As 2023 draws to a close, it makes sense to reflect on what happened in the markets we cover. But when it comes to cannabis, the answer is “not a lot,” which doesn't help cannabis startups already facing a difficult funding environment.
In other words, 2023 was not the year Germany legalized recreational cannabis use for adults. That's important because it's not what the legal cannabis market once expected, and whenever there's a mismatch between reality and investor expectations, especially when publicly traded companies drive up those expectations. That's rarely good news. At least, not for everyone.
“One of the trends to watch in 2024 is consolidation,” said cannabis-focused investor Matt Hawkins, managing principal at boutique VC firm Entourage Effect Capital. “Companies have spent large amounts of capital preparing for the huge commercial market in Germany. As that possibility fades, companies may have to work together to support their operations.”
Find out what to remember in 2023 and what to expect in 2024 with the latest Global Cannabis Report from market intelligence firm Prohibition Partners.
what didn't happen
Hopes that the EU's most populous country might legalize recreational cannabis did not arise out of thin air. This possibility has been heavily considered since the Signal Union came to power in Germany in December 2021. But this coalition of Social Democrats, Liberals and Greens has since watered down their plans so much that one has to wonder how well-prepared they were. To overcome legal challenges that are not surprising.
As Prohibition Partners pointed out in a recent report, “Regulatory hurdles associated with adult-use legalization in a given country extend beyond national regulatory frameworks, such as the 1961 Single Convention on Narcotic Drugs. The drug is also enforced in EU law, which could make it difficult for countries and policy makers to create a legal adult-use market. ”
To avoid a backlash, Germany needed to find a way to loosen restrictions on cannabis use without violating international law and treaties. I did not find the miraculous path that others follow. Instead, it has chosen a slower and much narrower path in terms of commercial opportunities than companies and investors in the sector once expected, at least for now.
According to the German magazine Der Spiegel, the latest plans call for:
Decriminalization of cannabis. Home cultivation and ownership will begin from April 1, 2024. The Cultivation Club is scheduled to be launched around next summer.
As MJBizDaily's international editor Matt Lammers pointed out, “The bill still leaves little room for potential benefits to publicly traded cannabis companies.” This would not be a problem if many of the hopes they claimed were not based on that very prospect.
Despite the increasing legalization of medical and recreational cannabis use, the global legal cannabis market has not fully blossomed.
In the United States, Prohibition Partners found that legal adult-use cannabis sales are “beginning to normalize slightly above pre-pandemic levels.” Meanwhile, the cannabis industry is reportedly struggling to survive in Canada, where many of the companies in the sector are headquartered and listed. In this context, it was definitely tempting for them to promote Germany's greener grass point of view, but no one stopped them.
“I said for two years that Germany wasn't serious about legalizing cannabis because the German government didn't prepare like the Canadian government did before we legalized it. “Some cannabis pubcos (publicly traded companies) injected more, injected more, injected more, and the Ontario Securities Commission did nothing, didn't say anything,'' Lammers said. I wrote With X.
It's hard to tell whether these companies truly believe in the market opportunity Germany opens up, but their predictions are certainly hardly the envy of SPAC decks. And they don't match what a more objective observer would predict.
“In Europe, existing medical cannabis programs persist, but while the slow rollout of adult-use cannabis across the region is important from a symbolic and long-term perspective, rapid growth is not expected.” Prohibition Partners pointed out.
what still happens
Louis Koski, chief strategy officer at cannabis regulatory technology system provider Metrc, said it might be best to envision two scenarios for what happens in Germany.
“As the coalition government reaches the halfway point of its term, the most optimistic view is that Germany will pass a decriminalization bill in early 2024, followed by the introduction of a second stage model project bill soon after. A more pessimistic view suggests that the decriminalization bill will be passed early next year, but that the Coalition's dream of large-scale legalization is running out of time.
He mentions recreational use. Medical cannabis is already a reality in Germany. Germany accounts for half of Europe's medical cannabis market, with sales expected to reach around 390 million euros ($427 million) in 2023 for more than 230,000 patients, according to Prohibition Partners. .
Furthermore, “Germany stands out as one of the only true medical cannabis markets in the world thanks to its reimbursement system, in contrast to markets like the US where insurance companies hardly cover medical cannabis costs. ” said the CEO of a Berlin-based medical cannabis software company. Kopeia Garvin Hart wrote on LinkedIn:
But as Tech.eu pointed out in an article, the market is “oversaturated” with “many companies competing for the same prescription”.
Some of these companies were simply holding out for recreational users, so it may perhaps be a good thing for that side of the market, and for patients, that Germany hasn't legalized adult-use cannabis yet. No.
“There is no doubt that Germany's decision was unpopular among companies that had bet on the bill going in the other direction, but the decision to delay the legalization of recreational cannabis remains in place,” said Oliver Lam, co-founder of Oscar Capital. This move is positive for the medical and pharmaceutical market,” said Oliver Lam, co-founder of Oscar Capital. July European Cannabis Investor Survey.
Can Europe's cannabis market avoid US mistakes? Investors agree
Lam notes what went wrong with the “recreational-medical hybrid experiment” in North America, and he's not alone in wanting clear boundaries in the industry. But the dream of legalized recreation across Europe remains unrealized and could still be painful for many in 2024.
“A key metric for any investment is the total addressable market, but TAM in Europe's largest market is limited,” Entourage's Hawkins said. “This could be a leading indicator that the entire continent will struggle to create a commercial adult-use market in the coming years. We are more hesitant to deploy it.”
For prohibition partners, challenges unique to the cannabis sector come on top of a difficult macro environment.
There is a clear capital shortage in the cannabis industry, making financing difficult for companies involved in the industry. This is not unique to cannabis; rising interest rates that have tightened the money supply, along with rising inflation, a cost-of-living crisis, and a volatile economic outlook in the face of a post-pandemic recovery, have created a difficult economic environment for cannabis. There is. A company that operates in many industries.
But in the face of such pressing issues, cannabis reform remains low on the agenda for governments and voters alike. These factors have contributed to slow progress on the regulatory front, further exacerbating cannabis companies' financing challenges by limiting expansion and growth opportunities.
The research firm notes that there are still “several important milestones on the horizon” and that we will of course be keeping an eye on Germany as well as the Czech Republic. Cannabis reform bill. ” However, in the short term for startups in the cannabis sector, there could be further unwanted headwinds due to what didn't happen in Germany this year and how listed companies continued to raise expectations.
