As Canopy Makes Some Noise About Germany’s Growing Market, Is It a Sound Bet?

By Calin Coman-Enescu, Director of Capital Markets, New Frontier Data

Canopy Growth (CGC) last week hosted a virtual investor meeting where the company’s leadership discussed their views on the future of the legal cannabis industry as they continue to pursue market shares internationally.

As a prelude to discussions of value segments and cannabis 2.0 products, the company’s team expressed their views of the global market, and quite notably highlighted the Canadian, U.S. and German markets combined as accounting for 90% of Canopy’s global total addressable market for cannabis products by 2023. Together, those markets are expected to represent a TAM of USD$63 billion after projected growth of 400%, 600% and 1,000%, respectively.

Why does Canopy believe that the German market will grow 10x over the next three years, primarily driven by the medical cannabis segment? Though the investor meeting presentation neglected to divulge anything beyond conveying a need for a successful new market entry, it begged a look at the uncertain future of the German market.

Before lockdowns and social distancing, the German market established itself as the world’s third-largest legal market for cannabis-based products, after the United States and Canada. It was growing quickly, seeing medical cannabis imports more than double (123%) between 2018 and 2019 — from 3 metric tonnes (mt) to 6.7 mt. And they had doubled from 2017 to 2018, too.

Meanwhile, at the start of the year the International Narcotics Control Board estimated that demand in 2020 may reach as high as 16 mt as patient numbers were predicted to rise dramatically. Though the COVID-19 pandemic understandably dampened those expectations, the rise in patient demand exists. To help meet it, the German Federal Institute for Drugs and Medical Devices (BfArM) added some new countries to those authorized to export to the German market, namely Switzerland, Israel, Columbia, Portugal, Spain, and Uruguay. The original list included just Canada, Austria, and the Netherlands.

If that expansion sounds positive, the BfArM has thrown the industry a few curveballs. Last year, it decided that the same legal provisions regarding irradiation (to kill microbial contaminants) of ready-made pharmaceuticals would apply to products containing cannabis (in particular, cannabis flowers). That meant that many producers (Aurora notably included) were forced to take their products off the market in Germany while those companies applied for the appropriate licensing.

Overall — despite the strange times in which we find ourselves — the German market continues to chug along as it slowly but surely integrates medical cannabis into its healthcare systems and social fabric. Despite growth, pharmacists still struggle to obtain product on a reliable basis. Difficulties for patients remain either in finding doctors to prescribe cannabis products, insurance companies willing to reimburse patients, or reliable pharmacists able to supply them. At least the German government’s introduction of a wholesale reference price last year of €2.30/gram is having a stabilizing effect on price levels (both legal and illicit).

Though the future may not see the market growth which Canopy is projecting, the money appears to say that they are onto something. Since the start of 2019, there have been over a dozen M&A deals or private placements above €5m involving cannabis companies, with 80% of them concerning German-based businesses. Sanity Group raised €20m from among other Holtzbrinck and Cherry ventures, while Cannamedical raised €12m in April during the middle of Germany’s lockdown. The recent deals have drawn attention, and momentum is building in German deal flow with several other companies currently raising multimillion-euro rounds.

That the aforementioned deals were made amidst the most acute slowdown of economic activity in a generation is further indication of investors’ confidence in the German cannabis market.

Uncertain as the future presently looks, Germany may well be poised to emerge as the market powerhouse of Europe yet again.