German government may end up buying more medical cannabis than expected, but at a lower price

The Löwen Apotheke in Trier, which has signage saying it's the "Oldest German pharmacy. Lion’s pharmacy since 1241." (Photo by Alfredo Pascual)

The German government has clarified the quantities and price of medical cannabis flower it could buy from domestic producers, confirming that growers have the option to sell – and, to a certain extent, the government is obligated to buy – significantly more than the often-cited 2,600 combined kilograms (5,732 pounds) per year.

The reply to a parliamentary query also indicated that the average price per gram the domestic grows could fetch is as little as 1.87 euros ($2.11) per gram in a possible scenario in which the government buys 150% of the annual contracted quantities.

The price of about 2 euros per gram is in line with what producers have offered to win supply tenders in other European countries, such as Italy, or the price the Dutch government fixed in its ongoing application process.

The price also suggests that it will be challenging for German growers to make much profit from their grow operations, considering the limited economies of scale and duration of the contracts as well as comparatively high operating expenses and capital expenditures to build bunker-style facilities required by German regulations.

Exporters gearing up

Several countries and dozens of companies are gearing up to export to Germany because they expect domestically produced cannabis will be insufficient for the growing German demand.

While that will likely be the case, companies planning to export to Germany should keep in mind that different scenarios for the domestic grows could play out, some of which imply the government will buy significantly more than 2,600 kilograms per year.

Flower imports in Germany in 2019 were 6,500 kilograms. If, for instance, the government buys 150% of the agreed-upon quantities with domestic growers, the 3,900 kilograms would represent a significant portion of the domestic market.

That would mean a somewhat smaller export market being up for grabs for international companies intending on capitalizing on Germany’s burgeoning medical marijuana market.

The contracts between the federal government and the German subsidiaries of Canadian-based Aurora Cannabis and Aphria as well as Germany-headquartered Demecan are for a total of 13 lots of 200 kilograms per year apiece.

Demecan has three lots; Aurora and Aphria have five apiece.

However, the actual quantities to be bought by the government and the price it will pay depends on how much the producers effectively harvest and how much the government is willing to buy. Only minimum quantities are guaranteed.

The first harvest is expected later this year.

Important to note is that the contract between the government and growers establishes that an automatic 50% price reduction applies for any gram sold exceeding 120% of the contractually agreed-upon quantities – which start at 200 kilograms per lot per year.

Disclosure problems

Germany is by far the largest European medical marijuana market. But unlike Canada or some European markets such as Denmark, Germany proactively discloses very little about the size and breadth of its market.

In fact, many of the important data points about Germany’s medical marijuana market come from parliamentary queries made by elected representatives – and that information is disclosed to the public.

The exact price companies offered for each of the 13 lots has not been revealed.

But based on a previous parliamentary query, Marijuana Business Daily reported last November that the average wholesale price at which the government expected to buy the combined production of domestic producers was 2.3 euros per gram.

This was because the government said it expected to pay – per quarter – roughly 1.5 million euros to buy 650 kilograms.

The government’s reply also said it could buy another 325 kilograms per quarter paying the same price per gram.

But as MJBizDaily previously reported, paying the same price per gram for the extra quantities – as the government said last November – would contradict the contract that the German Federal Institute for Drugs and Medical Devices (BfArM) has with the growers.

In its most recent reply to parliament about this issue, the government aligned with MJBizDaily’s original analysis.

The new disclosure revealed that if the BfArM buys 150% of the agreed-upon quantities – which would be 3,900 kilograms per year – the agency would pay a total of 7.3 million euros.

This would translate into an average price per gram of 1.87 euros, significantly lower than the 2.3 euros per gram disclosed in the previous government reply.

Price, quantities might vary

If the three domestic growers harvest more than the yearly agreed-upon quantities, the government would be contractually obligated to buy up to 150% per lot.

In other words, if a company harvests and wants to sell 400 kilograms of a lot instead of the agreed-upon 200, the government is obligated to buy up to 300 kilograms with an option to purchase more.

For any gram exceeding 120% – or 240 kilograms, in this example – the price drops to 50% of the original.

This means the average price of just above 2 euros per gram applies only as long as the government buys no more than 120% of the agreed quantities.

According to the most recent disclosure, the German government expects to pay about 5.5 million euros for the contracted yearly 2,600 kilograms of cannabis flower – or roughly 7.3 million euros if it ends up buying 150% of the yearly agreed-upon quantities.

In the new disclosure, it becomes clear that in a scenario in which the government buys 150% of the agreed-upon quantities, the average price per gram – 1.87 euros – is lower than if it buys up to 120%.

Independently, there’s an option to increase the quantities 10% cumulative per year, which could be executed separately for each of the 13 lots, if both parties agree.

This would mean that the 200 kilograms would turn into 220 kilograms with the first increase.

Alfredo Pascual can be reached at [email protected]

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