Over the past two years, the medical cannabis industry in Israel has undergone a significant leap in its development. Until a couple of years ago, most of the activity came from veteran companies active in raising, preparing, and distributing medical cannabis. Now we live in a completely different reality, dominated by mergers, acquisitions, and public offerings on the Tel Aviv Stock Exchange.
“The medical cannabis sector, from the point of view of the capital markets, sprang up in Canada,” recounts Reut Alfiah, head of the Medical Cannabis group at international law firm ZAG-S&W. “In the USA, federal law forbids activity in the medical cannabis sector, whereas in some of the states of the USA local law permits it. Since NASDAQ is subject to federal law, companies active in the US cannabis sector cannot offer shares there. Thus the Toronto Stock Exchange became the preferred target for companies looking to go public.”
Over the past two years, she adds, the sector has started to awaken in Israel as well, thanks to regulatory developments among other factors. Ms. Alfiah is referring to the new legalization steps in the sector, published in 2016, which have spurred more and more investors and entrepreneurs to invest in the developing industry. “As is natural in any developing industry, the companies wind up on the stock market, and these companies are trading at a particularly high price-to-book ratio.
"At the starting point we primarily saw new companies entering the exchange, having set up operations in the wake of the new legalization; but today we see true industrial companies that have shifted into the medical cannabis sector, such as the Cannassure Therapeutics subsidiary of Solbar, and Canndoc whose operations were acquired by InterCure. And recently we have seen companies entering with histories stretching back many years, such as Pharmocann and Panaxia which made their way to the exchange by way of a merger process.
“It’s important to emphasize that on NASDAQ medical cannabis companies can issue shares only if they pursue no activity inside the USA. Thus the largest market remains hungry for companies in the sector, and thus the situation is created where the Israeli stock exchange has become attractive for medical cannabis companies as a springboard toward NASDAQ. We, as an international firm, are playing a big role in public offerings on NASDAQ, and currently there is certainly a visible upward trend in the number of cannabis companies wishing to trade in the major-league arena.”
ZAG-S&W started its medical cannabis activity roughly five years ago. At the start, they were mostly advisors to entrepreneurs and international companies active in Canada, the USA, and Europe, and as the sector began to develop in Israel as well, so did the company’s activity in the local market.
The company offers a legal and business package drawn from its experience and capabilities and adapted to the client’s objectives all along the way, while meeting the challenges of regulation, risk management alongside identification of opportunities, and formulation of strategy, and presenting creative, efficient solutions. Also included is consultation for issuing shares in Israel (Tel Aviv Stock Exchange), or the USA (NASDAQ, NYSE, or OTC) or Canada (TSX, CSE), as well as consultation to private and public companies in raising funds through private share issues and/or shelf offerings.
“This period resembles the period we went through in biomed several years ago,” Ms. Alfiah says. “Today we have a wave of mergers between companies in the medical cannabis sector and stock-market skeleton companies. Early on, any company with a minimum of activity received a high level of trust and its shares rose considerably. The biomed field was like that when it began. Investors had trouble discerning which of the companies would succeed, and they didn’t know how to identify the companies’ assets in order to make wise decisions.
"Over time, many companies failed to accomplish what they’d promised, the investors became wiser, and today there are higher demands from pharmaceutical and biomed companies. In the medical cannabis sector too, a similar process is under way. The stock market, and its investors, are beginning to understand what it means to be a company active in that sector and what makes a company attractive.
“The Israel Securities Authority has learned with amazing speed about the sector, and just now it published recommendations to investors: When they set about weighing whether to invest in a company or not, the Authority recommends that they learn about the company. In the same recommendations, they remind investors that a memorandum of understanding is no more than a memorandum of understanding.
"At the beginning, a company’s shares would jump upward because the investors didn’t understand what a memorandum of understanding means. Is it binding? Does it demonstrate compliance to standards? Is there a guarantee that the products the company manufactures will sell? It’s the same with a dealer code. The investors must understand that that’s a preliminary code and doesn’t prove any real abilities on the company’s part.
"There are almost 500 private farmers who’ve received codes, but from there to an active hothouse and sales, the way is long.” Ms. Alfiah goes on to explain the importance of understanding small details. “How is a company with zero sales presenting an estimated value of ₪400 million? What is that based on? In this sector, there is a whole set of parameters to understand before any investment decision.”
The medical cannabis sector, Ms. Alfiah clarifies, will only expand. “We believe that in the State of Israel, cannabis cultivation will eventually be the equal of any other agricultural crop in every way. So the companies that succeed will be the ones that involve themselves with pharmaceutical activity and the ones with significant R&D.
“Looking five years ahead from today, it will be more worthwhile for companies to cultivate in places like Africa, Spain, and Cypress, where labor is less expensive. Israel’s added value is, as always, in being the startup nation. In other words, R&D.
“There are doubtless Israeli companies that will become world leaders in the industry. They need to know how to operate and what to do in order to achieve that. Among other things, they need to invest in clinical research. To know how to open centers of operation outside Israel. And how to put together directorates and management teams that are able to make and implement correct decisions.
“The private companies will need to know the right time for going public. A company in the sector that wants to extend its activities needs a lot of money. Especially in the case of pharmaceutical activity, and R&D. Usually more money than can easily be raised privately. Investors prefer shares that they can sell at will. The stock market as a public platform can be of assistance to cannabis companies.”
In order to successfully trade on the stock exchange and create real value, Ms. Alfiah explains, the company must see itself objectively. What are its assets? What added value can it bring in order to make itself attractive on the stock exchange? “If in the past we were satisfied when a company had a dealer code and a three-acre farm, today it isn’t enough.”
Later, when the export licenses come through, there will be many companies, both local and foreign, going public. “Today foreign investors have a problem investing in the local industry, because the police need to run a proper check on them and the Medical Cannabis Unit needs to approve them. In this connection too, I assume that over time the regulators will find a way to ensure that foreign capital doesn’t derive from criminal elements and the sector will receive foreign investments with approval. With that money, the industry in Israel can expand.”
Once all that is accomplished, a new phase will begin in the development of the medical cannabis sector. Among other things, investment houses and institutions will hire analysts who understand the sector. “This industry is in its infancy, and it is developing very quickly.”
The estimation is that companies succeeding in the sector — that is, those that will know how to meet deadlines and sales expectations, while leveraging the results of their R&D — will quickly very find themselves traded on NASDAQ in the range of hundreds of millions of dollars.