The medical marijuana industry in New York is shaping up to favor established cannabis businesses. But with final regulations for medical marijuana still to be determined, and backers’ hopes that the industry will quickly expand, small producers may yet find a foothold in the state.
One major hurdle is that only five licensed growers, and up to 20 dispensaries, are permitted in the state.
‘I don’t think it’s enough,’ said State Sen. Diane Savino—who sponsored the medical marijuana legislation in the state Senate—at a Crain’s forum on the business implications of medical marijuana. ‘Our goal is to get the regulations up and running and fight the fight to get more license holders in New York state.’
Until then, large operations that can grow marijuana, process the plant so it does not have to be smoked, and distribute and sell the drug will have a better shot at the licenses. The companies must also be able to put up a $2 million bond, a provision meant to cut down on ‘fly-by-night’ operations, according to Ms. Savino. The Department of Health will be able to set the prices of the product with input from the state police: Law enforcement will be counted on to tell health officials how much pot sells for on the black market so that legal pot is priced competitively.
Ms. Savino was joined Hanan Kolko, a partner at law firm Meyer Suozzi English & Klein; Derek Peterson, chief executive of Terra Tech Corp.; and Megan Sanders, a general partner at Marimind Cannabis Engineering and chief executive of Mindful, a cultivation and dispensing company.
If New York resembles other states that have legalized medical marijuana, there could be half a million patients in New York, Mr. Peterson said, estimating that 1.5% to 2.5% of the population in California, for example, are authorized to buy the drug for health reasons. He said the number of dispensaries slated to open in New York could not handle that many customers. By comparison, San Francisco and Oakland, Calif., have a population of about 1.5 million and about 40 retail dispensaries—double the number that would be permitted in all of New York state.
‘In Colorado, we see many [growing operations] that are too small,’ said Ms. Sanders. ‘We must select people who have commercial cannabis growing experience.’
For some, that means companies like Terra Tech that have had success with medical marijuana in other states.
‘I know they are mostly attracting out-of-state folks, but I hope they can include some in-state companies, too,’ said Adam Kurtz, an entrepreneur who is planning to bid for a license. Mr. Kurtz, who is based in Rockland county, estimates it will cost him $700,000 to $800,000 to come up with a business plan before even bidding for a license. Those costs include professional and consulting services, and contracting with a law firm that has experience dealing with the Department of Health.
Mr. Kurtz calls the Department of Health weekly for updates on regulations, he said. Every week, he receives the same statement—that regulations are still being developed.
Ms. Savino’s experience sounds similar. The state senator joked during the panel about her personal reminders to Department of Health Commissioner Howard Zucker, who is developing the proposed regulations along with the state police commissioner, according to Ms. Savino. ‘I call every month and say, ‘You have 16 months left! You have 15 months left!” she said. ‘My goal is to stay on top of them.’ New York’s Compassionate Care Act was passed this spring, setting the clock ticking for the 18-month window the Health Department has to issue regulations and patient identification cards. The law will sunset after seven years unless renewed.
A spokeswoman for the DOH said the department is ‘working expeditiously to develop the regulations, which will be adopted after the public has had the opportunity to comment on them and the department has considered those comments.’
Despite the law’s restrictions and many unanswered questions, entrepreneurs are clamoring to do business in New York. It’s not hard to see why. Margins for the medical weed business are around 40%, said Mr. Peterson. Retail dispensaries command $3,500 to $5,000 in annual sales per square foot, he said, putting them in the territory of Apple and above Tiffany & Co.
‘The job opportunity here is massive,’ said Ms. Sanders. ‘In my grow alone, we have seven advanced degrees—engineers, biologists, professional horticulturalists.’ That doesn’t include ancillary services, such as plumbers, accountants and security personnel, whose services the cash-based marijuana industry makes ample use of.
If the number of dispensaries stays low, another possibility, suggested by an audience member, would be to have a courier service delivering marijuana to homebound patients. That is similar to what is happening in southern California, where retail outlets have come under fire from local communities that don’t want them there.
‘A courier service is interesting, since you can’t mail it,’ Ms. Savino said. ‘UPS and FedEx can deliver oxycontin to your house and leave it on your front porch, but they can’t deliver medical marijuana. There’s opportunities for a cottage industry there.’