First-mover advantage: It’s a phrase long used by Canadian cannabis companies that have spent billions of dollars to accelerate their international sprawl since legalization in 2018. But as Germany moves to open its adult-use market, it remains unclear to what degree Canada’s early start will help its companies succeed abroad.
On Friday, German Finance Minister Christian Lindner said that his government intends to legalize cannabis next year, and confirmed plans to publish its draft legislation this fall.
While medical cannabis has been legal since 2017, Germany would be the first country in the European Union to legalize the drug for recreational use. As Europe’s largest economy with nearly double Canada’s population, Germany’s recreational market is expected to quickly outpace domestic demand.
With the prospect of a new cash source in grasp, Canadian companies are jostling to position themselves to capitalize on the new opportunity. But several barriers stand in their way: Legislation could ban Germany from importing Canadian-grown cannabis, fundraising remains a challenge for Canadian producers and legalization could still be years away.
Despite Mr. Lindner’s enthusiasm, German federal drug commissioner Burkhard Blienert doesn’t expect the legalization law to come into force before 2024.
“The prospect is real, but it always takes longer than you think,” said Canaccord Genuity analyst Matt Bottomley, noting that actual sales in Germany could come years after regulation is introduced. “I don’t think one country legalizing is going to solve all of the Canadian companies’ problems.”
While there are no official measures yet, many expect Germany’s market demand could reach upward of 400 tonnes of cannabis annually, compared with the 100 tonnes bought by Canadians in the first year after legalization.
Frankfurt-based Bloomwell Group, a medical cannabis distributor, estimates that the recreational market could reach €16-billion ($21.2-billion) within its first year – and Canadian companies could be in a position to bridge the gap. “It will take years before we have the capacity in Germany to come close to covering the market,” said Bloomwell chief executive Niklas Kouparanis.
Canada is already Germany’s top supplier of medical cannabis, and several Canadian companies have started building facilities and distribution lines abroad in anticipation of legalization. But accessing the new recreational market won’t be easy.
The main hurdle 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 breach of international and European Union law if it were to import recreational cannabis from Canada.
Legalizing imports on a broader scale will require renegotiating European law to remove cannabis from the list of prohibited drugs, a process which experts say could take several years.
Without renegotiations, Germany – and any other European countries that follow – will be required to produce all their recreational cannabis domestically. According to Justus Haucap, director of the Duesseldorf Institute for Competition Economics, such a situation is likely.
“I’m skeptical that cannabis grown in Canada will be imported to Germany. I think instead, Canadian companies will invest and grow there,” said Mr. Haucap, who participated in recent consultations with the government.
While operating outside the bounds of the Convention on Narcotic Drugs would not be unprecedented, he said, Germany could choose to limit imports on recreational cannabis, as Canada has done. This means that in order to compete, Canadian companies could be required to establish facilities within each country.
Such a decision would be a disappointment for Canadian companies, which currently produce much more recreational cannabis than they can sell within Canada. Last year alone, producers destroyed 468 tonnes of dried, unsold cannabis, according to Health Canada.
It also presents cash-strapped Canadian producers with an added hurdle: finding the funds to develop new facilities abroad, especially when maintaining them domestically has proved such a challenge.
When Canadian companies first built their facilities within Canada, they had the enthusiastic support from both retail and private investors, and pulled in hundreds of millions of dollars within a couple of years to jumpstart production. In 2017, Canopy Growth Corporation raised $90-million for a facility in St John’s, and in 2018, Aurora Cannabis Inc. pumped $250-million into its Sun facility in Medicine Hat, Alta. – just two of the dozens of large facilities across the country.
But as those facilities started to produce cannabis and sell it on the market, it became obvious that the sector had been overbuilt. In recent years, hundreds of cannabis-industry employees have been laid off as part of restructuring plans. Both the St. John’s and Medicine Hat facilities have since closed.
Now, equity financing is out of reach, especially with markets cooling dramatically this year. So far in 2022, cannabis companies have raised just $36-million from stock sales, a far cry from $2.8-billion last year, according to data from Refinitiv.
But some companies are edging in through the door that’s currently open: Germany’s medical cannabis market, which last year sold €150-million of product, according to health insurance data.
Germany imports nearly all of its medical cannabis, a third of which comes from Canada.
The year after Germany first legalized medical cannabis in 2017, its government released a tender offering a handful of licences to grow a small amount of cannabis within the country. Of the three companies that have received a contract, two are Canadian: Aurora Cannabis Inc. and Tilray Brands, Inc., each producing one tonne annually. 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 positioned of all the Canadian producers for the launch of recreational sales. According to Tilray’s European director, Sascha Mielcarek, its facilities were built to be ready for quick expansion once recreational cannabis is legalized, and could “double capacity in 6-12 months.” Tilray also owns a European distribution company and secondary facility in Portugal.
In its most recent quarterly report, Tilray said it held 20 per cent of the market in Germany. When asked if it’s prepared to make major investments in the country, Mr. Mielcarek said the company is 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 in addition to its plant in Germany. The company owns Pedanios GmbH, a wholesale distributor of medical cannabis in Europe that it bought in 2017 for $20.8-million.
Aurora’s director for Europe, Axel Gille, said the producer has the benefit of years of experience working with regulators and markets across Europe. “If you understand how regulators work in Europe, that certainly gives you an advantage,” he said.
Canadian companies have another option: to acquire existing German companies. Constantin von der Groeben, co-founder of Demecan, said he has already received offers.
“Some want to buy Demecan outright, others want to invest, set up a joint venture. At the moment, 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 licence - a lengthy and rigorous testing process.
While legalization remains an unsettled business, German politicians and scientists are eager to learn from the Canadian experience, and visited Ottawa and Toronto in September.
“We can see exactly which processes are running well and where there are still snags,” said Kristine Luetke, spokeswoman for addiction and drug policy of the Free Democratic Party. “Cannabis legalization – if done right – can work.”