Will medical cannabis exports be a cash cow for Israel?

“I believe that because of the cannabis gold rush, many people are going into the business without real understanding of what they are going into."

An employee tends to a freshly-harvested medical cannabis plant at Pharmocann, an Israeli medical cannabis company in northern Israel January 24, 2019. (photo credit: AMIR COHEN/REUTERS)
An employee tends to a freshly-harvested medical cannabis plant at Pharmocann, an Israeli medical cannabis company in northern Israel January 24, 2019.
(photo credit: AMIR COHEN/REUTERS)
They might not realize it, but medical cannabis researchers, farmers, manufacturers and users are all indebted to an Israeli scientist and his modest laboratory at Rehovot’s Weizmann Institute of Science.
In 1964, then-junior faculty member Prof. Raphael Mechoulam resorted to asking an ex-military friend serving in the Israel Police to illegally supply him with seized Lebanese hashish for his first cannabis-related experiments.
There, in that laboratory, Mechoulam would become the first researcher to isolate the THC and CBD compounds in the cannabis plant, offering great potential for the treatment of pain and inflammation.
Fifty-five years later, Israel – still renowned for its pioneering medical cannabis research and innovation – is set to commence exporting medical cannabis to a rapidly-growing, global, legal cannabis market. According to government projections, the state could earn between NIS 1 billion and NIS 4b. ($1.09b.) per year from such exports.
The long-awaited amendment passed last month to Israel’s 1973 legislation on dangerous drugs, permitting a supervised mechanism to enable Israeli medical cannabis exports, represented “a dramatic step” for the country, said Deputy Health Minister Ya’acov Litzman. Agriculture Minister Uri Ariel hailed “a historic message” for farmers, patients and the Israeli economy alike.
As expected, the decision received universal praise from green-thumbed private industry leaders, who feared that further government stalling on the issue could result in Israel missing out on a potentially lucrative, leading role in the field.
And while industry actors do believe that government approval has arrived in the nick of time, they also caution that Israel’s approval of medical cannabis exports is not going to lead to immediate gains. It could be some time before the first shipment leaves Israel’s shores.
“The market has waited for this for a long time,” Oren Shuster, CEO of IMC Medical Cannabis, told The Jerusalem Post.
“There were many companies that received pending licenses for production, and most were sitting on the fence waiting for exports to be approved before investing in growing facilities. It’s not like any agriculture practice, due to the big investment required and the long production process.”
IMC, based near the Gaza Strip border, boasts one of only four Israeli farms to be awarded a GAP (Good Agricultural Practice) standard for cannabis growth, based on the international standard for good growing of produce.
One key advantage that IMC and other cultivators in Israel have over European competitors, Shuster said, is the excellent Israeli climate.
While an increasing number of companies might seek to take advantage of that competitive edge, it’s important to bear in mind that the European export market – due to become the world’s largest – is not yet that great in size. Those companies likely to succeed will be the ones with the greatest know how and experience. Anyone seeking to export must receive a license exclusively granted by the Health Ministry and police approval.
“I believe that because of the cannabis gold rush, many people are going into the business without real understanding of what they are going into,” said Shuster. “There will be a lot of investment in the industry, and a lot of people will lose their money.”
Although some estimates project the European cannabis market alone to be worth in excess of $66 billion within a decade, Shuster emphasized that it remains just an estimate. In addition, export approvals do not mean that the first medical cannabis shipments are already on their way to Europe.
“The question is now regarding regulation and when practically we’ll be able to export, because it’s not clear as of now,” Shuster said.
“IF WE look at past experience and how long it took to receive government approval, maybe it’s still too early to speak about actual exports. Maybe that’s over-conservative, but it’s based on past experience.”
Far from the cultivation of medical cannabis in the hot sun of the South, Lod-based Panaxia Pharmaceutical Industries has become a global leader in providing medical cannabis treatments through a variety of familiar delivery methods.
Today, the company offers more than 30 different types of cannabis-related products, dosages and delivery methods.
“The first significant change about to occur now that exports are allowed is an obvious one: we’ll be capable of bringing our products and utilize our expertise that we have gained throughout the years in Israel, and we will be able to sell the products to other markets,” said Dr. Dadi Segal, CEO of Panaxia.
Two years ago, Panaxia became the first Israeli company to become GMP-approved by the Health Ministry, enabling the sale of its products in Israeli pharmacies. The company currently manufactures about 90% of the medical cannabis brands available on the domestic market.
“One of the largest problems we had as an industry was that the Israeli market is very small, less than 40,000 patients. It’s impossible to build an industry on such a small market,” said Segal.
“The German market is already larger than the Israeli market. But just imagine that at the beginning of last year, there were only 1,000 patients. The German market is exploding. The UK market has just opened, and expectations are that it will be even larger.”
While more than 30 US states have legalized some form of cannabis use, it remains illegal on a federal level, blocking potential Israeli exports to the American market.
But even gaining access to larger, European markets will not only benefit the cannabis companies’ coffers, Segal said. It will also benefit the patient population in Israel, as greater revenue will lead to the development of improved cannabis-based products, including for domestic consumption.
David Papo, chairman of the Pharmaceutical Association of Israel, agreed with Segal’s assessment. He added that revenues accrued through export will not only improve the quality of domestic medical cannabis products through additional investment in research, but also improve availability and affordability.
“From the point of view of private pharmacists in Israel, the impact is very positive,” Papo, whose organization represents over 600 private pharmacies in Israel, told the Post.
“This is because the growers, manufacturers and exporters with big business abroad will channel more money to medical research, and to agricultural research and for improving the plants. There can only be good outcomes from the export of medical cannabis.”
In addition to further investment in Israel’s already renowned medical cannabis research field, an internationally-oriented industry should also lead to deepening relations between Israel’s research centers and foreign innovation partners.
“Growing on a large scale can push the prices down, as it reduces the price of manufacturing the end-product. Exports don’t just mean greater quality and availability, but the prices will also go down,” said Papo.
While some medical cannabis companies, both in Israel and abroad, choose to develop their products in-house, many start-ups choose to outsource their innovation to GMP-approved Nextage, a subsidiary of Nextar – Israel’s leading contract manufacturing organization for the development and manufacturing of pharmaceutical and medical devices.
Since its establishment 11 years ago, Nextage’s cannabis innovation center has developed more than 70 innovative medical cannabis products, and worked on 1,700 projects for more than 300 clients.
THE COMPANY is chaired by CEO Dr. Orna Dreazen, a former general director of the Health Ministry’s National Public Health Laboratories, and general director of the Israel Laboratory Accreditation Authority. In an industry where regulation and accreditation is key, such experience gives the company a significant advantage over any competitor.
“Even if we take into account our experience in the pharma world, nobody develops a product for Israeli markets,” Nextage CEO Avraham Dreazen, Orna’s son, told the Post.
“It’s too small of a market, so the commercial incentive to develop a quality product is not there. As a result, companies developing for the Israeli market essentially do not invest in truly making it a pharma-grade product,” he added.
“But when you start looking at exports and international markets, whether the European market, Canadian market, and potentially the American market at one point, then the economic incentive to export exists for companies to invest.”
Despite the economic incentives generated by exports, Dreazen was quick to put the current wave of medical cannabis optimism into perspective. In addition to echoing the time prospective exporters may need to wait for regulations that truly enable exports to begin, she said experience shows that actually manufacturing medical cannabis in Israel will not make financial sense in the long run.
“Manufacturing in Israel is not necessarily cheap. As the cannabis market evolves around the world and more countries open up, companies will likely have outposts or agreements with manufacturers in certain territories with whom they will do a tech transfer of their product,” said Dreazen.
“You will not be mass producing millions of bottles in Israel, and then shipping them to Canada. That’s why a lot of companies, us included, are in the process of opening up facilities in Europe and Canada, where we can manufacture locally for the local markets without having to endure the regulatory and the import-export burdens.”
While the advantages for transferring medical cannabis manufacturing facilities to local markets are reflective of the manufacturing offshore witnessed in many other hi-tech industries, Dreazen expects Israel’s research and development prowess to remain firmly inside the country.
“Companies from around the world are approaching us with a very strict understanding that the research and development, and capabilities around product development, are located in Israel. The know-how, the minds, the universities are three decades ahead of almost any other place in the world,” she said.
“We have always thrived on the ability to do research and development. If we strengthen that point, Canadian companies and German companies will all want to be attached to Israeli ecosystem, but it’s for research reasons, not for any other reason.”
Despite optimistic projections of future profits and investments, regulatory uncertainty still remains over export-related issues, which are of the utmost importance for all players in the medical cannabis supply chain.
“There was serious progress made when the government approved exports, but what is currently missing is the need to decide the rules and instructions for the method of exports and which products will be possible to export,” Adv. Reut Alfiah, head of the medical cannabis group at global law firm ZAG-S&W, told the Post.
“The estimates are that the regulations and rules will be finalized at least eight months from now, bringing us to the end of the year. And then there will be a need for companies to adapt themselves accordingly for exports and, most significantly, to reach the states willing to import the products,” she said.
“The road until we witness exports in practice has become shorter, but there still remains a long way to go.”