The pharmacy industry in Israel is on fire. In the last six months, Israeli cannabis companies have cumulatively reported at least nine transactions for the purchase of pharmacies.
However, it seems that the prices paid for pharmacies vary a very wide range of between one million NIS and twenty-five million NIS.
First, we will understand why Israeli cannabis companies so eager to buy a pharmacy. Their stated purpose, as mentioned in almost every transaction report is to complete the value chain and to become vertically integrated. A pharmacy enables a manufacturer of medical cannabis to be in direct contact with patients, receive feedback from them, and thus continue to develop products that suit the changing needs of patients.
A pharmacy has another benefit in that it prioritizes the sales of the “home” brands.
So far everything is known.
Our analysis shows that transactions are made at a price-to-sales (P/S) ration raging between 0.6 to 1.1. Meaning that, on average, cannabis companies pay for a pharmacy less than its annual revenue. In contrast, cannabis companies in Israel are traded on the stock exchange at P/S ratio raging between 1 to 4.4. As a result, increasing revenue by purchasing a pharmacy is expected to increase the value of the cannabis company at a significantly higher rate than what they paid.
For example, Intercure (ticker: INCR) acquired MaxPharm pharmacy chain last September, which operates pharmacies in Holon and Rishon Lezion. Intercure acquired 55% of the chain in the transaction. As is well known, in the holding of over 50.1% the financial statements of the acquiring company are consolidated into the financial results of the acquiring company. In other words, revenues from MaxPharm will appear in Intercure’s financial results starting from the middle of the third quarter.
Intercure paid a total of NIS 16.7 million for 55% of the shares, some in cash and some in shares and options. The value of MaxPharm in the transaction is NIS 25 million. The chain’s revenues in the first half of 2021 were NIS 16 million. That is, a P/S ratio of 0.8.
Intercure is currently traded at a value of NIS 961m, and with annual revenues in 2021 standing at NIS 217m, the company’s P/S ratio is 4.4. Assuming that the income from MaxPharm will be priced by the market in the same way as the rest of the company, the increase in the pharmacy’s income amounting NIS 32 million per year may be reflected in an increase in the value of intercure of NIS 140 million (some are attributed to non-controlling interests).
For that reason, this is a great acquisition for Intercure. In addition, this added value might be even higher, since the pharmacy has growth potential after being acquired by a cannabis company.
Other main transactions in the last six months:
Last July, IMC (NYSE: IMCC) acquired the Green Pharm Group, for NIS 11.9 million. Green Pharm includes two pharmacies: Green Pharm in Netanya, Hi Way and another company with a transportation license. IMC has also acquired the panaxia-to-the-Home online pharmacy and trading center.
At the same time, Univo acquired the Medipharm pharmacy located in Holon. Univo purchased 51% of the pharmacy, at a value of NIS 14 million.
Seach Medical purchased two pharmacies: Tifrachat in northern Israel at a value of NIS 16 million and a Even-Chen in Sharon area at a value of NIS 6 million. The company also announced another purchase of a pharmacy in Tel Aviv.
Cannassure bought a pharmacy in Tel Aviv and paid NIS 1 million. This is the cheapest deal recently announced.
Amir Marketing announced that BOL Pharma has signed an agreement to purchase the online pharmacy Telpharma at a value of 21 million.
Details of the sales volumes were given in only four of these transactions, so the table lists only those for which a P/S ration can be calculated:
| P/S ratio | % purched | Valuation | Location | Deal date | Pharmacy Name | Company |
| 1.1 | 0.501 | 16 | Kiryat Yam | Oct-21 | Tifrachat | Seach Medical |
| 0.9 | 0.51 | 14 | Holon | Jun-21 | MediPharm | Univo Pharma |
| 0.8 | 0.55 | 25 | Holon+Rishon | Sep-21 | MaxPharm | Intercure |
| 0.6 | 1 | 11.9 | Netania | Jul-21 | Pharm Yarok | IMC |
Why are there such big differences between the prices of the different pharmacies? Apparently there are a number of parameters that determine the price of the pharmacy:
- Revenue and profitability.
- The growth potential of the pharmacy – Given the number of medical cannabis patients in the geographical area and the deployment of competing pharmacies.
- Deliveries – Does the pharmacy make deliveries and to what geographical distance.
- The nature of the developers of the pharmacy.
As far as pharmacy owners are concerned, they also have an interest in being purchased by a cannabis company. The ownership of a cannabis company gives the pharmacy priority, even if not official, for the more high-demand products and limited stock of coveted batches. In addition, for the pharmacy owner, this is sometimes a nice exit for a family business, which without the medical cannabis couldn’t be sold.
For cannabis companies, beyond the increase in revenue and other benefits mentioned, there is also long-term aspect. When Israel will have recreational legalization, many pharmacies are infrastructure for future dispensaries chains.
