Israeli Firms See Big Global Demand for Medical Cannabis – if Government Allows Exports

Companies remain optimistic about the business, despite Netanyahu’s freeze on exports

A worker tends to cannabis plants used for medicinal purposes at a plantation near the northern Israeli city of Safed, in a June 11, 2012 file picture.
Baz Ratner / Reuters

For Israel’s aspiring corporate cannabis growers, Prime Minister Benjamin Netanyahu’s decision last week to freeze exports was a setback – but not an irreversible one.

The ban on exports of medical marijuana is temporary, until Prof. Avi Simhon, the prime minister’s chief economic adviser, has completed a study of the matter. The growers are convinced that Simhon and Netanyahu will eventually be persuaded that cannabis is a real business that can earn billions of shekels in tax revenues.

Israeli cannabis has already won accolades for its high quality, said Nissim Bracha, the incoming CEO of Together, one of two marijuana companies traded on the Tel Aviv Stock Exchange. “Globally there’s huge demand for Israeli medical cannabis,” he said. “The subject still isn’t taken seriously as it should be because of the negative connotations it still carries.”

Medivie, the other marijuana company, spelled out the attractive economics of the marijuana business in a prospectus released last December.

The cost of erecting a greenhouse and the required security and production operations on a four-dunam farm comes to 10 million shekels ($2.8 million), it estimates. First-year operating costs add another 10 million shekels, mainly for electricity and upkeep.

The money in marijuana
First-year costs and revenues

Every cultivated dunam can yield a ton of marijuana annually at a coast to the grower of just 3.50 shekels ($1) per gram. Medivie says the price a gram of marijuana fetches from overseas customers is currently $250. Together says it’s double that, In any case, the overseas companies sell it retail at $10 a gram.

On that basis, Together of forecasting revenues of 50 million to 100 million shekels in its first year of operations and earnings before interest, taxes, depreciation and amortization of $1.1 million by its second year. That could grow to $28 million in year three, if demand is sufficient, the company predicts.

The Israeli medical cannabis market is valued at 145 million shekels a year, but that figure is expected to grow as its use become more widely accepted both by doctors and patients and by regulators. Today, about 32,000 Israelis use medical marijuana daily.

Eight companies are authorized to grow and package cannabis. People authorized to use marijuana medically pay a fixed fee of 360 shekels a month for 40 grams regardless of how much they use or in what form.

Even if the local market does expand, the new marijuana growers like Medivie and Together – neither of which have gotten approvals to plant a single seed – don’t see enough potential in it. They’ve set their sights on overseas. The world market for medical cannabis was $11.4 billion in 2015 and Bank of America predicting it could reach more than $20 billion by 2020.

Quality or not, both companies need branding power and have found it. Together has a memorandum of understanding with Doc Green’s to market under the U.S. company’s label while Medivie is cooperating with Netherlands-based Barney’s Farm, which is taking a 15% stake in its Israeli partners for $2 million.

Thus, for the two companies, export approvals are critical. An inter-ministerial committee last August estimated that cannabis exports could earn the government up to 4 billion shekels in tax revenues a year.

Even before it has export rights, Together reached a deal with an unnamed German company to sell it five tons of cannabis for 155 million shekels. on Sunday Together announced another export deal – this one for nine tones over three years for revenues of 52 million a year.

Both companies found their way to the TASE by buying shell companies and then enjoying as sudden surge in their stock prices.

Many investors compare the sudden surge of cannabis stocks to the bitcoin mania that briefly gripped the market last year and take the phenomenon no more seriously.

Netanyahu’s decision freezing export licenses caused Together shares to plunge 28% and Medivie’s 10%. In response, Together said it was weighing a plan to grow marijuana in Germany and Medivie said much the same on Sunday, which resulted in a small bounce higher for the shares. On Monday, Medivie ended down 2.1% at 18.04 shekels and Together fell 0.3% to 1.83.

At least one source who has been involved in the medical-cannabis industry for many years takes the companies’ rosy business forecasts with a grain of salt. Over the years, representatives of importers have come to Israel seeking to source cannabis but gave up in the absence of export approvals and moved on to other suppliers.

“There’s no special demand for Israeli cannabis. We’ve already missed the train,” he said.

Tikun Olam, the oldest of the established Israeli marijuana growers, is also skeptical. A company can’t simply grow marijuana and sell it as a medicine. It takes years to develop the right product, conduct clinical tests and finding the right varieties for different medical conditions.

Medivie CEO Menachem Cohen said he aims to overcome those obstacles by collaborating with Barney’s Farm. “Barney’s strains are very stable and high-quality, with unique genetics. Every scientist in the world studying a disease would be happy to receive an extract of oils from their strains,” he said.

Bracha echoes that. “We’ve chosen professionals with a 20-year experience in the field. When customers ask for a certain type of cannabis, our growers will give them what they want,” he promised.