Reasons for the unprofitability of Israeli companies operating in the segment exploiting the therapeutic properties of cannabis
The main reasons for the unprofitability of companies exploiting the therapeutic properties of the hemp plant are: the crisis of overproduction and high competition in the market, excessive regulation by the state, inefficient use of resources, unregulated import / export, choosing the wrong enterprise development strategy.
In the materials of our North American colleagues “Secrets of the rapid growth of Canadian hemp growing”, attention was focused on the fact that, for the most part, private companies in the Maple Leaf Country that specialize in the cultivation, processing or sale of cannabis with significant therapeutic potential are unprofitable. Recently, more and more Israeli medical cannabis companies are on the verge of bankruptcy, some of them have already closed or are on the way to do so. Now the specialists of the Israeli hemp market are trying to figure out why this is happening and the conclusions they draw will certainly be of interest to our esteemed readers and listeners.
All public cannabis companies (those that are listed on the stock exchange and their data is transparent to the public) have published their financial statements for the first half of 2022, from which an interesting and difficult picture emerges: except for 3 companies - “Intercure”, “Shih Medical Group” and Bol Pharma, all other Israeli medical cannabis businesses listed on the stock exchange cannot make a profit at all.
The reasons why hemp companies cannot make money are varied, but the bottom line is that this situation leads to the fact that many of them have debts and incur huge losses, and nothing depends on the activities of their management to keep the companies afloat. .
According to the specialists of the Israeli hemp market, the main reasons for the unprofitability of companies exploiting the therapeutic properties of the hemp plant are: the crisis of overproduction and high competition in the market, excessive regulation by the state, inefficient use of resources, unsettled import / export, choosing the wrong strategy for the development of enterprises.
Crisis of overproduction and high competition in the market
The market in Israel has really grown and, according to the estimates of the consulting company “Gilgal”, today is about $ 200 million, which indicates its increase compared to the $ 120 million it was estimated at the beginning of 2021 (indicative of an increase in demand). On the other hand, there is a disproportionate increase in supply - over the past two years, many farms, factories and companies for the production of medical cannabis have been opened. At the moment, the supply of therapeutically active raw materials on the market significantly exceeds demand, and some enterprises offer leaves and inflorescences of poor quality, which predetermines the impossibility of a significant number of market participants to make a profit.
This situation was created by the sudden emergence of a huge number of new “players” in this field, as well as by the ongoing reforms in the industry, which continue to this day. Thousands of applicants applied for jobs in the cultivation and sale of medical cannabis, and hundreds of them went so far as to invest large sums of money amid a “bubble” in the stock market that raised the value of companies to an unprecedented peak.
The legal market for medical cannabis in Israel is currently around 120,000 patients, so 2-3 factories and 5-10 farms are enough for the country to meet domestic demand. In reality, there are already about 11 factories and about 40 farms in Israel specializing in issues related to the cultivation, processing and sale of therapeutically active cannabis. Such a number of market participants makes almost all of them unprofitable. In the days of the “bubble”, many believed that exporting abroad would really allow active development, but it turned out that there were still no large markets abroad and that no one was waiting for Israeli raw materials with significant therapeutic potential.
Over-regulation by the state
Almost every medical cannabis company that fails or leaves the industry blames the "overregulation" of the market. For example, the time it takes to legally grow, package, or sell medical cannabis is significantly longer than almost any other business, in part because you have to deal with a product that is still considered a “dangerous drug” by law. ”, is manufactured and sold in accordance with drug standards.
This means significant time costs, large amounts of money, strict bureaucracy and strict audit - all of these procedures are significantly dependent on many government agencies. In addition, increasingly stringent standards and unwritten regulations have to be observed, which sometimes seem at least partly based on the whims of government officials, who change “from morning to evening”.
Resource inefficiency
Many companies in the medical cannabis industry have spent, and most of them are still spending, hundreds of millions of dollars a year combined on CEO and VP salaries, modern luxury cars, fancy offices, bonuses, grants, overseas flights, and more. something no one would normally do when it comes to companies with such low sales volumes and gross margins.
This inefficiency, of course, is due to the fact that at the beginning of the emergence of the industry in 2018-2020. (bubble period), medical cannabis companies have been able to attract huge financial resources from the capital market with great ease.
Unsettled import/export
Another reason for the difficulty of Israeli medical cannabis companies is fierce competition from similar foreign corporations, mainly from Canada. For example, since the first import in January 2020, Israel has already received about 60 tons of medical cannabis from abroad - an amount that is enough for all patients in the country combined.
This is a death blow to local producers, who, when they began to equip their production facilities in 2017-2019, did not assume that imports would “be put on stream”. It must be borne in mind that at the initial stage of the development of the Israeli market, imports were approved due to a shortage of raw materials, when the industry was in its infancy, and many farm owners believed that this state was granting foreign companies a temporary import permit, which would later be blocked .
Israeli companies, which actually made the main bet on the export of cannabis abroad, are faced with the fact that, for example, Canada does not allow imports into its territory at all. As well as the second largest market in Germany, which is already "captured" by powerful Canadian hemp corporations.
Choosing the wrong enterprise development strategy
A significant reason for the losses is the fact that over the past 3 years many managers and controlling owners have come into the industry who had no experience in this area of management at all. This fact probably explains the chosen development strategies, which were initially erroneous.
Many of those who started working in this field had no experience in selling medical cannabis, did not know what quality raw materials are and how the plant looks in general. In 2022, it can already be said that the above things are known, however, many companies were initially built on the basis of incorrect assumptions, for example, that medical cannabis is a normal “commodity”, since there is no difference between “good” and “bad” raw materials .
According to this concept, the farms that were built at the initial stage of the development of the industry are in fact not capable of producing a quality end product. It should be noted that quite a few of the farms have recently ceased operations, others are about to stop their operations, and their owners are moving mainly to import from abroad or marketing new brands from satellite farms owned by third parties.
Commentary of the specialists of the “Ukrainian Industrial Hemp Association”
Focusing on the "factory" model in the medical cannabis sector, which is in fact a production by packaging raw materials, has not paid off. The vast majority of companies that focused on the factory model providing manufacturing services to third parties, and even more so those of them that at the beginning of their development focused on factory services only for their own production, show a double-digit loss.
The creation and operation of the corresponding production facilities takes away a significant financial resource from companies (usually in the region of $ 2.5 million just for their installation and commissioning). Once a business is up and running, there are fixed costs that cannot be avoided - licensing, rent, security, equipment maintenance, and more. These costs allow the factory model to pay off only if it operates at the cost-effective capacity, which is impossible with 11 factories, when their need for Israel is a maximum of 3.
< Previous article Next article >