Companies Spend Big Competing for an Uncertain Market

Sometime soon the five lucky winners of New York’s medical marijuana sweepstakes will be growing, processing and selling cannabinoids to a select group of ailing New Yorkers.

The state is expected to wrap up its selection process sometime this month, and 38 other companies will walk away empty-handed after investing millions of dollars just for a chance at securing the precious licenses. Applicants had to submit a $10,000 application fee, $200,000 in collateral and proof that they had access to property suitable for growing and producing the treatment.

Even after obtaining the rights to the production and sale of medical marijuana, the five companies will have to invest millions more to get their facilities up and running and establish dispensaries. They will face an uncertain market that is expected to experience slow growth at the outset due in part to the restrictive nature of the Compassionate Care Act, the law signed last year that governs the medical marijuana industry in New York.

So why even get into this game? What makes it worth the initial investment, knowing how slim the chances are you will ever get the opportunity to carry out your carefully laid plans?

Michael Mayes is the CEO of Quantum 9, a Chicago-based marijuana industry consulting firm with clients in weed-friendly states across the country, including New York.

He says the appeal is in the long- term potential for growth. Though New York and his home state of Illinois have laws that create significant barriers to entering the market, the states are home to two of the largest metro areas in the country, offering an immense opportunity to any companies with the capital to withstand a few slow years in the beginning as patient trust in the system grows.

Illinois’ program’s numbers are slim so far. Set to launch this fall, it has just over 2,500 patients registered. Some of the low participation, however, has been blamed on provisions specific to that state’s law, such as fingerprinting and background check requirements.

In other words, it’s a long-term investment, as opposed to states with more open medical marijuana laws like California and Oregon or legalized recreational marijuana use like Washington and Colorado.

“New York and Illinois are long- term plays, as where Colorado or Washington would be short-term plays,” Mayes said.

One of the main obstacles for New York’s medical marijuana growers could be the limited list of diseases for which physicians are allowed to prescribe the drug. The Compassionate Care Act currently allows for 10 diseases.

Mayes said that as the program is rolled out and politicians hear from constituents who have benefitted from the use of medical marijuana, they are likely to push for an expanded list of diseases. In Illinois the list of diseases has expanded by 25 percent since their law was signed in 2013.

“I believe New York will probably do something similar, where if they’re starting to see dismal patient populations the advisory board will have to add more ailments and streamline the adoption registry process,” Mayes said.

In addition, the New York law does not allow any smoking of marijuana and will require companies to stick to strict quality measurements, making production more difficult.

Still, there could be another long-term goal for some of the companies that have applied. In states with recreational marijuana laws like Colorado, medical marijuana was legalized first.

Mayes said some of the companies seeking licenses could see recreational marijuana for New York on the horizon, even if it is still many years off.

“There’s definitely a first-mover opportunity for individuals in the medical market when it becomes recreational,” Mayes said.

Assemblyman Richard Gottfried, a long-time champion of medical marijuana, sponsored the Compassionate Care Act in his chamber, as well as the bill passed this year that will expedite the implementation process to make the drug available to a select group of patients in desperate need at the beginning of 2016.

He has a nuanced view of the barriers for potential licensees created by the state’s rigorous and highly competitive application process.

“The way the regulations are written and some of the requirements, if you don’t have a lot of money, you’re not going to be a player, and I think that’s unfortunate,” Gottfried said. “On the other hand, we do want the applicants to be people who are serious and not just a couple of guys who want to brew up product in the bathtub or the garage. We want people who are not a fly-by-night operation.”

Still, some of the requirements outlined in the law are onerous, he said, and could stop people with the necessary skills but less means from competing for a license.

“I think a lot of these requirements really make no sense,” Gottfried said. “If we imposed those requirements on people who were going to sell morphine, every neighborhood pharmacy would be up in arms, quite justifiably.”

Butler Evergreen LLC is one of the many companies that have invested hundreds of thousands of dollars in their bid for one of the five licenses. Mark Doherty, the company’s chief operating officer, said that should they be selected, the company will have to make large upfront investments with a long waiting period before they begin to recoup any money.

“The nature of the business, as it’s designed, is expensive,” Doherty said. “If you want to call that a barrier to entry, I guess you can make an argument there, but the way I look at it is that you’ve got to be really committed because you’re going to spend a couple million dollars just to get your application put together.”

But Doherty said the competitive application process and strict requirements of the law will work to create an environment that will encourage innovation and result in a superior product in the end, something that could make the New York companies industry leaders across the nation.

“With the way it’s set up in New York, it’s really allowing companies to come in and be the best, if you will” Doherty said. “The company that the law has sort of forced us to create in New York state is absolutely cutting edge and state of the art.”

And as far as concerns about initially low patient rates, Doherty said that is to be expected and is likely built into most applicants’ plans. 

“The reality is that every program in every state so far has taken time to get up and running,” he said. “There is a slow adoption rate.”

In addition, Doherty said, the medical marijuana business is not all about money. Many people at Butler Evergreen have been affected by a disease that could have been aided by medical marijuana.

In fact, Doherty’s wife was diagnosed with melanoma while she was pregnant with their first child. Shortly after giving birth, doctors discovered that the cancer had spread to her lymph nodes. She is still battling the disease.

“I was already well aware of the marijuana industry,” Doherty said. “I was already well aware of patients and how they are served and things like that. It’s been a real interesting process going through this while my wife has this illness and certainly could benefit from medical marijuana. Unfortunately, it’s not available at this time.”