Israel represents an exciting cannabis market and we are not surprised by the significant increase in the number of companies that are focused on this opportunity. Although we are favorable on this emerging cannabis market, to date the country has issued only a limited number of licenses to cannabis businesses an approach we find significant.
If you look at how the Canadian cannabis industry evolved, it started off as a limited license market as Health Canada analyzed additional applications and slowly issued further approvals. If you look at the way these strategies worked in Canada, you will see that a large majority of the companies that were granted licenses in 2014 and 2015 have been acquired for several billion dollars or have multi-billion-dollar valuations.
Although it seems challenging to compare the Israeli cannabis industry to that in Canada due to the sheer size of the leading Canadian cannabis producers, there are a number of reasons to explain why we are taking this emerging industry so seriously.
- The economics associated with cultivating cannabis in Israel are much more attractive than in Canada and this will play a huge role in the long-term, especially as it relates to profitability
- The export opportunity into the European Union (EU) is easier and cheaper when compared to Canada. The difference in the amount of time it takes to transport will also play an important role in profitability as it shortens the amount of time to get product to market
- Israel was a first mover on the medical cannabis industry and started learning about its medical benefits more than 50 years ago. The country has immense knowledge especially as it relates to specific cannabinoids and this will play an important role when big pharma gets involved with the sector
- In Israel, the costs associated with constructing a cannabis cultivation facility are much lower, making it easier for businesses to expand. In Canada, companies are spending more than $100 million to construct cannabis cultivation facilities, making it more difficult for these businesses to scale production capacity.
A Limited License Market to be Watching
Last month, we highlighted EuroMed as an Israeli business that has been granted a license to export medical cannabis to the EU. This is an opportunity that we have been excited about due to the limited license nature of the market and the size of the EU market. With a population that is almost twice the size of the United States and Canada, this is a market that we are excited about.
Another reason we are favorable on the EU opportunity is related to the state of the cannabis industry. In the EU, the cost of cannabis is much higher and this benefits companies that are selling products to this market. This is significantly different from what we are seeing in the US and Canada where the price of cannabis is decreasing as cannabis producers are quickly ramping up production capacity. With more than 100 licensed Canadian cannabis producers, we expect to see continued price compression, and this leaves us excited about what is going on in the EU. In the US, we are seeing a trend similar to that in Canada but in a much more fragmented manner. For example, the cost of cannabis in Oregon is less than $100 a pound while an ounce of cannabis in Florida is significantly more costly.
EuroMed: A Growth Story to be Watching
Going forward, we believe that EuroMed has the right approach when it comes to the global cannabis industry. Over the last year, the company has been forming strategic distribution relationships that will allow them to enter the EU. EuroMed is currently looking at the existing opportunity in Germany, Poland, and Switzerland. This is an attractive aspect of the business and something that we will be monitoring.
Phase I of EuroMed’s expansion will be the construction of a 22,000 sq. ft. modular greenhouse facility that is situated on a 100,000 sq. ft. concrete foundation. Once Phase I is operational (expected to be completed by the first quarter of 2020), the facility is expected to produce 5,500 kilograms per year and should generate at least $22 million per year (assuming a conservative $2 per gram off-take sale to Europe).
We believe that EuroMed is led by a management team that has diverse skill sets as well as a proven track record of success in a variety of sectors. Over the coming months, we expect the Israeli cannabis market to start generating even more traction and we will be watching how EuroMed is able to capitalize.
If you want to learn more about this opportunity and receive updates, please reach out to email@example.com.
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