Meet the King of Israel's Medical Marijuana Industry

'There is a great deal of excitement when you see how much it helps people,' says CEO of Tikun Olam, Israel’s largest grower of prescription cannabis. Yet the unusual business is not without its challenges.

Ofer Vakin

Aharon Lutzky has a long career in Israeli industry, one that is characteristic of many CEOs who grew up on kibbutzim – until personal circumstances introduced him to medical cannabis.

Lutzky grew up on Kibbutz Gvat in the north. When he was young he worked in the orchards, and after army service went to work in the kibbutz factory, Plastro Gvat, which made drip irrigation equipment – and advanced all the way to the post of CEO, in the years 1984 to 1992. Later Lutzky continued in plastics manufacturing and managed two other kibbutz plastics factories, Ginegar Plastic and Haogenplast.

But this ordinary careerpath took an unusual turn a few years ago when Lutzky’s son was injured in an industrial accident in the cotton gin at Gvat, and lost his hand.

As part of his rehabilitation process, he became familiar with a company named Tikun Olam – the largest grower of medical marijuana in Israel. Lutzky’s son started volunteering for Tikun Olam and asked his father to help by giving them business advice. soon,the owners, the Cohen family, offered Lutzky the job of CEO.

Lutzky sees the announcement by Deputy Health Minister Yaakov Litzman at the end of July of the expected reforms in the medical cannabis market as a major step forward for the entire business.

Litzman announced that medical marijuana will eventually be available at regular pharmacies for patients with a doctor’s prescription like any other drug; and the number of physicians who are authorized to prescribe cannabis to patients would increase. The Health Ministry’s plan is to exempt patients from having to be approved by the ministry’s medical cannabis unit; instead, it plans to certify specialists to provide permits directly to their patients without having to go through the ministry.

“Litzman’s proposal represents progress in the Health Ministry’s views. Litzman is opening the bottleneck in receiving medical permits for using cannabis with his move. The fact that they will recognize it as a medical treatment that is important to the patient and will help him is a cognitive revolution compared to the previous view that is a product for ‘potheads,’ a view that embodied the Health Ministry’s lack of trust about the product,” says Lutzky.

Olivier Fitoussi

How many people are treated today in Israel with medical cannabis? What is the potential market in terms of demand?

“Today there are about 20,000 patients in Israel and almost everyone has a relative who because of their medical situation needed cannabis. In a survey conducted in the United States, states in which medical cannabis has been legalized were examined and they reached the conclusion that 1.25% of the population consumed medical cannabis at the end of the process. This means that in Israel there is a potential for 100,000 consumers. We wonder why there are 20,000 users here today and in Germany only 500 users – it is a matter of regulation, which in Germany does not allow use to such an extent,” says Lutzky.

So Israel is not so far behind at all when it comes to legalization?

“Correct. Israel is not that bad, but it depends on who you compare it to. In Colorado before legalization there were 115,000 users of medical cannabis out of five million residents,” says Lutzky.

Tikun Olam was established as a non-profit organization in 2006 by Tzahi Cohen, after he sought permission from the Health Ministry to grow a few dozen plants for patients who had received permits for medical marijuana. He had a hard time getting it.

At first Cohen grew the plants in his home on a moshav in the north. In 2010 the number of patients with spermits reached about 1,000, and he could no longer fund and operate the business solely with volunteers. This was when the stage underwent new regulation in the ministry and Tikun Olam became a private, for-profit company.

Today, receiving a prescription for treatment with medical marijuana starts with a doctor who provides the patient with a recommendation for a permit. This recommendation is passed on to the Health Ministry, which examines it and decides whether to issue the permit. If it is granted, it is sent to one of eight authorized medicinal cannabis providers in Israel, which then contacts the patient and invites him or her to order the product.

Medical marijuana is not included in the state subsidized “health basket” of drugs and treatments, but the price is regulated. Every patient pays the supplier 370 shekels (a little less than $100) including value-added tax per month, without receiving any money back from his or her health maintenance organization.

The price is the same whether the prescription is for 20 grams or 200 grams – the range of amounts the doctor can prescribe monthly.

This system makes it in your interest for cannabis buyers to use as little as possible. After all, you get your 370 shekels in any case. The more the patient consumes, the more it costs you.

“True. Israel is unique on the matter of a fixed payment.”

What is the world price?

“The price around the world is between $5 and $15 a gram. In Israel the average price is $5.20 a gram. In Israel we also need to change the method of price per gram, since it really creates distortions.”

Ofer Vaknin

What about importing cannabis?

“There are no imports. The Health Ministry considered it but it is not relevant since the price of cannabis in Israel is significantly lower.”

If cannabis is cheap here, then maybe we should be exporting.

“There’s no permission to export cannabis from Israel. This is one of the things we would like to change, but the previous health minister [Yael German] declared that she did not want Israel to be seen as an exporter of weapons and drugs. In practice, we have Teva [Pharmaceuticals], which is the largest generic drug company in the world, and also quite a few weapons plants. Since they do not let us export, we established a partnership in Canada with a local company to which we have transferred the knowledge we’ve developed here in Israel. We conduct studies in the United States, too, and also have started there with cooperating with a local company.”

What is the profitability of the industry?

“It varies, depending on the size of the companies. Growing in quantities is cheaper because fixed costs drop. In general, the level of profitability can range from a few percent to tens of percent. Most growers in Israel claim they still have yet to get back what they invested establishing the company. But it’s clear the industry has great potential and should be growing and developing, simply because the product is very successful.”

How much does it cost to grow 20 grams of marijuana?

“That is like asking how much does a suit for an orphan cost. It depends on the size of the farm and whether it is summer or winter. In the winter it’s more expensive because of energy costs. Cannabis is an annual plant that likes when the day is 12 hours long. If the day shortens to less than 12 hours it flowers too early. In our hothouses there is equipment to control the lighting and heat in the winter, too, and that changes the costs.”

What is your biggest expense?

“In Israel the biggest expense is security. The heavy security costs, perimeter security with face recognition cameras connected to a center, and human guards around the clock. After that there is the labor cost, growing cannabis is a labor intensive industry.”

There is no mechanization in the industry? Harvesting machinery?

“There is a machine for ‘trimming,’ the process of separating the leaves from the flowers after they are picked. But no more than that.”

So you hire Thai workers?

“No. Mostly because we need a safety permit for every worker. Israelis work for us, Druze, Christians, Jews.”

What about marketing? Do you have marketers like all the drug companies?

“No. We have an Internet site, a Facebook page and Twitter.”

What is your market share?

“We make up 25% to 30% of the industry.”

Why are you the biggest?

“We are the oldest and best known. We have a very good website. Many customers think that the product here is the best, and a large number of our customers switched to us from another supplier. And we have unique varieties, even though that is something every company can say about itself.”

I can choose whichever supplier I want?

“Yes. Even though most customers are not aware of it.”

The one who decides which supplier will receive the prescription is the Health Ministry. In practice, it regulates the market.

“Correct. The form comes back with approval and the name of a supplier, and the supplier contacts the patient. But the patient has the right after that to change to supplier. He can send a request to change the supplier.”

A back-of-the-envelop calculation shows that the 20,000 Israelis being treated today with medical marijuana represent a market of almost 90 million shekels a year. Tikun Olam’s revenues are then about 25 million shekels. But even if Lutzky heads a for-profit company, it is impossible in an interview to avoid the ideological side he sees in the company’s activities, and he comes back to it time after time.

“Let’s not talk about the company only [from the money viewpoint]. From the beginning we have seen ourselves not just as a grower company, but as a treatment company, too. We make sure our patients receive the best treatment. For example, we decided that only registered nurses do the training for our products.”

What is training? You teach how to smoke?

“Not just smoking. You must remember that we sell flowers, which are used for smoking or inhalation, but we also sell cannabis in oil, capsules and cookies. One of our nurses interviews the patient, asks him about his medical history, why he came to it and teaches him about the right and appropriate strain.”

How many varieties do you have? What are the differences?

“There are more arousing and more calming varieties. Every strain has its own characteristics, also in terms of the active ingredients: In cannabis there is THC, which is a psychoactive material; and CBD, which is a material without psychoactive effect but with wonderful anti-inflammatory effect for diseases such as Parkinson’s and arthritis. CBD should not be on the list of [dangerous] drugs, and in the future I believe we will see it as a medicine for a long list of diseases.”

Tikun Olam finds the appropriate variety for each patient and after a few months checks how satisfied the patient is.

“For now, receiving a prescription is a cumbersome and difficult process. By law, the doctor needs to confirm that the patient tried four other drugs against pain and the treatment with them did not help over time, and only then is he allowed at all to recommend cannabis. The only case in which cannabis is the first line [of treatment] is for Tourette syndrome.”

Litzman’s reforms could actually damage your connection with the consumer. It sends them to a pharmacy instead of having your direct connection.

“It would seem the answer is yes. But since that is not the final version of the proposal, I hope it will still change. The connection with the consumer is what allows us to adapt the varieties to everyone. It also allows us to conduct clinical research with hospitals.”

What about black market use of your cannabis? People receive medical marijuana through a prescription and pass it on to users who are not ill?

Lutzky says estimates are that some 400,000 to 800,000 Israelis use marijuana, so the number of medical marijuana users is only a small part of this number.

“We should remember that most medical users receive a supply of 20 to 30 grams a month, which cannot be significant for [recreational drug] use. But yes, there are certainly here and there those who take advantage of the prescription. But even if there are, it is not a big disaster. It is insignificant compared to those who use cannabis from other sources and get it through the underworld, which buys marijuana from Hezbollah and Hamas, who knows what is in it. We try to make sure that customers receive cannabis for their own needs, mostly through being strict about permits.”

“You can’t argue with success. There is a great deal of excitement when you see how much it helps people,” said Lutzky. It is safe and has no negative side effects, no one dies from it, he says.

“In the worst case it is inappropriate for you and you stop. It is not addictive. There are other substances in cannabis in addition to THC and CBD. Substances that have been studied less and they too have a positive effect.”