Is It Worth Investing In Israel’s Medical Cannabis Industry In View Of The Regulatory Fluctuations

Photo Credit: Kobi Gideon

The Israeli Medical Cannabis industry has recently been thoroughly shaken. The Israeli industry, being at the forefront of global technological and scientific leadership in the development of medical cannabis, was stopped by the Government. Prime Minister Benjamin Netanyahu announced that he is freezing the reform in the export of medical cannabis until further notice. This announcement came a few months after Israel announced its intention of joining the global race, including an increase in the number of people licensed to set up cannabis farms, opening the market to the export of medical cannabis, and regulating the sale of medical cannabis in Israel.

Israel enjoys a strong position in the global cannabis industry, as the primary source of the scientific findings about the medical qualities of the active substances in cannabis, THC (the most familiar active substance in cannabis, which is responsible for most of its psychoactive effect) and CBD (the second most famous substance in cannabis, with therapeutic qualities). Today Israel has some of the world’s most advanced farms for medical cannabis. Moreover, many Israeli technology firms are responsible for developing products that make cannabis growing methods more efficient, special strains, ways of exploiting its medical qualities, and promoting the consumption of cannabis, using medical technologies for patients all over the world. Nevertheless, and in spite of its considerable knowledge, experience and capabilities, Israel has not yet dared to join the global market for medical cannabis exports. Now the Government’s zigzagging is putting the Israeli industry in an impossible situation, with uncertainty over whether to invest in the industry, and if so, how.

Medical cannabis is a relatively new field, and most investors are not knowledgeable enough to understand the complexity of the plant, how to grow it and adapt it for medical use, the regulations, or the advanced technologies being developed to improve its effects and methods of use. In many case, lack of knowledge combined with business instinct leads investors to invest in the raw material, namely, the farms. Today there are six countries that have opened their gates to global trade in medical cannabis. Over the next 5 years, most of the western world is expected to join them, leading to an overall drop in the price of the raw material.

To illustrate this, three years ago one kilogram of CBD cost 60,000 dollars. Today the price has plunged to 6,000 dollars, and it will continue to fall as more and more countries produce and trade in the plant. Exactly the same is expected to happen with other active substances in cannabis, including THC. The expected drop in the price of cannabis has a direct influence on the growers. For example, in California they recently granted 3,000 licenses to set up cannabis farms, in other words 3,000 farmers are about to invest a lot of money in setting up the infrastructure. Although the borders of the United States are still closed to imports and exports, this move will mean a surplus of supply of cannabis in California, a significant drop in prices, and anyone who cannot handle the market correctly or does not have an advantage of size, will find it very difficult to continue.

Although the race for the production of medical cannabis is reminiscent of the California “gold rush” in the 19th century, investing in cannabis is far more complex than in gold. So it is important not to be dazzled by the magic word “cannabis”, although many wealthy business people worldwide understand that this market offers a quick way to get high returns and are excited about getting involved in the industry. Since many of them do not understand how this market is expected to behave, they often put their money into dubious ventures such as immature cannabis farms with insufficient experience. A farm’s maturity can be expressed, for example, in the technologies it uses to make growing more efficient which result in a high quality product according to defined standards. The fact that a farmer is experienced in the secrets of agriculture does not mean that he knows how to grow cannabis that meets the criteria for medical use. So if an investor wishes to succeed in the cannabis industry in the long run, he must find partners who understand the global medical cannabis field, and not just in the country where he invests.

Therefore, and also because of the expected inflation in the raw material, the area that is expected to offer the highest returns is the production and marketing of processed cannabis, products that offer high added value to the consumer, apart from the medical benefits of the raw material.

Another developing trend in the medical cannabis field is the rush of immature companies to the public capital market. This is one of the plagues of the cannabis industry that is expected to cause huge damage in the long run to the whole medical cannabis industry. Thus investors must be aware that many people in the business world are unable to distinguish between a company backed up by professional knowledge and regulatory understanding that justifies the issue and a company that is issued without suitable backup for a quick and easy short term profit.

In addition, it is important to ensure that investments come from reliable sources. Cannabis, which is still subject to the Dangerous Drugs Order in Israel and most other countries, obviously has the potential of attracting unreliable elements. Investors must make sure they are dealing with a credible company, not one that will be tempted to go beyond the regulations, which would harm their reputation.

Unlike other areas of content, where understanding can be focused on just one specific aspect, the development of medical cannabis products requires in-depth understanding of a wide range of subjects – illnesses, agricultural strains, regulation and business. Therefore the best source of investment in medical cannabis will be a company with multi-disciplinary capabilities. In other words, an organization that can handle all the interfaces of medical cannabis – pharma, regulation, technological development, agricultural and production aspects, plus experience in the capital markets, marketing and commerce.

To sum up, the medical cannabis industry in Israel has enormous potential to be an excellent target for investment, but in order to realize this potential, investors must act wisely and with great caution.