Israel's medical cannabis sector fast withering

Israel's medical cannabis sector fast withering

As one publicly-traded company after another switches from cannabis to real estate, "Globes" examines what went wrong.

The rapid decline of Israel's cannabis sector is not new. In early 2019, medical cannabis was considered the next thing, a hot trend that attracted a host of senior figures including former prime ministers, politicians, military and police officers, as well as real estate developers, tech entrepreneurs and even sport and movie celebrities.

Everyone wanted a piece of the action in a market that excited stock exchange investors, and promised rapid growth based mainly on the hopes of exporting high-quality cannabis products cultivated in Israel and overseas.

But nearly four years later, the picture in the industry is bleak. Cannabis stocks have crashed on the Tel Aviv Stock Exchange following disappointing financial results and the flight of the famous figures who had backed the sector. Cannabis companies are now abandoning the industry in favor of other activities, usually in the field of real estate.

The latest and perhaps most surprising company to join this trend is Panaxia (TASE: PNAX), which announced on Monday that it was commencing financial activities instead of the cannabis sector.

Other companies that have recently announced the abandonment of the cannabis sector include: Cannomed (TASE: CNMD), which is entering the urban renewal real estate sector after the Gindi brothers sold control in the company to Tzachi Abu; Intelicanna (TASE: INTL), which has merged with a real estate company; and Together (TASE: TGDR), which has merged with real estate activities owned by the controlling shareholder Nissim Beracha, although it has reported that it will maintain some of its cannabis activities.

These companies have failed to progress in the field of cannabis, due to the competition, the lack of product differentiation, or because they bet on the wrong parts of the value chain (mainly a factory, or cultivation without pharmacies). Some of them had cash flow troubles after the injection of a lot of capital from the owners, who withdrew their backing when they no longer believed in the ability to receive a return on their investment.

There was also the promise of exports from Israel for the leading Israeli brands around the world, which did not materialize, while at the same time the competition in the local market is intensifying, with imported brands flooding the market.

Another prominent Israeli company Univo Pharmaceuticals (TASE: UNVO) has also switched to real estate after getting its fingers burned by its investment in cannabis.

Who remains

Is the exodus of these cannabis companies good news for the rest? Not necessarily. Prominent Canadian companies in the cannabis field also operate in Israel today, independently or through partners. At the same time, private farms are beginning to take over the agricultural side of the market, explains Adv. Hagit Weinstock from Weinstock Zehavi & Co. "These companies, for example Trichome and Greenfield, did not come to build dreams. They have stable businesses that can generate about NIS 20 million at the beginning, up to a maximum of NIS 50 million, and that's enough for them. They make money, and their produce is ordered years in advance."

A market source claims that some of the private farms (not the ones mentioned by Adv. Weinstock) survive by also selling cannabis on the black market. The source added that the Ministry of Health generously distributes licenses to companies that trade in cannabis, "without actually touching it", and who purchase it from abroad or from local farms, and sell it to the pharmacies. The bottom line is that the market is flooded, with or without the companies that have abandoned the sector.

One company that has successfully navigated the stormy situation is InterCure (TASE: INCR), whose chairman is former Prime Minister Ehud Barak. InterCure has a market cap of NIS 770 million and in the third quarter of 2022 alone reported revenue of NIS 101 million and a net profit of NIS 10 million. The company has NIS 240 million cash in its coffers.

InterCure has captured about 30% of the Israeli market due good local products, import agreements with leading parties, and especially its chain of pharmacies, which today includes over 25 branches in Israel and two abroad, and allows the company both direct contact with customers and to rake in retail profits on products from other companies.

Another successful Israeli cannabis company is Seach Medical Group (TASE: SEMG), which has stable agricultural activity, perhaps because it is owned by a farming family, and several pharmacies. Seach revenue, operating and net profit, and positive cash flow are all growing steadily.

InterCure, Seach and perhaps a few others will remain in the field in the coming years. It will be possible to count them on the fingers of one hand - not really a "sector."

Region: Israel

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