The HQR (Medical Cannabis Unit) issued guidelines that reduced cannabis imports to Israel. But revealed a significant weakness of the industry: Domestic growth needs protection from outside competitors. Local companies.
The cannabis industry in Israel has been the center of attention for about two years Of the Israeli capital market and it includes companies that deal in the entire chain of cannabis products: from growing inflorescences themselves to creating various products for consumption from the cannabis plant. As in any field that enjoys great popularity, it seems that everything that deals with cannabis will achieve a great return for investors. The performance of prominent companies in the field is indeed interesting: for example, in the last three years Univo has risen by 114%, Panaxia has added 170%, Tikun Olam has risen by 275% and Intercure has jumped by 1,400%. The great interest led the Tel Aviv Stock Exchange to recently launch an index on the shares of cannabis companies.
However, as the industry matured, there was a trend of separation between different companies, Moreover – between different segments of the cannabis industry, which is expected to lead further down the road to significant differences in the stock performance of the various companies. In our opinion, Investors today need to make more accurate diagnoses of what they are investing in. As far as companies engaged in growing for export purposes are concerned, these are likely to show poor performance, due to the reasons detailed below, although – I refer to the whole. Specifically there are companies that may succeed, the majority will fail.
HIKR intervenes in the market
In December, the HQR (Medical Cannabis Unit) published procedures regarding cannabis products imported to Israel, which determined that the product must undergo various laboratory tests. The rationale for these tests, according to the HIKR, is to ensure compliance with inflorescence growth standards, since it cannot monitor the growth. Abroad. In practice, these procedures have led to a significant decrease in cannabis imports to Israel, as foreign companies do not hold these laboratory tests.
We examined how the decline in imports affected the market. As of December 2020, there are 80.3 thousand patients in Israel with a medical cannabis license. According to the HQR, the main reason for issuing a license for cannabis is neuropathic pain not due to cancer (44,000 of the licenses). Psychiatric background, and about 2,000 licenses were given to Crohn’s patients, which is surprising, since we assumed that licenses for dealing with serious illnesses or medical conditions would be higher than those given for dealing with pain.
The HQR data also show that about 80% of cannabis consumption is consumed by the flower inflorescence, and almost all licenses are for a 20T substance that actually has the highest concentration of the “mastal” substance, THC. Apparently There is a kind of “legalization” under the radar and the use of cannabis also for pleasure, this of course, without reducing the importance of treating medical conditions. That is, the demand from consumers is for quality cannabis and has a strong impact.
We went out into the field
The HQR’s announcement, which led to a restriction on imports, raises many questions: Why are laboratory tests required when growing in countries with no less standard and supervision than those in Israel? What does this requirement really serve? In our experience, requirements that make imports difficult are usually designed to maintain local industry. Why is it necessary to maintain the local industry? To this end, we decided to go out into the field and collect first-hand data.
We turned to various pharmacies that sell cannabis to licensees in Israel, and researched them in depth on customers’ buying habits. In all the conversations the same point came up again and again: there is a clear preference for imported material over local cultivation.
Next, we expanded the study and examined the reviews that cannabis receives from consumers on sites that visit medical cannabis. The reviews of the local material were reasonable, but in relation to the imported materials, which the pharmacists stated were in high demand, they were very inferior, To say the least. “That the local farmer will focus on growing avocados”, “Lucky they have finally started importing material from abroad”, “There is nothing to compare to the local and poor goods”, “It seems that the local grower has no chance against what comes from abroad” – these are some of the reviews.
What can we learn from this about the cannabis sector?
Cannabis cultivation is done according to a defined global standard, such as food, medicine and medical equipment. A standard mark for cannabis cultivation is called GMP (Good Manufacturing Practice), which ensures production under appropriate conditions, and is currently also applied in Israel. However, the fact that production is conducted in a proper process is not a guarantee for the quality of the product, and certainly not a guarantee for the demand expected of it in the global market by consumers.
It is difficult to break free from the feeling that the restrictions of the YKR were intended to protect local growth, but they also helped to expose its weaknesses: inferiority to growth in other countries. When it comes to companies whose business is only cannabis cultivation, the decision whether to invest in them should be made only after receiving real data on the volume of cultivation and exports abroad and the price at which inflorescence was sold. All of course based on proven data and not on pink forecasts..
So how to properly examine the cannabis industry?
Every month we meet at least one cannabis company looking for investors. On the face of it, in the excel file, everything looks great and they all tell how in a moment they start selling tons of goods to the Germans and the rest of the nations of the world. But if in the Israeli market the goods are considered inferior and the local companies need the protection of the regulator, we take with very limited guarantee their ability to sell inflorescences to other countries? Moreover: we even estimate that all the predictions regarding the sale of inflorescences abroad will not come true at all, except for companies that make INDOOR crops that are considered to be of higher quality, but they are not common because they require a high initial capital investment.
Cannabis inflorescences are not expected, in our opinion, to become a significant export industry, And they will not be the next “oranges” of the country, and when considering an investment in the field of cannabis, companies whose whole business is growing for the future export of cannabis are not leading candidates for investment. These companies may be interesting if cannabis is legalized in Israel and they will supply more produce to the local market, so it is possible that the pricing of companies engaged in growing inflorescences will increase, especially in light of the protection provided by the regulator.
Among the companies that aim to export abroad, the advantage of investing in the cannabis industry is in companies that develop technology that serves the growth and production, or in companies that produce specific specialized cannabis products, or companies with significant marketing capabilities.
The writer, Shmuel Ben-Arieh, is the chief investment officer at Pioneer. Pioneer and the writer have no personal interest in what is said in the article. The aforesaid does not constitute a substitute for the management and / or marketing of personal investments that takes into account the data and the special needs of each person.