TASE investors get high on Israel's cannabis stocks

Cannabis

It is unclear whether medical cannabis exports will be permitted, but share prices of companies in the industry are soaring.

The medical cannabis market in Israel is undergoing a period of uncertainty. The big question now is whether exports of cannabis products from Israel will be allowed, and if so, when. Despite the uncertainty in the sector, shares in cannabis companies have overtaken cryptocurrencies as the latest hot market shakers on the TASE.

Cannabis share prices soared by triple-digit percentages over the past week, and trading in them is currently very volatile. Is this a bubble? This will become known only at a later stage, but there is no doubt that the cannabis market is behaving like an investment fashion.

Right now, merely mentioning that a company is about to commence cannabis activity, without any details about that activity, is enough to send its share price soaring. In most cases, it turns out later that the business involved is growing cannabis plants and processing the crop into a medical product. At this stage, however, most of the enterprises include agricultural land on which not a single cannabis plant has been planted so far and processing plant on which even the cornerstone has not yet been laid.

Flying cannabis

The medical cannabis market was previously considered a market of innovative technology, and most of the Israeli companies that have acquired a reputation in the field were developers of unique cannabis products: a medical device that improves cannabis consumption, software for improving cannabis strains, or unique formulations. Today, however, the companies now leading the market are for all intents and purposes agricultural companies. The crop is sophisticated and sensitive, requiring special knowledge, and theoretically can be sold at a high price, but it is still just an agricultural crop.

The listed companies are reporting huge potential for revenue and profits, based on the following fundamental assumption: that cannabis exports from Israel will be approved soon - an important if right now - which will leave the Israeli companies alone in the global market for some time. The investors' logic says that even hundreds of Israeli companies rushing into the market will not be able to supply the global demand, and prices will therefore remain high, to the benefit of everyone entering this sector.

This scenario, however, does not take into account the inexperience of most of these companies in marketing agricultural produce in the international market, the fact that producing cannabis that will meet the standards required for a medical product is no simple matter, and the restrictions on cannabis imports in many countries around the world. These restrictions are keeping the global market smaller than the potential attributed to it, even before the question of obtaining an export permit, something that may not happen, is taken into account.

All in all, it is unclear what prices Israeli cannabis producers will be able to obtain for their produce, if it is sold, and how much competition will be in this market. As of now, such competition is expected to include dozens to hundreds of Israeli companies, in addition to competition from non-Israeli concerns, initially mainly in Canada, and later also other countries.

From the perspective of the potential cannabis farmers, the sudden interest in them expressed by TASE-listed companies is a strong temptation. Setting a high-quality cannabis business can cost tens of millions of dollars. Many farmers are finding themselves with growing licenses that cannot be used. Now, they are suddenly getting calls from companies that seem to have access to capital through the stock market, even if most of them do not really have available capital; all they want is to add the word “cannabis” to their name in order to give their share prices a boost.

Planting cannabis in open fields is usually done in this season. If farmers do not find out soon what is being planned and whether it is worthwhile planting, all of 2018 will be lost for growing crops in fields. Hothouse farmers are not dependent on the season, but growing crops in hothouses is much more expensive to set up.

Saying that Israel can be a medical cannabis powerhouse is not just wild talk. Israel's regulation in this sector has always been relatively permissive, first in allowing academic cannabis research and later in allowing the pioneering use of medical cannabis. The result has been an accumulation of much experience and knowledge in this field, and it is therefore certainly possible for specific Israeli companies to dominate the market, but there will be only a few of these among all of the private and listed companies that have recently become active in the cannabis sector.

The dynamics of a fashionable and sheep-like investment trend

Stock exchange shell Medivie Therapeutic became the first listed company to enter the cannabis field in November 2017. The company is managed by Menachem Cohen, an owner of protected housing facilities, who was familiar with the medical cannabis sector from his work with senior citizens. The market was thrilled with the change in Medivie's business, and sent the stock exchange shell's share price skyrocketing 400% in a month, but that was only the beginning.

Another stock exchange shell, Together Startup Network, got into the act, presenting revenue projections in the hundreds of millions of dollars. Ignoring the fact that the company's business was just getting started - in the “seed” stage, as it were - and that its ability to make forecasts was limited. Together immediately leaped 125% following the announcement, but the really big boom started in March.

It is interesting that the surge began after the government refused to approve cannabis exports, and arranged for the appointment of a committee to look into the matter. This denial of approval put the industry in the headlines, and it then emerged that most government ministries, other than the Ministry of Public Security, supported cannabis exports. It suddenly appeared that the coveted approval was right around the corner.

Then, exactly when the TASE was losing its enthusiasm for the blockchain sector, it discovered cannabis. Medivie's share price went up 400% more between March 18 and March 27, bringing its rise since November, when the company announced its entry into the cannabis field, to 1100%. Together's share price gained 490% just between March 11 and March 28, completing a rise of 1430% since entering the cannabis sector in January.

Last Tuesday, agricultural inputs company Amir Marketing and Investments in Agriculture announced its intention of investing $27 million in a cannabis company. Amir Marketing did not disclose on that occasion in which company is was investing, or where it would get $27 million, but its share leaped 28% the same day. This was not a stock exchange shell adding a few millions to its market cap; Amir Marketing is an active company - a 28% jump in its share price meant NIS 60 million more in market cap.

On the same day, D-Pharm announced that it would merge with a cannabis company, without adding any further information whatsoever. Its share price went up 140%. D-Pharm, a stock exchange shell, announced last year that it would become active in the blockchain sector, but then said it was abandoning this field for the drones industry. Cannabis has now taken the place of drones.

NextGen BioMed jumped on the bandwagon last Thursday. Up until then, NextGen was a stock exchange shell aiming at gold mining operations in Ghana. On Thursday, however, the company announced its intention of dropping all its mining activity and moving into the cannabis field. Even though the announcement indicated that this change in direction had yet to be reflected in any real actions other than a discussion by the company board of directors, NextGen's share price jumped 22%.

This was apparently the straw that broke the camel's back for some of the cannabis speculators, who began to feel that the trend had become too hot. Most of the cannabis companies' share prices began falling on Thursday. The share prices of Medivie and Together are down slightly today, but the share prices of the companies that entered the cannabis field last week are still rising.

The state of these shares right now can be regarded as a chart. It can be seen that cannabis shares in Canada and the US followed the same pattern, peaking in January and falling since then.

Coming soon: Cannabis in Israeli pharmacies

As of now, it is unclear whether cannabis exports from Israel will be permitted, because it is unclear what is holding them up. The Ministry of Agriculture and Rural Development and the Ministry of Finance are enthusiastically supporting the plan. The Ministry of Health is qualifying its support, but is nevertheless in favor, while the Ministry of Public Security says that it supports the measure in principle, but wants to make sure that the market can be supervised, and is asking for more money for this purpose.

The government needs to make a decision quickly in order to enable crops to be grown in open fields this year. Meanwhile, however, the decision is being delayed, and cannabis market sources are alleging that the influence US President Donald Trump may be responsible for the government's hesitation in approving a policy that contradicts the official US policy on the issue.

Meanwhile, the internal Israeli reform in the cannabis market is proceeding as planned. According to this plan, medical cannabis will be sold by prescription in pharmacies towards the end of next month, instead of being issued in psychiatric hospitals.

This change is part of a reform that requires growers to make their products in facilities with Ministry of Health approval, and to market them through an intermediary concern that has obtained a permit for the purpose.

Barring surprises, products from the first two marketing companies under the reform are due to reach the retail chains late this month. The companies are Panaxia, in cooperation with the Rafa Pharmaceutical distribution company, and BOL. Seven other growers, which began operating before the reform, will be able to distribute their products by the old method through the hospitals until they organize production and distribution facilities that comply with the requirements. As of now, other companies cannot operate in the Israeli market.

Published by Globes [online], Israel business news - www.globes-online.com - on April 3, 2018

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

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