In 1964, Israeli scientists Raphael Mechoulam of the Hebrew University in Jerusalem’s Center for Research on Pain and Yechiel Gaoni of the Weizmann Institute made history by becoming the first to isolate Tetrahydrocannabinol (THC), the psychoactive chemical component in cannabis.
In late December, the Israeli Parliament passed the 16th amendment to Dangerous Drugs Ordinance that concerns the governance and regulatory aspects of exporting medical cannabis from Israel. The legislation authorizes the Israeli Police to conduct supervision of cannabis farms, and grant approvals for cultivating, growing and exporting of cannabis and cannabis-related products.
During the last year, there has been a significant increase in the number of companies that are focused on the Israeli medical cannabis market and this is a trend that we have been watching. We have been favorable on the Israeli cannabis opportunity for several reasons and find this to be an exciting opportunity for the following reasons:
- Israel’s climate is ideal for cultivating cannabis and the economics associated with this are very attractive
- The country has an early mover advantage on the medical cannabis opportunity
- Government regulations have been easing and this will create significant opportunities for the companies that are levered to this market
- The potential export opportunity for medical cannabis is massive and this is a trend we are closely following
- The valuations associated with the companies levered to this market are much lower and this leave significant room for potential growth
Out of these five factors, none is more significant than the easing of regulations being passed by the Israeli government. While we consider the better economics associated with cultivating cannabis to be a major factor, nothing can happen without the support of the government.
Israel was the first mover on the medical cannabis market and the market has become a major area of interest. We have been closely following Israel’s medical cannabis market as well as the companies that have leverage to this emerging opportunity.
Isracann: An Emerging Israeli Cannabis Company
Last month, we highlighted Isracann which has been focused on the Israeli cannabis market and is focused on becoming a premier, low-cost cannabis producer. The company has significant leverage to this attractive cannabis market and has secured three farms with cultivation licenses totaling 580,000 sq. ft.
Isracann has been working on further strengthen its balance sheet through a private placement and is well capitalized, having fully funded the buildout of 232,900 sq. ft. of cultivation facilities that can produce approx. 23,500 kilograms of premium cannabis on an annual basis. One of the important aspects of this opportunity pertains to this facility and how it get licensed. The company’s facility is a IMC-GAP/GSP certified facility that has been constructed to meet all regulatory standards.
In late 2019, Isracann expects to complete its first harvest and plans to ramp up from there. The facility offers the company significant room to expand and we are favorable on this. We expect to see increasing demand for Israeli cannabis products and the focus on increasing production capacity is important for the company’s growth potential.
Earlier in this article, we highlighted the climate in Israel as being ideal for cultivating cannabis. We want to discuss this further since it is a major differentiator for companies that are levered to this cannabis market.
When you look at the economics associated with cultivating cannabis in Canada, you will see that it costs approx. $1.50 to $2.00 (on average) to produce each gram of cannabis. In Israel, the economics are much more attractive and producers are able to grow cannabis for approx. $0.40 per gram. The leverage to the Israeli cannabis market is significant and we think economics will play a key role once the company starts cultivating cannabis.
A Company With Catalysts for Growth
When we look at Isracann, we see a company that has a visible growth strategy and has significant catalysts for growth. The management team has significant experience working for leading Canadian cannabis operators and we expect to see this expertise to support the company’s growth strategy. Isracann has done a great job when it comes to making strategic additions to the team and we are monitoring how they execute going forward.
One of the reasons why we are excited about Isracann is due to the number of catalysts for growth. The cannabis producer plans to significantly increase the amount of cannabis it can produce and plans to scale its existing facilities to approx. 500,000 sq. ft. Once the expansion is complete, Isracann will be able to produce approx. 50,000 kilograms of premium cannabis on an annual basis. This would make the company one of the largest producers of medical cannabis in Israel and this is something we are watching.
Another exciting aspect of the Isracann story is the relationships that it has in place. The company has entered into strategic relationships with the research, scientific and medical communities to identify opportunities and develop a pipeline of drugs and devices. Isracann is focused on addressing an undersupplied domestic market and anticipates near-term expansion to major European marketplaces. We are favorable on this growth opportunity and will monitor how the team executes on this.
Valuations are Attractive and Worth Watching
When we look at the North American cannabis industry, we get a little concerned when we see several companies with valuations that are north of the $2 billion mark. The recent trend in the United States has caused valuations spike higher and we have been focused on identifying trends or companies that are under-appreciated or undervalued.
We believe that the companies focused on the Israeli cannabis market have valuations that are much more attractive and provide much more upside potential. The market has not been overly focused on the Israeli cannabis market and we think that this has helped hold back valuations. We believe that this trend is transitory and plan to take advantage of the valuation disparity prior to any change. Isracann provides attractive leverage to this trend and we find the valuation to be attractive, especially when compared to its peers.
The Israeli cannabis market is an exciting opportunity and we are closely monitoring this market. Isracann is an opportunity that we are excited about and if you want to learn more, please reach out to email@example.com.
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