Smoking weed may become legal in Germany this year. However, the partial legalization is not the big hit. In an interview, Finn Hänsel from the Sanity Group explains what this means for his business and whether the hesitant reform will be the death knell for an entire industry.
The cannabis law is to come in a significantly slimmed down form. How disappointed are you?
Finn Hänsel: The draft law had been known for a long time and not much changed in the final version. So the surprise wasn’t very big. I see the result in two ways: As someone who advocates a new drug policy, I think it’s a nice sign to all users and those who have suffered from criminalization for decades. Cannabis should no longer be banned in the future and should no longer be considered a narcotic, that’s really a rethink. It’s definitely a good thing, and we’re happy about that. On the other hand, of course, we are also entrepreneurs. And from an entrepreneurial point of view, I have to say: This is a disappointment.
We would have wished that the federal government had been more courageous in legalizing it. Instead, she has divided the law into two pillars. Pillar one, around which the current draft law revolves, is primarily about non-commercial home cultivation. We would have liked to start with pillar two. These are the regional pilot projects in which companies are involved that take care of the production, distribution and sale of the cannabis. Such pilot projects are currently underway in Switzerland. In Germany, however, this has been postponed.
What does this mean for your business and future investments?
We will continue to invest in the medical division of our company, which includes medicinal cannabis products. In the future, doctors will have significantly fewer bureaucratic hurdles in prescribing cannabis and patients will have better access. We will also benefit from this. On the other hand, there is our consumer division, which consists of cannabis products in the cosmetics sector and recreational cannabis. Of course, we have invested here with a view to possible model projects, from cultivation to processing and delivery points. We will put that on hold for the time being and wait and see how further legislation develops. We will not make the planned investments for the time being.
Does this also affect your production site near Frankfurt? The city had applied together with Offenbach as a test region.
We have a small production facility for cannabis extracts near Frankfurt am Main. In the course of the government’s initial legalization plans, we thought: could we build an extension on site and expand the property? This would have required larger investments, which we will not be making for the time being because the government’s plans are different and many things are still unclear. For us, however, the region remains very interesting with regard to possible pilot projects.
How high should the planned investments have been?
In the low single-digit millions. If it had been raised by the federal government, it would have been in the tens of millions. These are investments that we cannot now make in good conscience without having legal certainty.
How cautious are investors now?
Very carefully. I don’t think the investors who are normally interested in the cannabis market will invest for the time being. You will want to wait and see what else develops in this legislative period. The cabinet decision is not enough. The government draft is still going to parliament, but there are already a number of change requests. I think it was an important milestone, but it’s not the end of the story. Accordingly, I believe that the uncertainty in the market will exist until the law is passed.
Do you see this uncertainty for both markets – i.e. for medical cannabis and the recreational area?
Yes, both markets are uncertain. If the law is through, and there’s a good chance it will be by the end of the year, then we’ll have a higher level of security for medicinal cannabis. Then the investors who focus on this business will probably feel safer. As far as the luxury food market is concerned, there will still be a great deal of uncertainty for the foreseeable future.
What is your growth forecast for Sanity Group and the cannabis industry as a whole?
We estimate that the overall market for medicinal cannabis products will grow two to three times in the coming year. If the medical field comes as it has now been approved in the cabinet draft, then we as a company will probably increase by a factor of three to four in 2024. If one of the model projects in Switzerland that we are involved in works, then our luxury food business will also grow. That will be decided in the next two weeks. If the German draft law does not go through like this, we would probably double at most next year. Accordingly, it is very important for our planning and purchasing of goods that the draft law goes through.
Is the hesitant reform a long-term death knell for the German cannabis industry?
That was certainly not a death knell now, but it remains a rollercoaster ride. The industry is always up and down because it is particularly dependent on external factors. Corona was definitely a big damper for the industry because everything in medicine was going in the direction of Corona and other topics fell behind. Then came the great euphoria after the governing coalition announced full legalization. Everyone started planning, thinking things over. Then there was another setback because the traffic light had to tone down the legalization plans. And now the euphoria goes up a notch again when cannabis is no longer a narcotic.
Will all companies survive or will we see bankruptcies?
I think that many German companies that have primarily focused on the luxury food market will probably have problems with their business model. You will have assumed that you will make large sales in the luxury goods market in the next two years, which are not happening now. These companies have to reposition themselves.
So you assume that the industry will consolidate?
Yes definitely. For quite a few companies, the fact that full legalization has been postponed indefinitely has become an existential threat. There are currently around 200 to 400 companies in the German cannabis market. I estimate that a third of the companies could face liquidity problems by the end of the year, if not half. A company can fix these problems by growing, but that probably won’t happen. Or investors add money, but they are unlikely to do so because of the high level of uncertainty.
Will foreign companies then dominate the German market in a few years and overtake domestic cannabis companies?
Yes, I see the danger that German companies will lag behind in the future. In the first phase of medical cannabis legalization in 2018, you saw a lot of Canadian companies in the German market and hardly any German ones. Then there was a second phase that brought about a boom in German cannabis start-ups. And now, in the third phase, this boom in German cannabis start-ups has slowed down somewhat. German companies that may now face liquidity problems can be very easy takeover targets for large international companies that want to gain a foothold in the German market. Of course, that would not be a desired result for the German cannabis industry. We have to have a good balance with local players who create jobs here, build the infrastructure and pay taxes here. In other words, I think this is a dangerous situation. On the other hand, it has to be said that the cannabis industry is a little bit stuck around the world right now. You can see that in the big Canadian companies like Aurora and Tilray, whose share prices have fallen. I don’t think they’re going to buy up companies in Germany on a large scale because they have to fight their own problems first. So we’re a little lucky. But as soon as the situation in Canada improves, that danger is there.
What would have to happen to prevent this?
There must be clarity very quickly on detailed questions about medicinal cannabis. For example, there is still a requirement for approval, which means that health insurance companies can and far too often refuse to cover the costs of cannabis therapy. Politicians must set clear framework conditions so that growth is possible in the cannabis industry. She has to go straight to work on legislation for the commercial cannabis market that will allow for pilot testing. Our great concern is that we will not be able to continue for the time being. The law must come into force before the 2025 federal elections so that companies can plan with certainty and can show their investors valid business plans that really make sense and are based on a regulatory environment that can be assessed. That will be a tight box, also because another law will probably have to go through the Federal Council, in which the Union is currently dominating.
Laura Eßlinger spoke to Finn Hänsel
The interview is first at Capital.de appeared