The medical cannabis industry is starting to mature. The sector garnered criticism after several companies began trading their shares on the stock market long before they had sales to speak of. At least 12 companies entered the industry.
Now the trend has shifted. In the past few weeks, companies with years of experience growing medical marijuana and developing new strains are launching on the stock market by merging with publicly traded shell companies. Finally, investors will have a real opportunity to invest in Israel’s medical cannabis market — the one that’s up and operating, not the hopeful future one. Is it a worthwhile investment?
The cannabis stock frenzy is not unique to Israel. On the Toronto Stock Exchange, companies including Canopy, Aurora and Tilray traded at a combined market cap of $26 billion, as Canada moved toward legalization of marijuana in October. But the shares are extremely volatile and many are tens of percentage points off their highs. Their stock market valuations are completely disconnected from their actual profits.
Likewise, Israeli funds investing in these North American stocks, managed by Ayalon and IBI, saw as of October their values increase by 50% from their launch, only to have it all wiped out. IBI’s fund is now 8% lower than at its April launch.
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It’s hard to argue with forecasts showing that the markets for both medical and recreational marijuana are expected to grow sharply, given the growing number of countries that are legalizing it to varied extents, the increasing acknowledgement of its medicinal properties and its mounting social acceptance.
Then there’s the fact that huge companies like Coca-Cola and the maker of Corona beer invested billions of dollars this year in marijuana companies with an eye to developing soft drinks based on CBD, a component of cannabis with medical applications but no psychoactive affects. While it’s hard to quantify the scope of the change, while the North American market for legal marijuana is worth $9.2 billion a year today, Arcview Market Research estimates that international sales will reach $57 billion by 2027.
Israel’s newest stock market players are Better and Pharmocann, which are merging with the stock market shells WhiteSmoke and Medical, respectively. Both companies have a decade of experience in Israel’s medical marijuana industry. Better has a market cap of 36 million shekels ($9.575 million) — up 48% for the year and currently 17% below its peak valuation; Pharmocann, with a valuation of 38 million shekels, is up 345% for the year and is 6% off its top share price.
And then there’s Panaxia Pharmaceutical Industries, which is merging with the stock market skeleton Herodium Investments. Panaxia manufactures a range of products from marijuana, one of just two Israeli companies with the necessary processing facilities. As a result, most of the other Israeli companies in the field are likely to be Panaxia clients. It has a market valuation of 37 million shekels, is up 112% for the year, and is currently priced 8% under its peak.
The biggest and best known company in the field is Intercure. Its current valuation is 420 million shekels, up 1,270% for the year, and is currently 7.5% off its top price. It is notable for having former Prime Minister Ehud Barak as chairman. Its current sales are based on Canndoc, a small company it bought out with 6.2 million shekels in revenues as of 2017 and 600,000 in profits. Intercure says it seeks to expand into 10 other countries.
Another player in the field is Breath of Life Pharma, whose investors include the owner of local drugstore-chain giant Super Pharm, and which owns the country’s second marijuana processing plant. Last year it had revenues of 10.8 million shekels and losses of 17 million shekels.
Four out of Israel’s eight active medical marijuana companies are slated to be publicly traded.
Yet despite the rosy forecasts for the medical marijuana industry, this doesn’t mean anything for the shares of any specific Israeli company.
Investors are right to regard the industry with some caution. One of the better known players, Together, reached a market cap of half a million shekels this year, and released dozens of announcements to the stock exchange regarding its plans to grow marijuana and its agreements in foreign countries, but is still yet to plant its first plant. Its market cap is currently 250 million shekels, 68% off its peak but still up 283% for the year. Mediway, another company that tried to ride the trend, also is yet to show any actual progress, and even its research and development contract with High Pharma was recently canceled. The company is still trading at a market cap of 115 million shekels, up 100% for the year but down 49% from its peak.
As for the companies with actual operations, the two big questions at the moment are whether they’ll receive export permits, and what the local market will look like following a Health Ministry reform. A reform scheduled for April would see the companies competing against each other over a local market that, while growing, is still relatively small. Current demand is for 10 tons of medical marijuana a year — some 33 grams a month for each of some 28,000 patients. Patients pay growers 370 shekels a month, regardless of how much they consume.
Israel has been considered a medical marijuana powerhouse for years, yet the government has been hesitant to approve exports, possibly due to fears of being perceived as an exporter of arms and drugs. For months, Prime Minister Benjamin Netanyahu has been deciding not to decide whether approve medical marijuana exports, despite professional opinions calling on him to do so. As a result, Israel has missed out on major international tenders issued by hospitals, research institutes and companies. But market players say the ministry reform will give Israel particularly advanced regulation in the field.
For the local players, export approval will mean significantly higher share prices; being limited to the local market will significantly limit the companies’ value. That said, the timing of export approval is far from certain.
While a few companies have hinted at foreign operations to bypass the need for local export approval, these statements should be regarded with some skepticism. These countries already have major companies in the field, and local consumers are likely to look for the best-known brands. The Israeli companies seem to think Israel’s “startup nation” reputation will be enough to make them global players in the field. In practice, there’s no way of knowing how much demand they’ll find abroad, once all the necessary regulatory approvals come through.
The market is likely to expand, but given the risks and the high prices of some of the shares, randomly choosing a medical marijuana company to invest in is likely to be a risky strategy. Ultimately, the companies’ valuations will need to be on par with their earnings.