InterCure continues record run but faces looming domestic supply issues

INTERCURE continued its streak of record results, seeing both revenue and profit soar year-over-year during the second quarter of 2022, marking its tenth consecutive quarter of profitable growth.

While the Israeli cannabis giant enjoyed its best semester yet in 2022, its success comes amid growing pressures in its domestic market.

Not only has patient growth been almost non-existent in the first half of the year, ongoing regulatory restrictions continue to make importing cannabis into the country incredibly difficult, with supply shortages expected in the near future. future and companies such as Tilray turning away from the market.

After ramping up its cultivation operations in Israel and opening its first flagship Cookies store in Vienna, Austria during the quarter, the company remains confident in its ability to weather the headwinds.

Q2 results

On August 15, InterCure released its financial results for its latest quarter, beating analysts’ earnings expectations but falling C$2 million from revenue expectations, seeing its share price drop by more than 4% on the Tel Aviv Stock Exchange in the following days.

In the three months to June 30, 2022, Intercure recorded revenues of C$37.5 million, up just under 10% from the prior quarter, but more than 110% from CAD 17.8 million made during the same period in 2021.

While this marked the tenth consecutive quarter of positive growth and the eighth consecutive quarter of cash flow positivity, it just missed analysts’ average estimates of C$39 million.

On a conference call with investors on Tuesday, InterCure CEO Alexander Rabinovich said revenue was “about” evenly split between own-brand retail sales and wholesale sales, although he noted that those numbers could change as the company ramps up production.

Meanwhile, gross profit was C$16.3 million, a 44% margin, up from 41% in the prior quarter and just above the 43% seen in Q2 2021.

Adjusted EBITDA followed a similar trend, coming in at C$8.7 million for the period, representing 23% of revenue, its lowest EBITDA profit margin (other than another 23% in Q3 2021 ) since Q3 2020.

Net income for the period increased 160% year-on-year to C$6 million, representing an EPS gain of C$0.34, greater than both the C$0.12 gain realized in previous quarter and average analyst expectations.

During the period, InterCure launched a new flagship Cookies pharmacy in southern Israel’s largest city, Beersheba, which Rabinovich says is the “world’s largest dedicated medical cannabis pharmacy.”

Along with the launch of another new pharmacy in the northern town of Nahariya, InterCure says it now operates 24 outlets, not including its new international store in Austria, 16 of which actively distribute cannabis.

The company also added 12 “highly demanded” new strains to its cultivation operation, which it also reportedly “developed” during the period to “solidify” its position as the largest cultivator in Israel.

Through these efforts, Rabinovich expects “growth to continue” through the coming quarter.

The Israeli market

Although Mr. Rabinovich was careful to provide investors with forward-looking figures regarding InterCure’s share of the Israeli market, the company remains the dominant player in the space by some margin.

While its international operations remain nascent, having only announced plans to launch outside of Israel in December 2021, issues within its home market are likely to have a major impact on its operations.

In the first six months of 2022, in which InterCure saw revenue grow 130% year-on-year to C$72 million, patient numbers in Israel remained largely stable.

According to the latest figures, only 4,000 new cannabis license holders (patients) were added at the end of June, which equates to an annual rate of 8,000, or 70% less than the 28,000 new patients seen in 2021.

While this stagnation shows promising signs of waning, with 2,500 new patients added in July, doubts remain as to whether the rapid level of market growth can continue.

Mr. Rabinovich, who told investors that these latest results “are particularly impressive when you consider the slowing of patient growth”, explained that the stagnation was mainly due to the Ministry of Health preventing doctors, usually responsible for 20,000 prescriptions, to prescribe medical cannabis.

He believes the levels of “growth we’ve been accustomed to over the past three years” will soon return, adding that “the drop in patient numbers is not coming from the demand side, but from the regulatory side.”

Looming shortages

Israel, currently the world’s largest importer of medical cannabis, also faces major new import barriers under changes to Protocol 109.

These are already impacting companies’ willingness to attempt to export to Israel, with InterCure partner Tilray saying in a recent earnings call that it “made a conscious decision” not to repeat the shipments to Israel “due to the severe deterioration of market conditions with sales of medical cannabis”. and falling prices.

While InterCure says its relationships with all suppliers, including Tilray and now also Clever Leaves, remain strong, it says the import blockade could soon lead to shortages.

Mr. Rabinovich told investors: “There is no official data regarding the total inventory in Israel. I would say there is no shortage of inventory on low and medium quality. But if the new regulations continue to prevent imports, we will soon run out of high-quality products in Israel. »