Medical cannabis programs are expanding as state regulators increase the number and types of conditions that qualify persons for medical cannabis, especially in that states that approve anxiety or general pain management as qualifying conditions. As the number of patients increases, the production and sales capacity required to meet this demand must also expand. Recently, New Jersey announced that it was accepting applications for new dispensaries and cultivators. Missouri will also begin to accept applications on August 3rd.
State regulators utilize various licensing strategies to control the implementation and growth of the medical cannabis industry. The state licensing strategies can be 1) a vertically integrated approach used by Florida (recently deemed unconstitutional), 2) state-level license caps (Illinois, New Jersey, Utah) or 3) city-level license caps (Michigan). License caps are maintained through legislation or by limiting the time period during which the state will accept applications.
State regulators often provide transparency about the overall growth of the medical cannabis market and the competitive landscape. State websites make available information about the total market size (patients and caregivers), the number of competitors (dispensaries and cultivators), retail sales numbers, and tax revenues if applicable.
This information can be used by prospective licensees to assess the viability of the cannabis business and determine future revenues. Medical licenses in states with caps on production and sales can be more valuable given the higher patients per license than those that allow open enrollment and caregivers such as Oklahoma and Michigan.
For example, a review of information from a limited number of states with medical cannabis programs shows that Oklahoma has the highest patients per capita at 3.9% as compared to the state with the lowest patients per capita, Ohio, at 0.30%. Although Oklahoma has a high patient percentage rate, it has no cap on the number of manufacturing or retail operations. As a result, the state has 1,673 licensed dispensaries and 3, 559 licensed cultivators. This means that there are currently 92 patients per dispensary if all licensed dispensaries become operational.
Believers in the free market will approve of Oklahoma’s strategy to let the market decide the appropriate level of inventory and sales outlets in the state. The low fees and reasonable regulations made Oklahoma the wild west of cannabis. However, Oklahoma license holders will need plenty of capital to face off the heavy competition and the steep cost of building out cannabis businesses. Even if Oklahoma adopts adult-use, the total population is almost 4 million people, which is much smaller than Michigan, another state with no cap, which has a population of 10 million people. Michigan may have more upside but it is challenging to find a city that will permit a medical dispensary.
Oklahoma’s record number of cultivators also poses a risk of diversion to other states as a means of recouping the investment. Oregon is facing this issue as the state has 6.5 years of inventory. Cannabis business owners will need appropriate controls to ensure that excess inventory is disposed of in a legal manner. Dispensaries and cultivators will need to assess what impact an inventory glut will have on cannabis pricing and overall profitability as the ability to sell cannabis to a nearby state requires federal legalization.
The transparency provided by state regulators is crucial for the industry, and for the remaining states that will enact medical cannabis programs in 2020. Analyzing the available data can help firms increase returns on capital investment, and provide states with a roadmap for the implementation of a successful industry.