The West Coast, with the country’s first adult-use markets in California, Oregon, and Washington, receives a lot of attention from the media. Rightly so—these states, and the cannabis entrepreneurs within them, have laid important groundwork for the entire industry. Some of the industry’s strongest brands have emerged from West Coast markets. They’re pioneers.
However, arguably the cannabis businesses with the best long term positioning and highest company valuations are emerging elsewhere—specifically, in the eastern portion of the United States.
While the media may grant an out-sized share of the headlines to the West Coast adult-use markets, the cannabis companies that grew up in the more restrictive, under-the-radar medical cannabis markets in the eastern half of the United States may be poised to become the country’s most successful cannabis companies.
The reason is simple. Unlike out west, where licenses to operate cannabis businesses are relatively easy to obtain, and the markets tend to be oversaturated with retail, cultivation, and processing licenses, states on the East Coast have typically restricted the size of their markets, limiting the total licenses granted and creating very high barriers to entry. The companies winning licenses in the East Coast markets of Illinois, Massachusetts, New York, and Pennsylvania have been competing against other professional and well-capitalized applicants in highly competitive application processes, which has largely resulted in some of the best capitalized companies in the country residing in the east. The companies that have obtained these licenses also benefit from operating in protected and limited-license markets; whereas, their western counterparts operate in much more saturated markets and face stiff competition for less market share.
In Colorado, Oregon, and California, you can find hundreds—in some cases, thousands—of dispensaries and production facilities competing for market share, while these numbers are much smaller in the eastern states. For example, Illinois, a state of nearly 13 million people, has granted only 60 dispensary licenses and 20 cultivation/production licenses. Likewise, New York and Florida, both states with around 20 million people, have both granted only 10 vertically integrated licenses. Pennsylvania and Ohio, both with around 12 million people, have granted 30 and 39 licenses, respectively.
It is no wonder that some of the companies that enjoy some of the highest valuations in the industry, and enjoy reputations for running highly professional operations, have come from these more restrictive medical markets primarily in the Eastern half of the United States. It was recently reported that Green Thumb Industries (GTI) is planning to go public in Canada, and is estimated to be valued north of $500 million. GTI is based in Illinois with operations in states like Massachusetts, Maryland, Pennsylvania, and Nevada. Other companies in similar positions include Pharmacann, iAnthus, Acreage, Cresco, Columbia Care, and my own company 4Front, all of which are based on the East Coast, and operate primarily in eastern medical markets.
These markets provide additional benefits with their potential for expansion, something largely not available in the much more mature western adult-use markets. We’ve already seen this play out in many states. New York, Florida, and New Hampshire recently added chronic pain to the list of conditions that qualifies someone to become a patient, which has led to significant growth in the patient populations in those states. Pennsylvania recently allowed the sale of marijuana flower, something initially prohibited by the commonwealth. Florida is expected to follow suit later this year. In Illinois, the legislature is poised to pass a bill that would qualify anyone with an opioid prescription or condition for which opioids could be prescribed to qualify as a medical marijuana patient.
And, of course, there is always the possibility that these states will adopt full legalization in the near future, providing a huge potential head start for businesses operating in the medical markets who already have the production and retail infrastructure to convert, as well as a captive customer base, something we’re seeing play out currently in Massachusetts and is expected to follow in Maine, Michigan, New Jersey, Rhode Island, New Hampshire, Connecticut, and possibly even Illinois and New York.
The list of states either adopting or expanding medical marijuana programs continues to grow, even as the spotlight continues to shine on the adult-use markets. In Massachusetts, where adult-use implementation is underway, the state continues to issue licenses for new medical cannabis businesses. Pennsylvania recently accepted applications to nearly double the number of license holders in that state. Maryland is gearing up to issue additional cultivation licenses. West Virginia is expected to accept applications for retailers and producers later this year. And applications for new licenses have been submitted and are currently pending in places like Connecticut, Rhode Island, Ohio, Arkansas, and North Dakota.
Perhaps the state that has gotten the most attention, and typifies the opportunities that can come with the expansion of a restrictive medical program, is New Jersey. The Garden State has famously had one of the most restrictive medical marijuana programs in the United States, with only five vertically integrated license holders serving a miniscule patient population, and any attempts to expand access thwarted by their cannaphobic former governor, Chris Christie. But with reform-minded Gov. Phil Murphy replacing Christie earlier this year, the state is on the cusp of a major program expansion. Gov. Murphy has announced that the state will greatly expand the list of qualifying conditions, and grant new licenses for producers, cultivators, and retailers sometime this summer. The existing license holders will be able to immediately expand their production and open new stores, giving them a substantial initial competitive advantage after years of taking losses in a program the former administration originally designed to fail.
Most notably, Gov. Murphy has called for New Jersey to legalize marijuana for all adults, something expected to be voted on this summer, which would provide blue-sky expansion possibilities for those businesses that hold medical licenses, as well as opportunities for new entrants. One only needs to do some simple arithmetic to forecast the revenue numbers these businesses could realize in a limited-license market within a state of 9 million people, and bordering the major population centers of New York City and Philadelphia.
This is not to say all is rosy for East Coast operators. Establishing a medical marijuana business in these more restrictive markets is an expensive undertaking, often with longer timeframes to see meaningful revenue and returns on investment. Applicants often spend hundreds of thousands of dollars in these highly competitive application processes, with no guarantee they will actually win license. Compliance with state and local laws and regulation make build out projects lengthier and more expensive in much of the eastern United States. And it can take a few years for a large patient base to develop, especially in states with more limited qualifying conditions, requiring more operational capital than their west coast counterparts.
But those who are able to weather these early storms have generally proven to be some of the best bets in the industry, particularly the multi-state operators whose license portfolios have garnered nine-figure valuations on the public and private markets. This may ultimately put them in a position to acquire the most successful product brands that emerge from the more mature and competitive markets in California and Colorado.
For those looking for opportunities in the cannabis space, the adult-use markets on the West Coast may be sexy and the most headline-worthy today, and have undoubtedly created some strong brands and noteworthy companies. But for those with an eye on long-term growth and expanding valuations, they would be wise to keep an eye on the ever-growing medical markets east of the Mississippi.