How New Cannabis Markets Are Shaping the Industry

By Geoff Korff

The past four years have seen the passage of medical marijuana laws in a handful of Midwestern and East Coast states. Illinois, Pennsylvania, Ohio, Maryland, and even New York can be counted as having relatively young markets. Florida finds itself on an island as the single southern market with substantial upside in terms of patient participation under their current regulatory structure.

These new entrants to the broader American marketplace have had the luxury of learning from the successes and missteps of Western states that came before them. In many cases, they have enacted statutes legislatively rather than by ballot measure, allowing many of these new markets to create substantially more robust regulatory frameworks than was the case in early medical states like California, Oregon and Washington.

The effects of these disparate and fragmented systems on the overall American market continue to impact how companies plan for future growth. Smoke Wallin is the president of Vertical Companies, which maintains the largest outdoor cannabis grow site in the world in California and has partnerships in multiple states. His company has seen firsthand the differences between the early adopter states in the West compares to the more recent entrants in the Midwest and on the East Coast.

“Vertical has participated in both the limited licensing approach as well as the open market approach. We believe both can be effective, but long term the open market approach will allow more patients and consumers to be served with low-cost, high-quality options,” he says.

Still, Wallin admits that the limited licensing approach has its advantages in the early days of a new market. “We are supportive of a go-slow approach state by state as appropriate in each of those markets. Making the licensing process a rigorous one is important to maintaining the integrity of the system,” says Wallin.

This view is not shared by all would-be cannabis entrepreneurs, however. What one company views as a rigorous and thorough process, others may see as a complete barrier to entry. States like Ohio and Pennsylvania have substantial pre-requisites to licensing. Capitalization requirements typically necessitate that firms have access to hundreds of thousands of dollars (if not millions), as well as large teams of operators with previous cannabis experience in regulated markets. Gone are the days where a hope and a dream, coupled with sheer sweat equity, were enough to get a marijuana business license.

“The new medical states are substantially different from many of the earlier states, especially those that were operating under the caregiver model, in that the licensing now is very restricted,” says Erik Vaughan, president of Standard Wellness, an Ohio-licensed cultivator.

According to Vaughan, Ohio’s licensing process was extremely competitive. “I can speak to our experience in Ohio and say that we saw virtually every large, nationally active firm apply in this state including a high-quality group of local, newly established cannabis businesses.”

New medical states tend toward a more conservative model, restricting the overall number of licenses that are being issued to a small group of operators. “There is a growing acknowledgement by state regulators about the dangers of overproduction and its potential to lead to diversion, so I think we will continue to see the trend of limited licenses combined with very high standards be the norm as new states come online,” says Vaughan.

RELATED: In Oregon, Overproduction Prompts Debate Over Cannabis Export Legislation

However, there continue to be medical states that adopt an open and rolling license scheme.

Thomas Rosenberger, the executive director of the National Cannabis Industry Association of Ohio, points to Oklahoma as a recent example. “In contrast to Ohio, Oklahoma used a rolling application process with no license caps. This licensing system allows a medical marijuana program to roll out much quicker, but makes it prone to issues like product oversupply and frequent closure of unprofitable businesses,” says Rosenberger.

“In three months after Oklahoma legalized medical marijuana, they’ve already issued more than 1,100 licenses, which is more than eight times the number of licenses initially allowed in Ohio, and rivals the number of licenses in Colorado, where adult-use is legal,” he says.

The approach to licensing has taken on some regional characteristics. Western states have continued to maintain fairly open licensing and access to the marijuana marketplace.  “As a general rule,” Rosenberger says, “states in the Midwest are taking a more measured approach to legalization. We see states in this region putting in place tighter license caps from the beginning and implementing stricter qualifying condition lists for patients.”

All of these requirements mean that the new medical marijuana markets typically comprise  one of two types of operators: The western-state operator that has been in business for years, or the local business person that has built wealth in other industries and can afford to buy their way in by hiring teams of consultants, lawyers, architects and lobbyists.

Additionally, we might add a third category: the Canadian-based operators.

The end to marijuana prohibition in Canada is rapidly approaching as cannabis will be legalized for adult-use sales on Oct. 17.  Already many Canadian businesses have issued IPOs and landed on the Canadian Securities Exchange or certain OTC markets, thus bringing a massive influx of capital and resources to those businesses.  It will only be a matter of time before the Canadian marijuana firms, flush with cash from their IPOs, will turn their sights on the U.S.

Regardless of the source of this necessary financial backing,, the cannabis market is becoming more uniform with respect to the consumer-facing, national brands that are emerging. Wallin points out that “national brands of medical and adult-use cannabis will be the new frontier of competition in this space. Vertical believes strongly that the legalization process rightfully belongs at the local level. State by state, citizens are choosing how where and when cannabis is appropriate. As the federal prohibition gets repealed we still expect a state-by-state approach. That will be the most successful and also most likely outcome as a national and ultimately, international market unfolds.”

Geoff Korff is president and CEO of Ohio-based Galenas LLC.

Read more from the source: CannabisBusinessTimes.com

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