The frenetic activity of Israeli investors in both private and stock exchange investments in the growing and marketing of cannabis has diverted attention from the absence of foreign investors in the sector, although foreign investors do not lack interest in it.
Adv. Yoav Etzyon, a partner in the high tech and venture capital department of the Amit, Pollak, and Matalon (APM) law firm, explains, "Every investor who holds more than 5% of the shares in a company with a license to grow and/or process and/or sell cannabis requires approval from the medical cannabis unit in the Ministry of Health. The Ministry of Health asks Israel Police for verification that criminal groups are not taking over production of cannabis in Israel."
When foreign investors are involved, the police say they lack the means to provide such verification. Etzyon says, "According to the medical cannabis unit, the police claim that they lack sufficient information to examine the background of foreign investors and take no action to obtain such information from sources outside Israel." He adds that other regulators are doing this. "The unfortunate result is that requests by foreign investors to enter this sector are left in limbo, meaning that foreign investors cannot invest in the sector. They are not given a negative answer immediately; they encounter the problem only after devoting great efforts reaching a deal."
Foreign investors can own shares in cannabis companies indirectly through their parent companies only if their actual holding in the cannabis company is less than 5% and therefore does not require approval from the Ministry of Health medical cannabis unit and Israel Police.
Etzyon says that he represented a number of such investors in Israel, but after the process stalled, he is now inclined to inform them in advance that there is currently no way for them to be approved. A considerable proportion of them choose not to invest in Israel.
Etzyon says that the process is angering investors and giving Israel a bad name. He says, "One investor I represented, a Canadian millionaire who spent a lot of time and resources getting this approval and already signed a substantial investment agreement with an Israeli grower, told me after his investment request had not been approved, that Israel was a total write-off and he planned to delete it completely from the map of his business."
According to Etzyon, the Ministry of Health is aware of the problem, but is having trouble making any progress in the situation. "I'm sure that they're trying to find solutions," he says, "but meanwhile we're losing."
Adv. Hagit Weinstock, who represents many groups dealing in cannabis and led the growers' petition for approval of exports, says that the police are in effect preventing external investors from becoming parties at interest in cannabis companies. She is advising them, however, to take the risk by nevertheless investing through special legal structures designed to protect them. "We live in a strange country," a frustrated Weinstock says, "The police have not published any procedure explaining how it checks potential foreign investors and what criteria the investors must fulfill. We have customers who request has been pending for four months and even six months.
"The Ministry of Health cannabis unit's procedure says that they must obtain the approval within 30 days, so we're taking the risks and transferring the shares to the foreign investor. If the state later has any complaints, we'll see it in court."
Weinstock tells about a group, not a client of hers, that wanted to invest $15-20 million, but the deal ran aground. "And this is only one deal," she says. "We know about an investor, one of the biggest in the world in the cannabis industry, whose deal is liable to fail for lack of approval."
Weinstock asserts, "We're losing these investors while the state is busy with trifles. The people in the government and the Knesset dealing with the matter are not actually doing anything."
Weinstock's complaints are not confined to stopping the flow of money from foreign investors. She also addresses the issue of cannabis exports, which has been pending for many months for no reason understandable to the cannabis companies.
No response from Israel Police was available as of web posting.
The cannabis reform
A multi-faceted cannabis reform has been taking place in Israel over the past year. Permits to grow cannabis have been granted to many competitors, not only the eight growers to whom licenses were previously granted. In practice, hundreds of temporary licenses to grow cannabis have been granted, most of which will expire within a year. Growing cannabis plants has been separated from processing, distribution, and marketing in the belief that processing in approved facilities, not necessarily by the farmers, will improve the quality of the product. Cannabis will be marketed in pharmacies in Israel in order to make things easier for the consumers, who up until now have been obliged to go to a small number of unpleasant distribution points. A number of doctors have been granted permits to prescribe cannabis directly for patients instead of receiving the approval from the Ministry of Health medical cannabis unit itself in order to release the bottleneck in medical cannabis authorizations by the medical cannabis unit. Cannabis prices have been changed so that instead of a uniform price for each user, regardless of the amount purchased (a practice liable to encourage users to buy more than desirable and distribute the extra cannabis to their friends), a price will be set per gram.
The most significant factor in the equation is exports, which are designed to create an economic mechanism to fund the activity. The Israeli market is not big enough to justify growing by tens or hundreds of competitors, processing the produce in facilities according to a medical standard, and distribution and marketing like a consumer product. Only exports can justify this activity for the entire value chain.
Why have exports not been approved yet, even though most of the government ministries support it? It is hard to provide a definite answer to the question. Some market sources say that the state distributed cannabis growing licenses too widely and is afraid of flooding the market. These sources add, however, that economic and logistic barriers will in any case ensure that only several dozen owners of cannabis growing licenses will actually do any growing; the others will in any case be unable to grow because their temporary licenses will expire, so there is no real risk.
Another possibility is that the various ministries have not yet decided how to distribute the pie of revenue in the sector. The pie, however, is getting smaller as time passes and Israel groups establish their activity overseas, while more and more countries are approving exports from their territory and are competing with Israeli products.
The Israeli reform got underway in April and appears to be a success, but without approval for export, it will be more difficult to continue. A Knesset discussion will be held on July 16 under the title, "Exports of Medical Cannabis." Despite the promising title, the discussion will be held in a special committee for combating the problem of drugs and alcohol.
Headed for Canada
Foreign investors are interested in Israeli cannabis primarily because of the export option. Canada, currently the leading country in the world in cannabis exports, this month decided to legalize cannabis in the country. Israel and Canada are competitors that are likely to cooperate in cannabis marketing. Canada is interested in Israelis' ability to produce cannabis cheaply, thanks to weather conditions in Israel and the agricultural know-how accumulated here since the material became legal. Cannabis exporters from Canada are interested in expanding and engaging in export activity from Israel.
According to a report by the Deloitte accounting firm examining the potential of Canadian cannabis, the market could reach $7 billion by 2019, including the illegal market (about half of the total market). The medical cannabis market in Canada, which currently amounts to $1 billion, is projected to reach $1.7 billion.
According to the survey, cannabis consumers currently pay an average of $8.24 for a gram of illegally purchased cannabis and will be willing to pay up to 10% more for legal cannabis. At the same time, consumers said that they expect significantly better quality in order to switch to buying the products legally and at a premium. Many consumers said that they would continue buying the product illegally.
The report indicates that the Canadian market will gladly accept Israeli produce because of its price advantage resulting from better weather conditions. Israeli cannabis companies are already listed on the Canadian stock market and the majority of foreign investors interested in these companies are Canadian investors, although as of now they are unable to invest in Israel.
The stock exchange is high on cannabis shares
Listed cannabis shares have unquestionably been the hottest trend in recent months in the local trading theater. Rises of over 10% and daily trading turnovers in the tens of millions of shekels have become a fairly frequent sight in the shares of listed companies reporting new activity in the sector.
Despite the prevailing uncertainty in the developing cannabis sector and the fact that in many cases the companies involved, some of which are stock exchange shells, are reporting only consideration of the possibility of entering the cannabis business, investors are not hesitating. They are snatching up shares of every company that jumps on the bandwagon.
Cannabis shares rollercoaster
As of now, these shares have often generated unimaginable returns for investors in them with increases of over 10% and over 100% within a few months. This is liable to make people forget the high risk incurred in an investment of this type.
Trade in these shares features great volatility. The graphs describing the behavior of these shares look like a rollercoaster, because in many cases, the steep rises are followed by an aggressive correction in the form of falls of over 10% that wipe out all of the share's gains and more.
"Medical cannabis is not exactly a drug. Inclusion in the basket of products covered by medical insurance? We're optimistic."
Is cannabis on the way to inclusion in the basket of products covered by medical insurance in Israel? Israeli company Rafa markets cannabis products under the Axiban brand name manufactured by Panaxia Pharmaceutical Industries. Axiban is one of only two brands of medical cannabis currently sold through pharmacies. Rafa announced that it had submitted its products for inclusion in the health basket. Discussion of the basket will begin in August-September and decisions will be taken towards the end of the year.
Rafa intends to request full or almost full reimbursement from the state for any patient with medical approval for cannabis, regardless of the disease for which the patient received the prescription. Rafa will ask for approval in two stages - first for serious diseases only and later for all diseases. Rafa's products are cannabis oils, and in the future also pills and suppositories, but not flowers. The company believes that the drug configuration will make it easier to obtain reimbursement because such a configuration incurs less risk that the products will reach the private market. Rafa has asked for reimbursement only for its product, not for all cannabis in Israel.
The cannabis reform in Israel took effect in April. Rafa began marketing the Panaxia products to pharmacies under this reform, together with another company - BOL. In addition, eight growers (including BOL) are continuing their operations, supplying products directly to consumers. The goal of the reform is to gradually sever the direct link between the growers and the consumers, so that at the end of the process, the growers will sell their produce to processing plants, from where it will be sold to marketers, and from there to pharmacies.
Israel has tens of thousands of people with licenses to consume medical cannabis. Under the new reform, the price of doses in pharmacies can vary from NIS 150 to several thousand shekels a month, depending on the dosages (NIS 15 for 10 grams). Most of the consumers use low dosages, but the cost is still considerable. Before the cannabis market reform, every patient paid NIS 370 regardless of the quantity. Following the reform, the need for insurance reimbursement has become clear, especially for patients paying large sums. According to these figures, the cost of adding cannabis to the health basket will be NIS 10-20 million for the existing users.
The number of cannabis patients is projected to increase substantially in the coming years because under the reform, a prescription for medical cannabis, which also constitutes a license for possession of medical cannabis, will be obtainable from a number of registered doctors, not only directly through the Ministry of Health medical cannabis unit. The process of obtaining authorization from the medical cannabis unit, which was bureaucratic and sometimes very long (as shown by the Ombudsman's recent report), was a bottleneck preventing an increase in the number of users.
Rafa marketing and sales director Anat Savion predicts that the reform will double the number of licenses to use medical cannabis.
"Globes": Now that the licenses are more accessible and assuming that the product is included in the health basket, is there not increased concern that cannabis will make its way from the users to the recreational market?
Savion: "Our products are not designed for smoking and are therefore less attractive to the recreational market. In addition, the dosages prescribed after the reform are more precise and in general smaller. Every patient gets what he really needs. This also reduces the risk of cannabis being diverted to other markets."
Savion adds, "The status of medical cannabis is not exactly a drug. It has a special status as a 'medical cannabis preparation.' We therefore hope that it will be brought up for discussion, but meanwhile, they haven't returned the case to us, so we're optimistic."
What has been happening in the market since the reform took effect?
"We started marketing in early April. We're in every pharmacy that has been approved so far with our only competition coming from BOL's product. The demand to purchase the products in the pharmacy instrument is high. Right now, for technical reasons, most of the approved doctors are not yet connected to the computer system that enables them to issue the prescription directly. These are technical matters that we hope will be solved soon."
Are you also planning on exporting if it approved?
"We're certainly thinking about it, together with our partner, Panaxia, which is already operating overseas, in building cannabis processing plants. Rafa is marketing drugs mainly in Israel, but is exporting products, so we also understand this aspect."
Published by Globes [online], Israel business news - www.globes-online.com - on July 2, 2018
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