the way: Legislation could ban Germany from importing Canadian-grown cannabis, raising funds remains a challenge for Canadian producers and the legislation could take years.
Despite Mr Lindner’s enthusiasm, Germany’s federal drug commissioner Burkhard Pleinert does not expect the legalization law to enter into force before 2024.
“The possibility is real, but it always takes longer than you think,” said Matt Bottomley, analyst at Cannacord Genuity, noting that actual sales in Germany could come years after the regulation was introduced. “I don’t think legalizing one country will solve all of Canada’s business problems.”
Although there is no official procedure yet, many expect German market demand to reach upwards of 400 tons of cannabis per year, compared to the 100 tons that Canadians bought in the first year after legalization.
Berlin-based Bloomwell Group, a distributor of medical cannabis, estimates the entertainment market could reach 16 billion euros ($21.2 billion) in its first year — and Canadian companies could be in a position to fill the gap. “It will take years before we have the capacity in Germany to get close to covering the market,” said Niclas Koparanis, chief executive of Bloomwell.
Canada is already Germany’s largest supplier of medical cannabis, and several Canadian companies have begun building overseas facilities and distribution lines in anticipation of legalization. But access to the new entertainment market will not be easy.
The main obstacle is that Germany is bound by the 1961 United Nations Convention on Narcotic Drugs, which prohibits the import and export of cannabis for recreational consumption. This means that the country would be in violation of international and EU law if it were to import recreational cannabis from Canada.
While many countries circumvent this provision by running pilot projects, legalizing imports on a larger scale would require a renegotiation of European law to remove cannabis from the banned drugs list, a process experts say could take several years.
Without renegotiation, Germany – and any other European countries that follow – will be required to produce all types of recreational cannabis domestically. According to Justus Haucap, Director of the Dusseldorf Institute for Competition Economics, such a situation is likely.
“I am skeptical that cannabis grown in Canada will be imported into Germany. I believe that instead, Canadian companies will invest and grow there,” said Mr. Huckab, who was involved in recent consultations with the government.
He said that while operating outside the confines of the drug convention would not be unprecedented, Germany could choose to limit recreational cannabis imports, as Canada has done. This means that in order to compete, Canadian companies may be required to set up facilities within each country.
Such a decision would be a disappointment for Canadian companies, which currently produce far more recreational cannabis than they can sell within Canada. Last year alone, producers destroyed 468 tons of unsold dried hemp, according to Health Canada.
It also presents cash-strapped Canadian producers with an additional hurdle: Finding funds to develop new facilities overseas, especially when maintained locally, has proven to be such a challenge.
When Canadian companies first built their facilities inside Canada, they enjoyed the enthusiastic support of both retail and private investors, and pulled hundreds of millions of dollars in two years to stimulate production. In 2017, Canopy Growth Corporation raised $90 million for a facility in St. John’s, and in 2018, Aurora Cannabis Inc. $250 million at its Sun facility in Medicine Hat, Alta. – Only two of the dozens of large installations across the country.
But when these facilities began to produce and sell cannabis in the market, it became clear that the sector had been over-built. In recent years, hundreds of workers in the cannabis industry laid off As part of the restructuring plans. Since then, both the St. John’s and Medicine Hat facilities have been closed.
Now, equity financing is a long way off, especially with markets slowing dramatically this year. So far in 2022, cannabis companies have raised just $36 million in stock sales, a far cry from the $2.8 billion last year, according to Refinitiv data.
But some companies are advancing through the currently open door: the German medical cannabis market, which last year sold 150 million euros worth of products, according to health insurance data.
Germany imports nearly all of the medicinal cannabis it produces, a third of which comes from Canada.
A year after medical cannabis was first legalized in Germany in 2017, its government issued a tender offering a few licenses to grow a small amount of cannabis within the country. Of the three companies that have been awarded a contract, two are Canadian: Aurora Cannabis Inc. and Tilray Brands, Inc. Each produces one ton per year. The third is Demecan, a German startup that bought out its Canadian partner, Wayland, which filed for bankruptcy in 2019.
Tilray has been called the best site out of all Canadian producers to launch entertainment sales. According to Tilray’s European director, Sascha Mielcarek, its facilities are built to be ready for rapid expansion once recreational cannabis is legalized, and can “double capacity in 6-12 months.” Tilray also has a European distribution company and a secondary facility in Portugal.
In its most recent quarterly report, Tilray said it holds 20 percent of the market in Germany. When asked if it would be willing to make significant investments in the state, Mr Melkirk said the company was “in a very good position” to do so.
Aurora, too, is waiting in the wings: The Edmonton-based producer has made investments in Europe, with facilities in several countries as well as its plant in Germany. The company owns Pedanios GmbH, the wholesale distributor of medical cannabis in Europe which it bought in 2017 for $20.8 million.
Axel Gill, director of Aurora Europe, said the producer has years of experience working with regulators and markets across Europe. “If you understand how regulators work in Europe, that definitely gives you an advantage,” he said.
Canadian companies have another option: acquiring existing German companies. Konstantin von der Groppen, co-founder of Demecan, said he had already received offers.
“Some want to buy Demecan outright, others want to invest, create a joint venture. For now, we want to remain independent.”
Companies looking to enter the German market for the first time face other regulatory barriers: Currently, companies selling to Germany are required to obtain an EU-GMP license – a lengthy and rigorous testing process.
While legalization remains a precarious business, German politicians and scientists, keen to learn from the Canadian experience, visited Ottawa and Toronto in September.
“We can see exactly which processes are working well and where there are still hurdles,” said Kristen Lutke, a spokeswoman for addiction and drug policy at the FDP. “Cannabis legalization – if done correctly – can work.”