In early 2019, the emerging medical cannabis sector in Israel became a hot trend in the capital market, attracting a host of senior figures from the worlds of politics (Ehud Barak, Ehud Olmert, Haim Ramon), the military and defense (Yohanan Danino, Tamir Pardo, Yaakov Perry, Ido Nehushtan, Eitan Ben Eliyahu). Prominent real estate entrepreneurs (Barak Rosen, the Gindi brothers, Ido Hajaj, Yigal Damari) and figures from the high-tech worlds (Ziv Aviram), retail (Leon Kupler), sports (Gili Vermot) and even entertainment (Aviv Geffen).
Everyone wanted to take part in a developing market that excited the imagination of investors in the stock market at the time, and ensured rapid growth, which relied mainly on the hopes of exporting quality Israeli cannabis overseas. The stock prices of the companies that entered the industry soared, even if they did not yet record significant income. The proliferation of reports about transactions that have arisen around them has added fuel to the fire.
More than three years have passed, and today it is already a real business, generating considerable income with dozens of pharmacies selling medical cannabis scattered throughout the country. But when the business is real, the challenges also become such. Ten medical cannabis growing, processing and marketing companies listed on the Tel Aviv Stock Exchange already show handsome revenues, sometimes tens of millions of shekels a year or more. However, only three of them have become profitable in the past year, export activity is still marginal, Sometimes 80% or more since the days of the “hype”. Needless to say, many of the “celebs” who flocked to the industry in the past are no longer in it today.
The industry today is facing some significant issues. Although the local market has grown at a surprising rate, but mainly on the basis of import products, and if so, what could be the Israeli advantage in the export markets? At the same time, excess production capacity, fierce competition that leaves most of the power in the hands of the point of sale (pharmacy) and unstable regulation, make it difficult for companies to make a profit.
Most of the local industry is traded on the Tel Aviv Stock Exchange, companies that last year generated revenues of about NIS 650 million, most of which came from the domestic market – about half from the sale of imported products. Of the companies traded, only three managed to present profitability. Those facing it today and where it is headed.
Avinoam Sapir, CEO of Tikun Olam Cannabit, is actually optimistic. Stuff like that”. Shiri Eden, one of the top analysts in the cannabis market and a consultant to the fund that invests in the field, reinforces his words: “Companies are priced too low. They are growing, some are profitable, and the Israeli cannabis market can grow more than 100% easily.”
Israel is surprisingly considered a significant cannabis market in the world, but abroad there is a great opportunity in terms of the number of users and the price that can be charged – and yet exports are in the meantime on the margins, even after removing most regulatory barriers.
Dr. Dedi Segal, CEO of Panaxia / Photo: PR
Dedi Segal, CEO of Panaxia, claims that “We are very export-oriented. In Germany we estimate that we will reach a market share of 30% with quite high gross profitability. This year, activity in Germany was about 7% -8% of our turnover (which stood at NIS 84 million, Joe) but it should be remembered that we have only just started.
“In the German market, the Canadian company Tillery is huge, close to 70% of the market, and we are constantly biting into them. Apart from them, there are dozens of other competitors, but small ones. It is a market of 50 million euros, which is growing significantly.” Panaxia believes that in the German market, it will stand out thanks to its unique product, cannabis in evaporation and inhalation: “It is a more accurate and healthier method of administration.”
“It’s not an export, it’s an overseas production line”
Sheikh, which produces the raw material for panaxia products, is also marketing to Germany at the same time and has recently started exporting in small quantities to Australia. Yogev Sarid, CEO of the company: “In the near future, the Israeli market will be our main market, with the export market providing diversity and support. It is possible to market good products abroad that I can not sell in Israel, because the levels of THC (the “memstal” substance in cannabis) are low. “
Sapir: “We are repairing a world very close to implementing the agreements we have in Germany and Italy, now that the corona is over. We have an agreement in principle with Teva to export to the Ukrainian market,” although it is currently unclear what is happening in this market. But Sapphire has no illusions that exports will be simple. “I think it will be difficult to compete in inflorescence exports with Africa or South America. The advantage will be in very special products, with a clear medical characterization.”
Alex Rabinovich, CEO of Intercure, which leads the local cannabis industry in revenue (NIS 220 million last year) and value, explains that the company has solved the issue of regulation on exports from Israel, by not exporting from Israel at all: “We are not just looking at it. As an export, we have built a global production system that provides our unique products in Israel and abroad. Our center is Israel Here we have built our most advanced facilities. In addition, nine facilities in five different countries produce for us exclusively, but we do not own.
“It was important for us to lead the Israeli market, which is the most advanced market in the world today, but Israel will not remain the main market for years and the revolution that has taken place in Israel will affect every Western country and today our products are in demand in many countries. “Regulation for medical cannabis. To date, abroad has not been significant in our revenues, but we do bear the start-up expenses and expect that soon we will see a continuous increase in revenues from other countries as well.”
Rabinovich: “It was important for us to lead the Israeli market, which is the most advanced market in the world today, and is currently four times larger than the German market. But Israel will not remain the main market for years. What happened here will happen in other countries. For example, even in our exporting countries we will have our own pharmacies, where we will market our brands. To this day abroad has not been significant in our revenues, but yes in expenses. In 2022, we will also see revenue. “
“The regulator did not say the last word”
Togder is the only one traded in Tel Aviv to set up a facility it owns abroad, in Uganda, where production costs are relatively low. Nir Sosinski, one of Togder’s owners and responsible for operations abroad: “We import from Uganda to Israel. We recently started on the Uganda route Germany, and later also England. This will change Togder’s revenue over the next year. The German market is not big, but if one day there will be legalization, say, then I want to be there. In Israel, what to do, there is a population barrier, and in Germany 80 million inhabitants. “
Togder Heads at Uganda Incubator Company Togder Pharma / Photo: PR
The question arises, how will Israeli companies come out, if the products that are sold well in Israel are mainly imported products? Industry executives admit that in Israel itself, products made in Israel are difficult to compete with imports. According to Segal, “Most growers sell little local merchandise, and these are their cheapest products.”
Sapphire: “About 40% -50% of this market will be imported, and consumers perceive it as better. But the regulator has not yet said the last word in the field,” meaning there is concern (or hope, among some companies) that regulation will restrict imports.
Nir Peles, one of the controlling owners of Knashur: “If I have to respond to regulation, and also to consumer preferences, I have to diversify the sources, and currently I also buy other farms and also import, in addition to growing with us. The business is no longer agricultural, but more logistical.”
When you say “strong brand” or “consumer preference”, what makes the product a favorite in Israel and is that what it will be abroad as well?
Eden: “There are groups on Facebook where they open the product, take pictures of what it looks like, tell about the experience. There is a general preference for cannabis with high THC levels, but today when there is no longer a shortage of such products, preferences also develop within the high THC category. Some consumers want Even CBG, which is a substance whose level is not announced on the packaging, but sophisticated consumers, group managers, can take the product to the lab and see if there is or is not CBG, and it has an effect. “They record success in every batch. Things can go wrong.”
Sosinski: “The Israeli consumer is looking for a product that is more covered in trichomes (a component of the plant) and kisses 24% of THC (kisses the maximum allowed by law for a medical consumer). It is very difficult to reach such a level in a greenhouse, although sometimes we succeed. But between us? “Between what the consumer is looking for and the medical benefit. Or rather – the hidden superior to the visible in this context.”
Sapir: “There is also a market for truly medical products, which target a specific indication – epilepsy, dementia, acute pain – according to our experience and previous experiments. Teva chose to market the oils of Tikun Olam in Israel. In the third quarter we will meet these products on the shelves. Significant seal for our products. ” But world repair also reads the direction of the market. “A month ago, we launched the ‘Olam’ brand, which suits the preferences of the Israeli consumer, and we do not emphasize the specific medical benefits of each product in it.”
“Whoever has a large inventory, a sign that he failed to sell”
Price is also a consideration. Nissim Bracha, CEO of Togder, explains that: “The Israeli market is willing to pay for quality products, but as in any field, there is a group of consumers who must consider the price. “Although we bring premium products from abroad, we also produce the highest quality products at affordable prices, and we are on our way to becoming the largest value player (products where price is a significant consideration) in the market.” In such branding, the connection with Rami Levy’s Good Pharm drugstore chain makes sense. The partnership is currently setting up specialist cannabis pharmacies, which will sell Togder’s exhibits.
Why have only a few companies operating in the industry become profitable?
Eden: “The market has converged into a state of real competition, including price competition. Those who do not bring highly sought-after varieties, are unable to sell at good prices, and are forced to sell at low profit or delete inventory. Bad varieties are not sold at all because no one will waste their prescription On material that just does not work.
“I follow the issue of inventories because whoever has a large inventory, a sign that he has not been able to sell and that inventory may be deleted. There is also an oversupply in the world. There have been deletions, production facilities have been closed, and that will happen here as well.”
Another source in the market notes that “since there is a surplus of production capacity in the legal market, and accumulated full, prices also in the black market (grass smokers in violation of the law) have fallen. In this context, Sapir notes:” I am waiting for legalization 2 million users. The fine for illegal breeding is low, and this industry feeds on arms purchases and trafficking in women and protection. “
“The potential: a deal between an Israeli and a foreign company”
In a market with so many companies, most of which compete mainly in Israel and most of which do not make a profit, there is talk of mergers. But do small companies have anything the big companies need at all?
Segal: “We are less interested in this at the moment because these are companies that are focused on the Israeli market. We might have been interested in acquiring a marketing arm in Germany, if we did not have a strong marketing partner there. I believe in Israel, a company without strong imports or a pharmacy Buy some time for these companies, for example to stop imports or for full or partial legalization. “
Sarid: “I believe that in the end four companies will remain here, and we will be one of them. The companies that will remain are the ones that have pharmacies, but not necessarily a factory.”
Sapir: “Owning a factory costs about NIS 1.5-2 million a month, and if you do not process over 500 kilos, there is no point in it. Pharmacies will also have to find their differentiation. Today there may be 200 points of sale. When there are 400-600, the turnover is per point got off”.
Eden: “The highlight will be a deal between an Israeli and a foreign company. Tillrey has announced a purchase plan and has close working relationships with Intercure, and also with BOL.”
Rabinovich, who has already acquired one activity, that of Better, says: “We believe in consolidation and are happy to lead it, in Israel and around the world. We believe that 3-4 leading companies will remain in the end. In terms of who will remain, the issue of cash flow is critical. “They generate cash and can not invest, and then the question is in which of these companies will the owners flow money and allow it to stand on its own two feet.”