In business, you have to spend money to make money. In the New York medical marijuana industry, you may just be spending money.
New York’s medical marijuana program went online Thursday after the five operating licenses were awarded in July — one year after the program was legalized. Applicants had to pay a refundable registration fee of $200,000 along with a non-refundable $10,000 fee. For a comparison, in Oregon, the application fee is $4,000 and in Massachusetts, there is a Stage One application fee of $1,500 and a Stage Two application fee of $30,000.
Of the 43 businesses that applied, five companies — Bloomfield Industries, Columbia Care NY, Empire State Health Solutions, Etain and PharmaCann — were awarded licenses. Of the states that have legalized marijuana, some — like Florida and Minnesota — also restrict the number of license holders, while others, such as Colorado and California, grant much greater access to licensees.
Twenty-three states and the District of Columbia have legalized medical marijuana.
Each licensed company can open four dispensaries and one cultivation facility across the state. Only eight storefronts were ready to open on Thursday, including one in Manhattan, Westchester County, Kingston and Albany, and two in the Buffalo and Finger Lakes regions. The rest will open through January, according to the New York Health Department.
Obtaining a license is just the first step in the long and expensive process of operating a dispensary — expenses that will eventually show up on price tags for patients.
“This country is built on a free markets model — competition tends to produce better results,” says Derek Peterson, chief executive of marijuana production and retail company Terra Tech. “Companies that are competing are going to try to produce a better product, and the patient is going to win. That is not going to be the case in New York.”
The New York Department of Health did not respond to a request for comment.
“I am proud that we are on course to provide certified patients with access to medical marijuana more quickly than any other state in the nation,” New York State Health Commissioner Dr. Howard Zucker said in a statement on the awarded licenses. The Department expects the dispensaries to be operational by January. When he says “more quickly,” he is referring to the fact that it has taken other states about two years or longer to completely roll out medical marijuana programs.
Terra Tech considered applying for one of the New York licenses, but decided against it, citing restrictive laws and exorbitant expenses.
“We approached it from a cost-benefit standpoint,” Peterson says. “We didn’t love the legislation. New York is a significant upfront capital investment.”
He adds that compared with Nevada, where Terra Tech was recently awarded eight permits, New York is “baby-stepping into the process.”
Kris Krane, co-founder and managing partner at 4Front Advisors, a cannabis business advising firm, estimates that the total capital and operating costs of New York dispensaries will end up being $15 million to $30 million for each company in the first year.
“People are going to spend more to get results,” Krane says.
Shouse California Law Group, a criminal defense law firm, estimates that it costs between $30,000 and $500,000 to open a legal medical marijuana dispensary in the state. California law does not require dispensaries to manufacture their own cannabis, bringing down costs considerably.
To be considered for a license in New York, companies had to be able to prove they could open four dispensaries and a manufacturing facility in varied locations in the state. Krane says some companies bought property outright, which could cost $5 million to $10 million. Others entered contingent lease or purchase agreements to hold the property through the application process, which could cost hundreds of thousands of dollars.
“Anybody that jumps into the New York market tends to have extremely deep pockets,” Terra Tech’s Peterson says.
In most cases, companies need to hire consultants for everything from manufacturing to retail, and Krane says hiring prices can range from $20,000 to $500,000. Lawyers, lobbyists and architects are also typically added to that payroll.
Once they receive their license, companies then face high build-out costs — and a six-month deadline to begin their production process, or they are subject to their license being revoked.
“The big costs are the build-out costs,” Krane says. “If somebody is building a large 30,000-square foot cultivation facility, that’s a multimillion-dollar project, about $4 [million] to $10 million.”
Bloomfield Industries plans on operating a 235,000 square-foot grow facility in Queens, according to local news reports, which could result in even greater capital costs.
Krane says a majority of the manufacturing build-out costs will come from upgrading older east coast facilities to handle a power- and water-intensive process. The new license-holders must have plants in the ground by the end of January to avoid revocation.
Companies must also build out the four allotted dispensaries and outfit them with intensive security systems, which Krane estimates can cost from $250,000 to $1 million per store.
Once these dispensaries are up and running, patients will begin to shoulder some of the burden of the restrictive legislation, he says.
Only medical practitioners approved by the state’s Department of Health can prescribe medical marijuana cards, which requires a four-hour education course and application before they can issue cards to patients. Krane says he expects this requirement to further limit access points for patients.
Additionally, dispensaries can only sell five brands of medical marijuana, and only in liquid or oil forms; smokable products are prohibited.
“These offerings won’t be well-suited to a lot of patients,” Krane says, because of limited ratios of THC — the psychoactive component — and cannabidiol — which helps treat epilepsy, anxiety and other conditions — and the restricted forms of ingestion.
As for pricing, the New York Department of Health must approve product prices — which will include a 7% sales tax — for each dispensary, potentially leading to low flexibility in pricing ranges for patients.
“These companies are operating in an oligopoly or monopolistic environment where they can essentially price fix,” Krane says.
Unless legislation is expanded to include more retailers and increase access to licenses, Krane says most patients will remain in the black market.
“No one is banking on the current program to be any kind of moneymaker,” he says. “What really matters here is the patients. That’s what this is all about: providing access to medicine for patients that really need it.”
This story was updated on Jan. 7, 2016.
View more information: https://www.marketwatch.com/story/want-to-sell-medical-marijuana-in-new-york-it-could-cost-you-30-million-2015-08-11