Up in Smoke: Making Sense Out of Israel’s Medical Marijuana Mania

A score of publicly traded companies have soared in value even though few have yet to enter the business and none of them are making any money

File photo: An employee checks cannabis plants at a medical marijuana plantation in northern Israel, March 21, 2017.
Nir Elias/Reuters

At last count, the Tel Aviv Stock Exchange was home to 19 medical marijuana companies with a combined market capitalization of 3.4 billion shekels ($950 million). Many of them have seen their share price soar by hundreds of percent.

The industry is abuzz with mergers and acquisitions, plans for initial public offerings on Wall Street, negotiations with global companies and hiring of big names as executives and advisers. And, of course, there’s Israel’s global reputation as a medical marijuana research and development power and the government’s approval of exports as of this month.

Yet, the industry isn’t just about smoke but about mirrors, too: Most of the 19 companies traded on the TASE have no sales, or even a license to grow or process medical marijuana. The ones that do sell are losing money, which should come as no surprise. The domestic market to which they had been confined until exports were approved is just 40,000 users who pay a fixed 370 shekels a month.

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Despite all that, Israeli stock market investors are infatuated. The economists, accountants and CEOs who attended a conference on the matter this month at Herzliya’s Interdisciplinary Center can only could only express shock and issue warnings.

“You can’t ignore the fear that we’re seeing a bubble. We’ve encountered all kinds of valuations [for the companies] and we haven’t been able to understand exactly what they’re based on,” Shlomi Shuv, deputy dean of IDC’s Arison School of Business and head of its accounting program, told conference.

One example he pointed to is InterCure, a medical holding company that segued into the medical marijuana scene last autumn when it acquired Canndoc. InterCure has a market cap of over 1.1 billion shekels after seeing its shares increase nearly nine-fold since the end of August.

Shuv pointed to a clutch of reports showing that Israeli medical cannabis companies would reach valuations many times what they are worth today.

One predicts that Herodium, which now has a market cap of 93 million shekels would eventually be worth 632 million after it agreed last month to merge with Panaxia Pharmaceuticals, the first company in Israel to get a Good Manufacturing practice (GMP) approval for a processing plant.

Another is Whitesmoke, now worth 60 million shekels on the TASE but forecast to reach a valuation of 370 million due to its merger with Better, an authorized supplier of medical cannabis.

Another company, Cannbit, is expected to see its market cap climb from 196 million shekels today to 462 million after Barak Rosen and Assaf Tuchmeir, the controlling shareholders of the Canada-Israel Group, agreed to buy shares. Cannbit, however, has no Israeli Health Ministry approvals to grow marijuana.

Experts said that deals like Cannbit’s that bring in big name investors, even if they have no connection with the medical cannabis industry, help generate excitement around stocks. Cannabit’s celebrity lineup includes Daniel Birnbaum, who led SodaStream into a big buyout from PepsiCo; Eitan Ben-Eliyahu, a former Israel Air Force commander; and former Yesh Atid Knesset Member Yifat Kariv.

InterCure can probably claim the biggest catch: When it hired Ehud Barak as chairman last year, its share price shot up 500%. When Univo Pharmaceuticals named Ehud Olmert as an adviser earlier this month, its market cap shot up to 154 million shekels from 90 million.

Prof. Amir Barnea said that even though medical marijuana companies are pharmaceutical businesses by most measures, the widely used models used to value pharma companies don’t seem to apply.

“These companies have no patent protection,” he stressed. When Golan Biton, Univo’s CEO, responded that his company did have patents for formulations, Barnea shot back: “This will create a brand? What use is it?”

Hagai Hillman, the CEO of the medical cannabis company BOL, hinted that the mature industry would resemble agriculture than pharma. “Profitability will be no different than that for eggplants or cucumbers,” he said.

Right now the Israeli industry is quite small and it won’t be getting much bigger in the near future, noted Yuval Landschaft, director of the Health Ministry’s Medical Cannabis Unit, told the conference.

Only seven companies are licensed to grow marijuana and only four more are expected to be added to the list in the next half year, he said. Another 560 have received preliminary approval. Only four – BOL, Panaxia, a unit of Teva Pharmaceuticals and Bazelet Pharma – have GMP-standard processing facilities. Another five are on their way to getting approval.

Eighty pharmacies are authorized to sell medical marijuana, although another 40 are expected to get approval, Landschaft added.

Shlomo Bartov, a partner in the Tel Aviv accounting firm Fahn Kanne, said inflated valuations for medical marijuana stocks weren’t unique to Israel. Of 138 companies he surveyed globally the average market cap was $470 million and a few giants even had valuations of $10 billion or more. “But only five companies had positive earnings before interest, taxes, depreciation and amortization,” he said.

“The fact is that most of this universe exists in expectations that the market will develop, that sales will grow and that there will be profits,” Bartov said. “It’s very hard to calculate valuations.”

So what is a medical marijuana investor to do?

Ofer Spottheim, CEO of medical cannabis accelerator Cann 10, offered the conference some tips, with the proviso that most local companies aren’t likely to survive. “They have no one to sell their crop to,” he warned.

Rule 1 is to make sure that company has at least one employee who is academic credential that meet Health Ministry regulations, or the company will never get a license to grow.

Rule 2 is to distinguish between growing for medical and recreational purposes.

Rule 3: Ensure that the company meets European standards. “Everyone dreams of selling to Germany, but most of them have no idea or understanding what the requirements are – the Israeli GMP isn’t automatically accepted in the Germany,” Spottheim said. Rule 4: Be warned that a company with a single hothouse won’t be able to meet demand beyond the local market.