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03.02.20

Economic Snapshot – The Medical Cannabis Industry – Special Analysis

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Medical Cannabis – Industry Description

Medical Cannabis is a relatively new industry in Israel, as most of its development occurred over the past two years. The industry’s development has been based on a regulatory infrastructure that has been formulating over the past decade and includes several government decisions that enabled to promote this business activity. This followed indications that cannabis might help patients who suffer from various medical conditions and alleviate their suffering (mainly those who suffer from chronic pain, cancer, PTSD, neurological diseases and more). In this framework, over the past few years, research in this field by notable universities and researchers has expanded in Israel and globally, and Israel is considered to be a global hub for cannabis research. Nevertheless, cannabis isn’t registered as a medicine and is defined as a narcotic drug in the UN’s Single Convention on Narcotic Drugs (1961), a fact which adds complexity and supervision across the supply chain and the regulation of the field in Israel nowadays. As of 2019-end, dozens of companies operate in this industry in Israel, of which 20 are traded on the TASE, with an aggregate valuation that is estimated to be about NIS 2 billion. However, most of these companies didn’t enter the stock exchange through IPOs, rather through reverse mergers with shelf corporations. Thus, the companies relied on the public which served as the main source for their valuations, without extensive investments from institutional investors, which are still reviewing the industry. Business information on the companies and their executive managements can be found on the D&B website. The industry’s leading companies are attracting businessperson from the economy, whether for key positions in the companies or as investors. In addition, the companies in the cannabis industry also attract investments from leading companies from a variety of economic industries. The industry’s customers are the patients (as end-customers) or the points of sale (the pharmacies that sell the products to the patients). The marketed medical cannabis products include three main product categories: Cannabis inflorescences, rolled cigarettes and cannabis oil. Consumption of such products requires a permit (from the Medical Cannabis Unit of the Ministry of Health (MCU) or a licensed physician). In parallel with the industry’s development, the number of patients with permits in Israel has been growing constantly over the past few years, at about 25-30% annually. According to date from the Ministry of Health, there are currently more than 50,000 patients with permits to consume medical cannabis, compared with about 40,000 patients in 2018 and 30,000 patients in 2017. The local market is currently experiencing regulation changes (“The Cannabis Reform”) by the MCU, but the implementation of the reform in its current format disrupted the business operations (price increase and shortages) to the extent that Bagatz ruled that its implementation must be halted until March 2020. Beyond the increase in the number of patients in the local market, the market’s main growth potential is in exporting the products to international markets. The global sales of legal cannabis are estimated to have been about $15-20 billion. In this context, there are regulatory obstructions between states that limit the growth potential, with the export activities being dependent on the positions of governments on the use of cannabis, which is fundamentally defined as a narcotic as aforementioned. In January 2019, the Israeli government approved cannabis exporting, subject to a preparation period during which the government would make bureaucratic adjustments for this move. The government’s decision has put the industry and interest in it on the agenda, however, the lack of a government in office (election year) prevented the completion of this move. It can be assumed that the promotion of exports would be completed by 2021 and would boost the revenues of the local industry. However, D&B estimates that the global supply is currently higher than global demands, as long as other countries won’t change their position on the industry and permit usage by patients. Therefore, competition is expected to become fiercer and the local industry would consolidate.

The Local Market Data

According to D&B’s estimates, the sales of medical cannabis in Israel in 2019 amounted to about NIS 300 million (in consumer prices, including the pharmacies’ margins, distribution companies and VAT – due to the implementation of industry reform in 2019 for regulating the chain of supply). After neutralizing the industry reform, we estimate that the industry’s companies recorded aggregate revenues of NIS 150-200 million, after recording aggregate revenues of several dozens of millions of Shekels in 2018.

 

The Number of Patients with Medical Cannabis Consumption Permits in Israel

Source: Various publications and industry estimates based on Ministry of Health Data

 

The number of patients with medical cannabis consumption permits in Israel has been rising constantly over the past few years. 2019 data indicates about 50,000 patients with permits in Israel, compared with about 40,000 patients in 2018 and about 30,000 patients in 2017 (an annual increase of about 25-30% in the number of patients with permits in Israel). The large increases in the number of patients with permits in 2018 and 2019 result from the industry’s regulation and a loosening of the permits approval procedure (through many dozens of physicians who were certified for providing prescriptions in lieu of permits of the MCU).

 

The Distribution of Illness (applications) among Cannabis Patients in Israel, 2019

Source: Public publications based on Ministry of Health Data

The data shows that about 52% of the patients who are treated with medical cannabis in Isreal suffer from chronic pain, while the most common illness which for which medical cannabis is provided is cancer (about 20% of patients). PTSD patients account for 8% of the supplied medical cannabis, and neurological disorders such as Parkinson, multiple sclerosis, epilepsy and Tourette account for about 4%.

Regulation

The Reform in the Local Cannabis Industry (The New Regulatory Framework)

In accordance with government decisions and in order to enable business operations in the industry, the government and the Ministry of Health on its behalf has started to regulate the industry over the past few years.

Initially, the industry operated under certain ordinances that were set (“The Old Regulatory Framework”) to which several new regulations were added over the past year (“The New Regulatory Framework”  – also known as the “Cannabis Reform”), whereas some of the new regulations canceled older regulations in this area. Numerous regulatory changes over a short timeframe didn’t provide the market with sufficient time to implement them, resulting in a disruption of the industry’s business activities in 2019.

Most of the industry’s reform revolves around the regulation of the chain of supply (A “medicalization” process – supplying the product to the patients just like a medicine is issued: from a prescription by a certified physician up to delivering the product in the pharmacy). Simultaneously, increased supervision on every segment of the supply chain, in order to guarantee the quality of the product and the process. However, the lengthening of the supply chain has led to the division of the industry’s profits across more segments (entry of distribution companies for distributing the products to the pharmacies and pharmacies for delivering the products to the customers). In addition, the increased supervision and licensing for guaranteeing the product quality exerted upward pressure on the costs of cultivators and producers. As a result of these changes, the prices of medical cannabis increased by tens to hundreds of percentages, with a distinction between those who consume low quantities (up to 20 gram), who still pay the same prices as they paid under the Old Regulation (a monthly payment of NIS370 for any quantity – these patients constitute 35% of all patients) and those who consume higher quantities (and usually experience more suffering from their illnesses –  these patients constitute 65% of all patients in the industry in Israel), who had to pay ten to hundreds of percentages more.

Alongside with the consumer price increase, on the supply side – some of the cultivators and producers didn’t make the necessary adjustments for complying with the new quality standards, including Tikkun Olam Ltd. who was one of the industry’s largest players and supplied about 30% of the patients in Israel, and as a result – there was a shortage of medical cannabis products in the market (eventually, Tikkun Olam’s financial performance deteriorated and it was acquired in September 2019 by Canabit Ltd.)

The price increases led to a controversy in the industry and a Bagatz appeal which was led by the Cannabis Patients Association. In December 2019, Bagatz ordered to withhold the Cannabis Reform for patients who received their permits before April 2019. This withholding would be valid until 2020. According to the ruling, these patients would be able to continue and purchase cannabis directly from the growers at the sum which was set before the reform, NIS370 for any quantity, instead of paying high prices in the pharmacies. Bagatz also recommended, in light of the sharp price hike, that a maximum price would be set for cannabis products (price control for medical cannabis products). This issue is expected to follow the industry in 2020, with a variance between the positions of the various government ministries on price controls.

 

A comparison of the main parameters between the New Regulatory Framework (The Cannabis Reform) and the Old Regulatory Framework:

New Regulatory Framework (Cannabis Reform) Old Regulatory Framework
Who can approve medical cannabis for a patient Physicians who were certified by the Ministry of Health, through a prescription, without requiring a ratification of the registration by the Ministry of Health The MCU, through a dedicated permit
The Regulation of the Chain of Supply Segmented (propagation, cultivation, production, trading house, transportation, pharmacy – intensified supervision and licensing across all of the segments) A shorter supply chain with lesser supervision and quality control
Distribution/Delivery Pharmacies Distribution centers of the cultivators
The classification of the cannabis product Buying products according to their active materials content (percentages of THC and CBD) Buying a particular cultivar of cannabis
Price NIS180 per 10 grams of product -> any quantity of 30 grams or more (NIS 540) would become more expensive than the price before the reform -> a price hike of tens to hundreds of percentages for the patients who consume higher quantities (about 65% of patients) NIS370 for any quantity + NIS 100 for handling and shipment

 

Summary and Outlook

The medical cannabis industry demonstrated accelerated development over the past two years in Israel and abroad, on the back of indications that cannabis may help patients who suffer from certain conditions and alleviate their suffering.

Therefore, several countries across the world recently approved the use of cannabis for medical purposes, including Argentina, the Country of Georgia, South Africa, Zimbabwe, Zambia, Canada, Thailand and more. However, many countries across the world still ban the use of cannabis, which is still considered to be a narcotic drug, including China, Japan, Russia, Arab countries and more. Even among the countries that allow cannabis use, some of the markets are closed to international trade and their consumption relies on local production. In order to bypass export restrictions to closed-economy countries, Israeli cannabis companies established several cooperations with local companies across the world in 2019, through dedicated partnerships, and this trend is expected to continue into 2020.

The Israeli industry assumes that other countries would change their position concerning medical cannabis and that additional countries that currently enable cannabis use would allow imports over the past few years, and become an exporting target for the local industry.

In accordance with developments across the world, also in Israel, which is considered to be a global cannabis research hub, the industry grew rapidly – from the supply side, dozens of companies were established in this area over the past couple of years, of which 20 are traded on the TASE, and on the demand side – the number of patients with use permits is constantly growing and crossed the 50,000 patients mark in 2019.

It would be interesting to follow the industry’s development in 2020, in the local arena – how the reform (which was withheld until March 2020 due to a dramatic price hike) would be implemented, the issue of price controls, and in the international arena – how Israeli exports would be promoted, once a government would be elected, and the position of countries across the globe to this area.

D&B estimates that the number of patients in Israel would continue to grow in 2020 and reach about 60,000 patients with permits. More about this can be found in industry’s reviews on the company’s website. In the international arena, we estimate that the global supply is currently higher than global demands, as long as other countries won’t change their position on the industry and permit usage by patients. Therefore, competition is expected to intensify and the local industry would consolidate.

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