German Cannabis Legalization Uncertainty Is Spooking Investors
(Bloomberg) -- Investors in Germany’s cannabis sector are holding back and some startups risk running out of cash amid uncertainty over whether a partial legalization of the drug for recreational use will take effect as planned on April 1.
Most Read from Bloomberg
NY Gears Up to Seize Trump Westchester Assets If Fraud Fine Is Unpaid
Baltimore Wants to Sell Hundreds of Vacant Homes for $1 Each
Yemen’s Houthis Tell China, Russia Their Ships Won’t Be Targeted
Justice Department to Sue Apple for Antitrust Violations as Soon as Thursday
After the ruling coalition’s bill passed Germany’s lower house of parliament last month, lawmakers in the upper house, where the 16 regions are represented, have threatened to block it by sending it to mediation when they meet on Friday in Berlin.
That would likely delay the legislation — potentially a first step toward commercial sales — by at least several months. It could even kill it completely, as its main proponent, Health Minister Karl Lauterbach, warned last weekend in a post on X.
“We are already highly unsettled, so it is very important to have clarity now,” said Niklas Kouparanis, chief executive officer and co-founder of Bloomwell Group, a Frankfurt-based holding company for medical cannabis firms.
“The industry needs to prepare now, it needs capital,” Kouparanis said. He estimates about 70% of the investors he has recently spoken with are delaying injecting cash.
Germany has grown into Europe’s largest medical-cannabis market since the government legalized the drug for patients in 2017.
If the ruling alliance is successful in getting the new law through, it could help open up business for producers like Tilray Brands Inc. and Curaleaf Holdings Inc. worth almost $250 billion across Europe, according to Bloomberg Intelligence.
Read More: Germany Cannabis Legalization May Ignite $248 Billion EU Market
Under the new rules, adults would be allowed to possess as much as 25 grams (0.88 ounces) of cannabis for use in public and grow a maximum of three plants for private consumption.
From July 1, cultivation in nonprofit clubs each limited to 500 members would also be permitted. A second stage of legalization would create regional pilot programs for commercial supply chains.
“We view these developments as important steps toward normalized cannabis use, which could lead other European countries to soon follow,” Kenneth Shea, BI senior industry analyst for consumer products, wrote last month in a note.
Legal cannabis sales in Germany might surpass $500 million by 2027, Shea added, citing data from market-tracker BDSA.
For the time being, however, executives in the cannabis sector are staying cautious as lawmakers in Berlin wrangle over the new rules.
“We have been in a little bit of a doldrum state right now for fresh capital coming into cannabis, it has brought valuations down,” said William Muecke, co-founder and managing member of Artemis Growth Partners, which invests in cannabis firms globally.
With an estimated 4.5 million regular users of the drug in Germany, the government has said its main motivations for pushing ahead with a legalization are to curb the black market, tackle drug-related crime and ensure safe, high-quality, regulated product.
Opposition to the law has centered around the health impact of rising use among young people, as well as fears about an increased burden on police and the health care system.
“If the law does not go through, we will see a lot of players fail in the industry,” said David Henn, chief executive officer of Cannamedical Pharma GmbH, a Cologne-based cannabis wholesaler.
“A lot of companies are heavily under pressure at this point, a lot of these companies are desperately trying to raise funds,” added Henn, who said he has seen “no investment” in the German medical cannabis space in the last year.
One of Henn’s major investors has a more positive take.
Orkila Capital has injected €50 million into Semdor Pharma Group GmbH, which owns Cannamedical, since 2019 and Jesse Du Bey, founder and managing partner of the US private equity firm, said it doesn’t need the law to pass for that to be “a good investment.”
But it could make it a “potentially spectacular” one, Du Bey told Bloomberg.
“I think 10 years of medical market growth could happen in the next several years,” he added. It could “make Semdor one of our best ever investments.”
Developments in Germany could also impact neighboring countries, with Europe’s largest economy seen as a trailblazer, according to BI’s Shea. Malta already permits limited cannabis cultivation at home.
Orkila Capital is not planning to invest in additional cannabis companies, but instead focus on continuing to fund Cannamedical’s expansion across Europe, Du Bey said.
The scale of that European market is largely dependent on the outcome in the upper house on Friday, according to Henn.
For now investors are betting on significant industry growth when legalization comes into effect — sooner or later.
Some 75% of Artemis Growth Partners’ investment focus is on Europe, according to Muecke, with cheap valuations offering buying opportunity. He views Germany as “the engine on the train to deregulatory change in Europe.”
While current “choppiness” from delays caused by German lawmakers is pushing out the timeline for the market reaching scale, Muecke said, “the genie is already out of the bottle.”
Most Read from Bloomberg Businessweek
Weight-Loss-Drug Users Pay Up for Help Ditching the Pricey Meds
Wall Street and Silicon Valley Elites Are Warming Up to Trump
Magnificent Seven? It’s More Like the Blazing Two and Tepid Five
Selling Shohei Ohtani: Can Baseball’s Biggest Talent Transform the Sport?
©2024 Bloomberg L.P.
