"Next for Tikun Olam: A cannabis pharmacy"

Aharon Lutzky

CEO Aharon Lutzky talks about the $400 million medical cannabis company's special business model, and its ambitions.

Cannabis companies were in the headlines again last week. One of the main reasons was the reports about Israeli company Tikun Olam, which enjoyed a $250 million exit from the biggest merger in the sector, in which Canadian company Aurora acquired Medreleaf for $2.5 billion.

Technically, the celebration is slightly premature, given that Tikun Olam and its owners have not sold the shares, but even so, the deal gives the Israel cannabis company a value of $400 million, a figure that the Israeli cannabis market, most of which is currently based exclusively on theory, has so far not even approached.

If the latest deal teaches us anything beyond Tikun Olam's commercial potential, it has to do with the company's business model. Tikun Olam, which realized at a fairly early stage that regulation would make exporting cannabis from Israel difficult in the near future, began as a concern exporting know-how in exchange for percentages from the companies buying the know-how. That is exactly how Tikun Olam acquired 5% of Aurora, which recently acquired the activity in which Tikun Olam was a partner in that huge exit.

"What is interesting about Tikun Olam's business model is that they aren't investing equity in the company's international expansion, and are therefore not being diluted," a market source says. "Overseas concerns ask them to provide their knowledge about nurturing and growing the plant, the effectiveness of the strains, and the various materials for different patients, and the instructional system for patients. In exchange, the party asking for the know-how invests money in starting up activity in that country, and Tikun Olam holds, say, 20-30% of a joint venture, and also receives royalties every time a cannabis product made from the strains it brought to the deal is sold."

"Israel will still be our know-how center"

"We decided already in 2011, when foreign companies began enquiring and taking an interest in our plants and research capabilities, that if we couldn't export the final product itself, Israel, would be the center of know-how, research, and development, and we would operate overseas in partnership with local players," Tikun Olam CEO Aharon Lutzky tells "Globes." "We want to use profits from other countries to continue selling at low prices to the end consumer in the Israeli market."

This activity first took shape in 2012 in Canada in Medreleaf, which held its IPO in May 2017 in Canada and was sold in 2018 to Canadian company Aurora. Following the recent sale, Tikun Olam was left with 5% of Aurora, currently worth $400 million, even after the steep drop in Aurora's share price recently, along with the rest of the cannabis sector in Canada.

If cannabis is regarded as a drug, and Tikun Olam certainly thinks of it that way, then the company's cannabis strains are now one of the leading Israeli-made drugs in the world. Aurora does not sell only Tikun Olam's strains, but something can be learned about the sales volume from the last financial statements published by Medreleaf in June 2018. Revenue in the 12 months ending in the first quarter of 2018 totaled $43 million. Adding royalties of a few percent, it still amounts to several million dollars in annual revenue, which is likely to balloon when the cannabis market in Canada becomes established.

The same is true in other countries. Tikun Olam USA is a private company in which Tikun Olam is a partner entitled to royalties. This company was founded in 2015. The joint venture raised $7 million to start its activity in 2017, and is now active in eight US states in which medical cannabis can be sold (federal law in the US still defines cannabis as a drug).

Activity in Australia and the UK began in similar fashion in the past two years. Medifarm (Tikun Olam Australia), is one of the leading companies in the young cannabis market in that country, which recently also allowed exports. Australia is physically remote from most of the international markets, but Lutkzy is not worried about that. "There are airplanes today," he says, and it is likely that Tikun Olam's Australian activity will be able to take in companies that allow imports, such as Germany.

What the Israeli regulator should learn

Lutzky has several complains about the Ministry of Health, which he phrases as "lessons that the Israeli regulator should learn from Canada." Canada decided to reform its medical cannabis sector in 2013, including a clear standard governing the way cannabis should be grown and processed and how it should be supervised at the security level. "In order to make decisions, they did research and gathered information from all over the world. At the time, Prof. Rafi Meshulam from Hebrew University, considered the father of medical cannabis, showed me a detailed questionnaire they asked him to fill out. Afterwards, they published the recommendations to the public at large and asked for comments. The emphasis was on total inclusion of the population and all the interested parties in the sector - not like in Israel, where all these decisions are made behind closed doors." Lutzky appears to have in mind the decision about exports - no one knows what is really delaying it, and rumors are running wild.

"In Canada, every doctor can prescribe medical cannabis for a patient, while in Israel, there are 80 doctors who have been authorized to do so. Only a few of them actually do it, however, in contrast to opiates, for example, which any doctor can prescribe, and which are far more dangerous."

Lutzky says that another problem in Israel is "the artificial separation between the grower, the manufacturer, the distributor, and the pharmacy (under the recent cannabis reform, which took effect in April). There is no such requirement in Canada. But we accept these rules philosophically, and we'll do what has to be done to keep the middleman margin from becoming large."

What is needed, apparently, is to be the owner of the whole value chain. As the cannabis reform comes into force, allowing cannabis products to be sold only by authorized pharmacies, Tikun Olam itself plans to become an authorized pharmacy, and it is already setting up the first branch of the pharmacy near its training center and offices, on Hashla Street in Tel Aviv. "Setting up a pharmacy and meeting these conditions enables us to market the products directly to the consumer," Lutzky says.

Pharmacies in Israel have to keep an inventory of certain drugs, meaning that Tikun Olam will not be able to sell only cannabis in its pharmacy.

"Globes": So the pharmacy is a formal matter to enable you to market cannabis directly to the consumer. Will there be only one branch?

Lutzky: "Not necessarily."

The beginning: Growing cannabis at home

Tikun Olam grew and developed in the margins of the Israel drug development sector. If it continues to expand the way it did in the past three years, it could become one of the most dominant companies in the Israeli health industry. Although close to ten original drugs have come out of Israel, and Israel exports billions of dollars of medical devices a year, excluding Teva most of these products are owned by international concerns.

Tikun Olam was founded in 2005 by Yitzhak (Tzachi) Cohen and his mother, Dorit Cohen. They currently own 92% of the company because there is no dilution in their model. The company is regarded by many as having created the cannabis sector in Israel.

A source familiar with the company from its early days says, "Before 2007, a few dozen licenses to use medical cannabis were granted in Israel, but there were no growing licenses; patients were sent to grow the plant at home or buy it from street dealers. Tzachi returned from the US after studying the secrets of the profession, and regarded the patients' lack of access to cannabis as an injustice. He believes in God, and believed that this plant was a gift that God gave to humanity."

Cohen pestered the Ministry of Health until he got permission to grow cannabis. "For lack of choice, he grew the first plants right in his parents' home," the source says. "It's a multi-storey house, and at one stage, most of the floors were occupied by crops. Initially, because the sector was unregulated, he basically had no way to charge for these plants, and he grew them as a public service. I estimate that his parents invested NIS 2-3 million in this activity. It was the first legal crop in Israel, and among the first in the world."

At a certain stage, when the number of licenses grew to 300-400, he could no longer maintain this activity. "So he went to Knesset members, mainly Haim Katz, who then headed the Health, Welfare, and Labor Committee, and was the first supporter of the sector, and told them that without regulation, he would have to close down the activity.

"Then the Ministry of Health asked for a spreadsheet with his expenses, made a calculation, and set a price of NIS 360 per customer per month, regardless of the amount, and the price went up NIS 10 over the years. That was the monthly price of cannabis at the time, for every quantity, of every type, and for every person."

Tikun Olam recently promised that despite the reform in the Israeli cannabis market, which will allow the product to be sold at different prices according to type and quantity, the company itself would not change its pricing in Israel, and would not raise it above NIS 370 a month.

With the growing interest in grass in Israel, seven more growers were approved. At the same time, Tikun Olam founded a large cannabis-growing farm in Biriya in northern Israel, and set up a network of nurses to train patients in using and adapting strains. It is also one of the few of the eight original growers in Israel to conduct clinical trials of cannabis strains: 10 clinical studies to date and 23 more in process. This is also the main advantage of Israeli regulation, which allows cannabis research in accordance with the same rules as any other medical research into material restricted under the Drugs Ordinance but with no special restrictions for cannabis.

Initially, products were sold from Yitzhak Cohen's home in Tel Aviv. "The beginning was amazing," the source says, who was familiar with the company at the time. "They sat in the yard and rolled joints, leading artists together with senior people from teh security forces, professors together with the latest post-trauma patients. It was a homey atmosphere."

The first official distribution center was established on Ibn Gvirol Street in Tel Aviv. The Ministry of Health wanted distribution to take place at the Abarbanel Mental Health Center, and that is what most of the other companies in the sector did, but Tikun Olam insisted on giving its consumers a different experience. The atmosphere in its offices on Hashla Street in Tel Aviv is closer to an innovative high-tech company than a company growing a medical plant that until recently had a dubious reputation.

In 2011, Cohen began promoting the idea of exporting cannabis from Israel. Since cannabis exports are not permitted, however, he began exporting the know-how and the brand, first to Canada, and in recently years on a broader scale. Tikun Olam's know-how and research are one of the main elements distinguishing the company from its competitors, and it therefore insists on getting a percentage of the activity of the companies for which it works.

Lutzky says that Tikun Olam is planning to start activity in more European countries in the coming years. What will come after that? Market sources indicate that Tikun Olam has been asked by dozens of countries to set up activity there, but Lutzky says that it is not planning right now to start activity in places where regulation is very restrictive or the average revenue is too low to generate reasonable profits. This attitude may change later, because as its name indicates, Tikun Olam regards itself as having a vision for healing the world, not as a commercial company.

Will you sell products like a drug in the future, or are you committed to the complete plant?

"Our product is already at a medical level in that we produce oil from the plant, so we also know what the plant strain is. This is right and important, but we also have technology that enables us to test levels of 10 active ingredients. The most important is CBD, regarded as the most important medical ingredient, and THC, which also has medical properties, but is also a narcotic, while there are other ingredients that are combined with these ingredients and that affect their activity."

Published by Globes, Israel business news - en.globes.co.il - on October 31, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

5 Comments
View comments in rows
Update by email about comments talkback
POST
Comments
Aharon Lutzky
Aharon Lutzky
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018