POTX - InterCure: How Bright Is The Company's Future In 2023

2023-04-06 10:24:11 ET

Summary

• Despite continued market challenges for the cannabis industry, InterCure's revenue continues to grow year-on-year and, more importantly, quarter-on-quarter to NIS 105.6 million in Q4 2022.
• InterCure's total comprehensive profit was NIS 43.7 million in 2022, up NIS 36.4 million from the previous year.
• We expect InterCure's revenue growth to continue in the coming years, driven by new product launches, increased partnerships with industry leaders, and business expansion in the European market.
• In the past six months, the European cannabis market has begun to revive and attract attention, all thanks to Germany, which aims to become the second European country after Malta to regulate the sale of recreational cannabis products.
• We believe that the proposed changes in the regulation of medical cannabis in Israel will finally be adopted in the second quarter of 2023, and the total number of patients using cannabis for medical purposes will increase to 165,000 by the end of 2023 and to 215,000 by the end of 2024.

InterCure ( INCR ) remains one of the leaders in the sector with a positive cash flow, while many competitors continue to struggle with multimillion-dollar losses and lack of capital, and some even exit the market without waiting for the reforms that are sorely needed for the cannabis industry.

According to the results of 2022, the number of patients using cannabis for medical purposes in Israel grew by only 12.7%, while according to InterCure, the number of consumers of the company's products and its partners grew by 77%, thereby highlighting the efficiency and flexible business strategies aimed not only at maintaining the company's leading position but also at increasing its share in anticipation of the removal of regulatory barriers and the resumption of growth in the cannabis market.

Improvement of InterCure's financial position despite the crisis in the cannabis industry

Despite continued market challenges for the cannabis industry, InterCure's revenue continues to grow year-on-year and, more importantly, quarter-on-quarter to NIS 105.6 million in Q4 2022.

One of the main reasons for the revenue growth is the increase in the number of pharmacies selling medical cannabis in Israel and the opening of a Cookies store in Austria. As of the end of Q4 2022, InterCure's pharmacy network is 28 units, an increase of eight pharmacies from the previous year, and twenty of them are already open to selling medicinal cannabis products.

In the first quarter of 2020 , InterCure entered into a pre-distribution agreement with Super-Pharm, the largest pharmacy chain in Israel, which operates 260 pharmacies, approximately 60 of which sell medical cannabis. Under its terms, the company planned to sell 10 tons of cannabis products over three years to Super-Pharm, subject to the signing of a final agreement (the "Super Pharm Agreement"), which will describe in more detail the terms of the partnership. However, according to the annual report , negotiations on this agreement between the two parties have been extended several times, and it is expected to be signed in the second quarter of 2023. We believe the likelihood of a positive outcome on this event is high and will ultimately increase the share of InterCure production in the Israeli market.

The company continues to pursue plans to expand the international supply chain needed to quickly and efficiently expand its presence in various parts of the world, focusing on the European market. InterCure has completed exporting pharmaceutical-grade medical cannabis products to the company's European hub, thereby building up the necessary product stocks for subsequent commercialization in the UK and Germany. According to company management expectations, and as part of a multi-year agreement with Cookies, the first store in central London will open in the second quarter of 2023. Alexander Rabinovitch stated the following on an earnings call about the UK market.

And yes, we believe that once medical cannabis products in high quality will be offered in the UK market in decent prices, of course, comparing to the local market conditions, we will obtain a good market share and eventually, the market will grow because of the same trends that we've seen in Israel in the early days.

In the past six months, the European cannabis market has begun to revive and attract attention, all thanks to Germany, which aims to become the second European country after Malta to regulate the sale of recreational cannabis products. One of the crucial factors that give confidence that the reform will be adopted is the announcement by Health Minister Karl Lauterbach that positive feedback has been received from the European Commission regarding the cannabis legalization plan in Germany. Overall, we believe that these plans by Germany will push Brussels to change its conservative stance on cannabis consumption, and other countries may follow the case, which will eventually lead to a substantial increase in the cannabis market and may cause cannabis-stock euphoria as it has been since 2018 for 2019.

We believe that InterCure can become one of the key players in the German cannabis industry through numerous partnerships, one of which is the agreement with Praetorian Global . InterCure has an exclusive multi-year right to manufacture and sell Binske-branded products in key markets, including Germany, Australia, Israel, and the UK.

But the most crucial development for InterCure and its business partners like Tilray ( TLRY ) , Organigram ( OGI ), and Charlotte's Web ( OTCQX:CWBHF ) is the news of upcoming reforms in Israel's medical cannabis industry. So far, about 123,700 patients in Israel have been licensed to use medical cannabis. However, there has been sluggish growth in the market in recent months, driven mainly by a shortage of doctors who can write prescriptions. The changes proposed by the Boaz Lev Committee are to replace the current license structure with a new model for obtaining prescriptions through one of Israel's four public health organizations, called Kupat Holim. Given that from the age of 18 , every Israeli citizen is required by law to be insured in the national insurance system and to be registered with one of the four sick funds, the proposed reform could significantly increase access to medical cannabis for patients by substantially increasing the number of doctors eligible to issue prescriptions. We believe that the proposed changes in the regulation of medical cannabis in Israel will finally be adopted in the second quarter of 2023, and the total number of patients using cannabis for medical purposes will increase to 165,000 by the end of 2023 and to 215,000 by the end of 2024.

We expect InterCure's revenue growth to continue in the coming years, driven by new product launches, increased partnerships with industry leaders, and business expansion in the European market. At the same time, according to our model, this financial indicator will exceed one billion shekels by 2026. Moreover, the profit margin will also continue to grow due to the adoption of reforms in Europe aimed at allowing the recreational use of marijuana, increasing the share of InterCure products in the Israeli market, expanding access to medical cannabis, and increasing the number of medical indications for which it can be used.

Conclusion

InterCure, as a leader in the Israeli cannabis industry, continues to show that the business remains profitable despite the ongoing market challenges seen in recent months. The company's management, led by the former Prime Minister of Israel, Ehud Barak, pursues innovative and efficient business strategies to sell high-quality medical cannabis and attract new customers.

InterCure maintains its position as one of the largest profitable cannabis companies outside of North America, with a total comprehensive profit of NIS 43.7 million in 2022, up NIS 36.4 million year-over-year, with cash and cash equivalents of NIS 232.6 million or 56.4% of the current total capitalization. The company has successfully overcome market challenges and increased the share of its products in the Israeli market, even before the barriers have been lifted, and the reforms announced by the Israeli Ministry of Health are finally adopted. The changes proposed by the Boaz Lev Committee are to replace the current license structure with a new model of obtaining prescriptions through one of Israel's four sick funds. This could lead to a significant increase in the number of doctors able to write prescriptions and thus make it easier for patients to access medical cannabis.

We believe that InterCure is one of the most promising companies in the cannabis industry ahead of comprehensive reforms in Europe and, thanks to numerous partnerships and innovative products, will significantly outpace industry mastodons such as Canopy Growth Corporation (NASDAQ: CGC ), Aurora Cannabis (NASDAQ: ACB ), and Cronos Group (NASDAQ: CRON ) in terms of business development.

In line with our investment strategy, we continued to acquire InterCure shares on the Tel Aviv Stock Exchange in the first quarter of 2023. We made purchases at an average price of NIS 8.1 per share, taking advantage of the current depression in the cannabis stock market, and plan to sell them when our InterCure price target of $6.40 or NIS 23.01 per share is reached.

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