I originally was scheduled to interview Rinat Efrima, the newly appointed Israeli CEO for IM Cannabis Corp. (CSE:IMCC) (NASDAQ:IMCC), or IMC, but when I jumped on the call I was greeted by CEO and founder Oren Shuster, who informed me that Efrima, whose new job starts March 1, was sick and he would be taking her place. I expressed my regret and wish for a quick recovery, but inside I had to celebrate the fact that I could now query the founder of this fast-growing vertical cannabis company based in Israel with major hubs in Canada and Germany, which is in the process of building an international supply chain for the premium European market through which to deliver IMC’s branded cannabis products.
It is a plan that has been in the works for years, Shuster explained. “My background is as an entrepreneur,” he said, speaking from Israel, his evening to my morning. “I started a software company with a partner more than 20 years ago as a bootstrap. We [built] more companies along the way, most in software and technology; we specialized mainly in healthcare. Israel is very advanced in healthcare IT. We developed medical records and cardiology management systems and telemedicine solutions and so on. In 2010, I was exposed to medical cannabis, and I decided to go into the industry. I wasn’t aware of how [long] it would take. I thought it will be like any other medicine. I was a bit naive. For many years, I kept it in a low profile because I understood it was very controversial in the beginning, and I came from a very traditional industry. It was only in 2017 that I decided to focus on cannabis, and since 2018, I’m 100 percent in IMC. So, I have strongly believed in medical cannabis and cannabis as a whole for many years.”
Shuster’s approach to the industry was always both medical and entrepreneurial. “From the beginning, the approach was very medical, and [that was] my approach as well. Israel is very strong in research and the clinical aspects of cannabis. Research on cannabis started in Israel in the early 1960s, and THC actually was discovered in Israel, so we are heavily rooted in the medical and the clinical aspects of cannabis in Israel.”
The company also is determined to be a patient-touching company as well as a producer and provider of premium products. To that end, IMC completed a transaction in December that it says positions it as one of the largest retailers of medical cannabis in Israel, with self-reported combined annualized revenue in the retail segment of approximately $44 million. That deal – the purchase of Oranim, “a well-established brand with a fourteen-year track record of successfully serving the needs of medical cannabis patients in the [Jerusalem] area,” per a press release – was the fourth such definitive agreement IMC has signed with cannabis pharmacies in Israel.
“Just to give you some kind of sense about the market, Israel is very similar to Michigan by population, and [will be] very similar when the market [is] fully legalized,” said Shuster. “Also, because medical cannabis started very early in Israel, similar to Michigan, it’s very well rooted in the culture today.”
But Israel’s uniqueness goes far beyond its similarity to a midsize American state. “Israel is very unique in few aspects,” explained Shuster. “First of all, it’s a real closed market, because Israel is surrounded by real borders because of the security situation, and the army is guarding the borders. So, we have closed borders. Secondly, it’s very small country, so it’s very easy to monitor illegal grows. Because of that, most of the illegal grows are in apartments on a small scale. Combine [that] with a very high percentages of cannabis users – official numbers [from] the government speak about around 27 percent of Israelis use cannabis – and it breeds a very expensive black market. Now, the uniqueness of Israel is that the black market is more expensive than the medical market. Usually, the competition is the black market. But in Israel there isn’t any price compression, or I would say differently, the price compression is not coming from the black market. On the contrary, there is leakage from the medical market to the black market, so in the black market, you can buy medical cannabis much more expensive than it’s being sold in the pharmacy. So, it’s a very unique situation.”
Officials place the number of cannabis patients in Israel at around 110,000 people. “The last time the ministry of health published the numbers was December, I think, so it’s very updated,” said Shuster. “The market is growing today at about 3 percent on a monthly basis. So, because of this situation – where the black market is more expensive – any user of medical of cannabis has an incentive to get a prescription to get medical cannabis. The only reason that it’s not happening massively now is because it’s very difficult to get a prescription in Israel.”
The country, he added, is in a period of transition, like a lot of places. “Today, both the coalition and the opposition are pro-cannabis,” he added. “Cannabis in Israel is last frontier treatment, but they are speaking maybe about [making cannabis] a first line of treatment. If that will happen, it could be like a legal market in a medical framework. I think we will see something very similar to that in Israel, because we don’t have the pressure from the black market. It will be a reasonable market, very good, I think, and I think that the size of the [Israeli] market in dollar value will be very similar to Michigan.”
How and from where Israel (and Europe) gets its cannabis also is evolving as specific markets (i.e., countries) and the global market mature. In 2020, Israel reportedly surpassed Germany as the top global importer of cannabis flower. The takeaway at the time was that while the growth in imports is encouraging, it’s hard to find a third-party country exporting meaningful quantities of high THC cannabis. But that was 2020. Recently, IMC announced that it has imported a large quantity of flower from Canada to Israel. I asked Shuster to talk about that part of the business.
“Israel was a closed market, and the product came from Israel, most of it grown in greenhouses, and very simple greenhouses because the weather is very convenient in Israel, not too extreme, and we don’t need glass greenhouses, and we don’t need many artificial environments,” replied Shuster. “When the imports started, suddenly Israelis were exposed to products that came from indoor facilities, much more monitored, and from a highly competitive market like the Canadian market. Because of that, they were exposed to higher standards.
“Israel is not a manufacturing country,” he continued. “We rely on imports when we’re speaking about the production of a product. Israel is very strong in exporting high tech, IT know-how, but not the products that needs labels. So, we are used to buying foreign brands, and because of that, the imported product gained high popularity in the Israeli market, and we’ve seen the quantities of imports increasing. I believe that as long as import will be open, Israel will rely heavily on premium products that will be imported to the market, because like ZI said earlier, we don’t have the competition of the black market and the price compression. Because of that there is plenty of room for the prices to go higher, even if it’s coming from expensive grows, as long as it’s quality product.”
Israel is also what Shuster calls a premium cannabis market, where like in Canada, with its capacity to grow around 7,000 kgs of premium cannabis a year, and in Germany, through its Adjupharm subsidiary, IMC is putting the means in place to meet the needs of an increasingly sophisticated consumer and patient base that demands quality cannabis products priced correctly. “What is clear is that you can’t grow if the market is highly competitive, and people are not willing to pay higher prices,” said Shuster. “It is very important, that aspect. We are not even close to that in Israel. People are willing to pay a lot of money for premium product, and some of it is going to the black market. The higher the quality, the higher the premium in the Israeli black market for the product, which is being sold from the medical market.”
As far as how much leakage is taking place, “I don’t know exactly,” said Shuster, “but consider that about 50 percent of the payment in pharmacies is being done in cash.”
Of course, Israel is, as Shuster repeatedly noted, a unique market. “The only products today being sold are flower, a very small portion of pre-rolls, and relatively small quantities of small percentages of sublingual tincture,” he added. “We don’t have oil, vape products, edibles, or gummies.” Still, it mis a market set to explode in many ways. “I think that many of the users in Israel are semi-recreational and got the license, and that this number will increase significantly,” said Shuster. “It’s all about the regulation. There is a committee now in parliament to legalize medical cannabis. They are speaking about a very, very liberal approach, and I believe that it will be like the backdoor of legalization. I think that the medical market will be so vague that they will have to regulate it and because the numbers of patients it will be like a legal market.”
Building a Global Supply Chain
That future forms the basis of IMC’s strategy going forward, and the reason for its recent acquisitions. The Israeli market is a growing market, and we needed access to engage directly with the patients and customers,” said Shuster. “Because the market is growing constantly and is going in a recreational way – although it’s still a medical market – and because [cannabis] is expensive in Israel and people are paying a lot for it, we wanted direct interaction with patients. We acquired a few pharmacies – some of the biggest in Israel – but we focused more on delivery services as one of our main focuses with the pharmacies that we acquired. There is big portion relatively of home delivery, and we’re integrating those operations into one call center, one logistics center, to enjoy the synergies and the benefits of doing it as an integrated operation.
“So, that’s the main focus,” he added, “and for us it’s important because the Israeli is looking for premium product. Now we have the company in Canada, and what we have done is we actually have built a supply chain, and IMC is working in premium markets. Israel is a premium market because people are paying premium. Germany is a premium market, and those markets are very similar to each other in many aspects. Both are medical market. In both of them, everything is sold through pharmacies, highly regulated. Both markets work with GMP standards. In Israel, it’s local, designed for cannabis called IMC GMP. In Germany, it’s E-GMP, for European GMP. They’re very similar. The market in Germany is very medically oriented today. For the Germans, accuracy is very important, the science behind the cannabis, the medical research, and today, IMC is the only company in Germany that can bring actual clinical data and the exposure to patients for many years and data collection that we have done, to bring all this know-how and experience, as well as the physician education that we can bring to a very young market like the German market.”
I asked Shuster if the plan is to replicate the vertical strategy being deployed by IMC in Israel, and eventually replicate touching the end-user in the German market, which is so similar to the Israeli market?
“This is exactly what we wanted to do,” he said. “Unfortunately, in Germany, we can’t own pharmacies and have direct access to patients. However, the market is going toward legalization, and I think that we will see many changes in the German market. Still, the market will stay a GMP market because standardization and quality are the most important thing in Germany, and it’s very challenging to work in this highly regulated environment. It’s a long process to become active in the German market, and I think the companies that are already there with existing operations and a distribution network and supply chain infrastructure will have huge benefits in the market when it opens up.
“Germany is more than 80 million people,” he added, “the biggest economy in Europe, and I believe that Europe will follow Germany. Whatever decision Germany will take, the rest of Europe will follow. This is what usually happens and because of that, the companies that will be in Germany will be in the best position to take advantage of the European market.”
I asked if there is more demand in Germany for cannabis than there is product available. “Today, the situation in Germany is that there is availability of product,” he responded. “The market is a medical market, and it’s growing, but it’s very small. I think it’s very significant what the new government will decide, because if they continue with the medical cannabis approach, and they do it over the counter (OTC) so that people can go in with an ID from the age of 21 or 18 and buy cannabis legally, it can happen very quickly without building all the infrastructure, and it will continue to rely mainly on imported products.
“If they go full legalization, it will be a longer process,” he added. “My belief is that it will be a hybrid model, and we’ll start with more medical approach, like the OTC approach, and we will start to build the infrastructure for full legalization. And by doing that they will be able to start much faster with this process. This is what I think they will do, but definitely the impact for the market once the process starts will be very significant.
I asked how much cultivation is done in Germany. “The total German market, the total grow, is less than 5000 pounds annually. That’s it, that’s the maximum capacity,” replied Shuster. “All the rest of the product is imported to the German market, mainly from Canada, but not all of it. Some of it is coming from Australia, some of it is starting to come from Denmark, some of it is coming from Portugal. It has to be EU GMP-certified in order to come to the German market.
“For us, Germany is the hub to the EU market,” he noted. “We’ve built a significant logistics center in Germany to be able to supply the German market with product just in time and also to be the hub for the rest of Europe. We have a distribution network in Germany, where we are selling directly and through partners. We also have supply partners that we’re working with from a few countries, and we’re expanding that. Part of our global strategy is the supply chain. We’re now building a supply chain that is starting in Canada – where we have a local grow, and we are also purchasing from others – and we have our own manufacturing facility in Canada.
“And we have the quality team, the purchasing team, and the processing,” he continued. “We’re doing this all centralized, and this year we will be fully operational. We will start the processing in Canada, and from there it will go to the Canadian market to our local brands, and some to Germany, and some to Israel, with optimization of each of the products to each of the markets.”
The focus is on quality. “We are working in premium markets, and in Canada we are focusing on the premium segment,” said Shuster. “For example. Our brand, Highland Grow, is number one in Ontario
in the last 60 days in the ultra-premium category. Our Wagners brand is number six in Ontario in the last 60 days in the premium segment. So, it’s not accidentally that we’re focusing on this segment. It’s because it’s our market today, internationally as well, and the reason that we went into Canada is to be able to have a consistent, high-quality supply of premium product without relying on others, as part of our vertically integrated approach, and to be able to sustain our own high-quality products for each of our markets.”
I asked if Shuster is aware of any other companies working in the same space by trying to exploit a unique opportunity to put together this type of supply chain structure while the global industry is still forming.
“I’m not familiar with any other company working, actually operative, in the pre-legal market, which is Canada, Germany, and Israel today. Federally legal, I mean,” he replied with care. “We are the only company that I’m familiar with that is doing that, and the only company that has built an integrated supply chain. It’s part of our vision. We’re working in hubs. Canada is the hub, Germany is the hub for the EU market, and Israel today is supplying locally and we’re also importing some of our products. In the future, we will also export from Israel to Europe once the market will be [standardized]. So, I’m not familiar with any other company that has done something [similar].
What about U.S. Domination by IMC?
What about the all-enticing U.S. market, I asked Shuster, noting that IMC had recently partnered with CBDMD to get some of their products into Israel. I was once again surprised by his answer. “No question that the U.S. market is super interesting,” he said. “It’s a huge market that is moving all the time, and in some markets, we can see that it’s highly competitive.
“It is different markets, different regulations,” he added, referring to state-by-state regulatory requirements. “It’s not like Europe, where it’s different languages, different cultures. It’s America, but operationally it’s different markets, because you have to build your operation in each of the states, and each of them is different with the licensing policy and regulations. I’m not optimistic about legalization in the near future in America. I don’t see enough incentives internally because of the structure. I believe that in the near future, the market will continue to be state by state, and we won’t see any legalization at the federal level. That’s my opinion. Maybe it’s not the popular what I’m saying.”
That said, is the United States a place Shuster wants to set down retail or other footprints? “We are working the market; however, we are very focused in our market, and we have a huge competitive advantage in our markets,” replied. “The markets are completely different. Once [cannabis] will be legalized in America, we have to remember that the FDA will be involve, and I think we will see significant changes. I think that some of the regulations that we’re facing in our market will start to be more similar with a standard deviation that we will see in America, and it’s still early, still very early in the industry. As of now, we are very focused on our market.”
I asked Shuster if a European-focused company (like his) working in cannabis-friendly highly regulated markets is a good bet for investors. “I’m very bullish about the industry, which is here to stay,” he replied. “We are only in the beginning, and we can see the growth of each market, each cannabis market. I believe that today, investors should build a portfolio and should have exposure to all the interesting markets, which is America – today the biggest market and definitely the most interesting because it’s the biggest and the most active. However, we have to remember that Europe is bigger than America by population, and it’s only in the beginning. So, to have exposure now to Europe, in its infancy, is like investing in the MSOs years ago, when almost nobody had done that. I think that it could be smart to have a portfolio with exposure to Europe and to developing markets, like Israel, as long as it is limited exposure. And I strongly believe in the MSOs, in some of them, not all of them. There are real opportunities, and with some of them the prices went down so significantly that I think that’s the best time to go in to buy cannabis stocks, even if it will go down more!”
I asked Shuster if IMC, which is currently trading at around $2.20 USD with a market cap over $151 million, is currently profitable. “The company is not making profits as of now,” he replied. “A part of it is because we had very intensive deals with many expenses. Because of the many M&As that we have done, it’s the bankers, the lawyers, and the accountants, and so on. This year, the focus is on integration and to make the company profitable. So, in 2022, I think definitely we are going to be profitable.
“We are not a short-term player,” he added. “The markets are not for short-term players. The market will grow significantly, but you need infrastructure to support the expected growth in the market, and this is what we’re doing now, and we’re doing it responsibly. I strongly believe in that. I’m the biggest shareholder, and I do that because I see where the market is going. The markets are growing, they need supply. In Europe and in Israel, there are very high standards and regulations. Not all the product you can sell. It’s not about growing and selling. If you don’t have the GMP standards, for example, and it takes time to build capacity for those kinds of products, you cannot sell [cannabis] in the market.”
As far as supply chain issues impacting IMC’s development plans, Shuster said the situation is manageable. “COVID is everywhere, unfortunately, and we’ve seen a wave in the last few weeks, a significant wave, but everybody is in the same boat,” he said. “Sometimes we see shifts from quarter to quarter because of the delays, but I think everybody is starting to learn how to work better with this situation, and to manage it much better than in the beginning.”
With our time winding down, I asked Shuster if any major acquisitions or big moves by the company were pending. “IMC has done seven acquisitions in 2021, maybe six – two in Canada and the rest in Israel – and we also went to NASDAQ, we raised money, so it was very busy year,” he replied. “Now the main focus of the company is the integration of all the acquired assets, to work on efficiencies, to integrate the operations, to focus on execution – that’s the main focus of the company. Because to do M&A is not enough; you have to integrate those businesses so that the business will be able to grow organically. That’s the main focus for us now, and that will be the main focus of 2022, to have a profitable operation, a well-built infrastructure, and starting to make money. But I strongly believe in M&A, and after we will finish the integration and the company will be very solid, we will continue with them.”
With around 400 employees, IMC has a CEO for each of its main regions, as well as for the overall operation. “Each of the regions is very different in regulations and complete working environment,” explained Shuster. “Because of that it has to be local. I’m the global CEO, and we’re working a lot on the global synergies in all the aspects. In Germany, they’re using all the data that we collected as educational materials for the doctors, for example. Each of us is taking the know-how from Canada. We’re launching our premium brands that we launched in Canada in Germany and Israel this year, and we’re integrating purchasing and processing. We are definitely working as an integrated company, and we are investing a lot of efforts in that aspect.
“I believe that what will happen in the market is that we will see more M&A,” he added. “Let’s take America, for example. American companies are focusing on America. The market is big, it’s growing, and it’s much easier to work in America than overseas because the regulations overseas are so different, the markets are so different, and so on. So, I believe that long term, there will be some companies that will be very strong in Europe, and companies that will be very strong in America. And I think, once the markets open up, we’ll see more M&A and business integration between some companies from different markets. The Israeli market, for example, is very difficult to penetrate from outside or to be a player in. If someone wants to be a player in Israel, the best way is to buy an Israeli company instead of building a company in Israel, a completely different environment.”
Does Shuster believe IMC will eventually be acquired by some massive global supply-chain operator? “As of now, I am looking more to acquire and not to be acquired,” he said. “We are building the infrastructure for a very big company because we are working in markets that are going to explode, and it takes us a lot of time to build that. We started very early, and so I think IMC will be one of those big companies, and that when the markets will start to grow, IMC will be one of the companies that will acquire more companies to extend our global reach.”
So, what keeps him up at night now? What are his biggest challenges? “I have so many,” he said. “I don’t know where to start. Each night is something different.”
He paused before finishing his answer. “We see changes in the market all the time, and we have to adjust ourselves and the business. So, there isn’t any new challenge. It’s part of what makes this industry so interesting. It’s so dynamic, about regulations that may change, the market, new products. We’re facing those kinds of situations on a daily basis, so it’s part of the business. I think that the most interesting thing is to evaluate the market and where it is going, and to plan ahead, because everything takes a lot of time. It’s a long lead time, so if you want something to happen next year, you have to start it now, or a year ago. So, I think that what is most interesting in this industry is to build a strategy that won’t be relevant for now, but that will be relevant for the future, and this is what is so exciting for me. During nights, I’m building the future actually. This is what is fascinating me. Challenges are part of business. It’s part of doing.”