In Israel’s Biggest Medical-cannabis Deal, Cannbit Buys Tikun Olam

$41.5 million sale comes after Tikun Olam failed to get permission to grow cannabis commercially

Cannabis seedlings are cared for by a worker in a green house of the cannabis cultivating and processing plant at Revadim Industrial Center in Lod, Israel, on January 23, 2019.
Bea Kallos / MTI / AP

In the country’s largest ever medical-marijuana merger, publicly traded Cannbit Pharmaceuticals said on Monday it was buying Tikun Olam’s Israel operations for a price that could reach as high as $41.5 million.

The deal came after Cannbit sharply reduced its asking price for troubled Tikun Olam, which is controlled by Tzachi Cohen. Completion of the sale hinges on approval by the health ministry.

Cohen is a global medical marijuana entrepreneur who made $255 million from the sale of MedReleaf, in which he had a 13% stake, to the Canadian cannabis giant Aurora last year. He pioneered the Israeli medical cannabis industry by founding Tikun Olam as a nonprofit in 2005.

Cohen decided to sell the company’s Israel operations after the Jerusalem District Court backed a ministry decision in August against renewing the firm’s license to grow the cannabis locally unless he ceased to be a controlling shareholder. Cohen was suspected of using drugs and of having underworld ties.

Medical marijuana is an up-and-coming industry in Israel, which has a long history of research and development in the field. The government approved exports of medical marijuana in April.

But excitement over the prospects for export markets shared by the government, which sees the industry as a way of creating jobs and generating tax revenue, has been dampened by worries that criminals will infiltrate the industry. Police concerns have held up export approvals.

Cohen had originally sought as much as $60 million for Tikun Olam and a 5% stake in Cannbit, which is controlled by an investor group led by Barak Orzen, and 5% royalties on future sales.

The sides settled on a lower price, comprising $23.5 million in cash to be paid immediately plus another $18 million if the merged company reaches a market value of 1 billion shekels ($290 million at current exchange rates) in the next five years.

Cannbit shares were up 12.6% at 11.22 shekels in Tel Aviv Stock Exchange trading late on Monday, giving the company a market cap of 246 million shekels.

Cohen will also get a 5% stake on Cannbit as well as royalties equal to 3.2% of sales. Cannbit is expected to change its name to Tikun Olam/

Under the deal, Cannabit will get Tikun Olam’s intellectual property rights for Israel, France and Poland (or Spain, if the company’s Polish operations move there in the next 12 months). It will also get a 74% stake in Tikun Olam’s Kfar Yehoshua cannabis farm, which has a valuable IMC-GAP certification for commercial farming of cannabis, as well as 100% of a processing plant under construction near Nazareth, plus marketing and distribution facilities.

Cannbit also gets access to Tikun Olam’s built-in customer base, a holdover from the time when users were given approval to buy from a single supplier. That base has shriveled to just 1,800, according to Monday’s statement, from a peak of 15,000.

What Cannabit didn’t buy is Tikun Olam’s pharmaceutical IP, which the company has already granted rights to third parties, including the right to use the Tikun Olam name in cannabis-based pharmaceuticals globally.