Germany bets on medical cannabis market, steps back from rec
The German medical cannabis program is poised for a big lift following recent legislative amendments, but the story isn’t so simple when it comes to a recreational counterpart.
The new legislation allows for personal possession and cultivation of cannabis and the establishment of cannabis social clubs, but it stops short of permitting commercial sales of adult-use cannabis.
“By now, investors should know ‘legalize‘ can mean many things,” according to a report by Pablo Zuanic of Zuanic & Associates, adding that the “new rules … do not necessarily represent a net benefit for the bulk of cannabis companies, and on the margin could be a source of risk.”
The legislative changes, described as “phase 1” by Health Minister Karl Lauterbach, are part of a cautious approach to cannabis regulation by the German government and maintain a clear distinction between medical and recreational cannabis markets.
Zuanic points out that a “phase 2,” which could include pilot programs for the sale of adult-use cannabis, is still under consideration.
“We are doubtful phase 2 will be enacted during this current coalition government,” he wrote. “Could pillar 1 be reversed in the future? We doubt it, but that will depend on the make-up of future governments.”
Boon for medical market
A meaningful change in the legislation is the removal of medical marijuana from Germany’s narcotics list, which is expected to simplify the prescription process and increase patient access by reducing legal and bureaucratic barriers for doctors and patients.
Currently, the market serves a relatively small portion of the population, with approximately 28,000 patients, or less than 0.03% of the German population, in 2023.
“Clearly, this segment was set to grow, but now with new regulations approved by the Bundestag (last) Friday, it could explode,” Zuanic wrote.
“We try to avoid hyperbole, but if in Florida more than 3.5% of the population is in the MMJ program, how many cash patients can we expect in Germany (a country with ~85mn population)?”
If 1% of the German population were to use medical cannabis, Zuanic estimates that the market could grow to €1.7 billion by 2025, a big rise from current levels. The growth would benefit major exporters to the German market, such as Canadian companies Aurora Cannabis (Nasdaq: ACB) and Tilray Brands (NASDAQ: TLRY).
More importantly, the new policies abolish the tender process for cultivating medical cannabis in favor of a licensing scheme, Tilray said Wednesday. The changes are expected to boost the supply of medical cannabis in the country and make it easier for companies like Tilray to operate and expand, potentially raising its production “by approximately 5x and more than double its revenue opportunity.”
However, smaller companies and new entrants, particularly online medical marijuana clinics, could face increased competition and pricing pressures under the new rules.
By the numbers
Despite a significant increase in cannabis imports, which were up 20% in 2022 to 25 tons and are expected to rise again in 2023, Germany’s market remains constrained by strict narcotics laws and regulatory challenges. These factors have limited patient access and kept the cash market small.
The majority of the country’s MMJ imports come from Canada, which accounted for 47% of all imports from January to September 2023. However, a meaningful portion of these imports are either re-exported or destroyed due to quality issues, further complicating the market’s supply chain.
The reimbursed market, where patients’ cannabis prescriptions are covered by insurance, has seen a slight increase, with sales expected to reach €208 million in 2023, up from €198 million in 2022. Still, prescriptions are typically issued only as a last resort and for chronic conditions, limiting the market’s size.
Zuanic suggests that changes in Germany’s narcotics law could turn the tide. Currently, patients can obtain prescriptions through telehealth services after an initial in-person doctor’s visit, but the overall patient count remains low.
Projections for the market’s size vary, however if 1-2% of the population joins the cash market, some analysts predict a market worth between €1.5 billion and €3 billion.
A comparison with other countries emphasizes the untapped potential of Germany’s MMJ market. For instance, 1% of Canada’s population participates in its medical cannabis program, significantly higher than Germany’s current participation rate.
“All this said, the scale and timing of the cash payer MMJ market growth (that may be triggered by the new law) is subject to debate, but we believe the growth estimates outlined above are realistic,” he wrote. “Still, we recognize there is a scenario where home growth and clubs could slow the rise of the MMJ market.”
