John Schroyer
The latest draft of New York’s adult-use cannabis industry rules – 282 pages released on Nov. 21 – hold not just guardrails for social equity companies but also hurdles for the longstanding 10 medical marijuana companies that have been waiting to find out when they’ll be allowed to enter the recreational market.
Those companies will have to wait at least another three years from the official launch date of adult-use sales just to apply for recreational retail permits, according to the rules.
There are several other restrictions for the 10 companies written into the rules, which primarily add up to one conclusion: the pre-supposed values of all 10 businesses are being slowly diminished by how the new adult-use market is shaping up.
That was exemplified recently when RIV Capital took a $138.9 million write-down on its acquisition of Etain, one of the 10 medical cannabis license holders.
“What we are seeing is a decline in the market value of assets based on comparable businesses, exacerbated by slower-than-expected regulatory developments related to the New York adult use cannabis market,” RIV Capital CEO Mark Sims said in the company’s earnings call, just days after the draft rules were released.
The other nine licensed medical cannabis companies include:
- Acreage Holdings
- Columbia Care
- Curaleaf
- Cresco Labs
- Green Thumb Industries
- iAnthus Capital Holdings
- MedMen
- PharmaCann
- Goodness Growth Holdings
Those might not be the names you see in the state, however, as several own subsidiaries that operate under different brand names in New York.
Of the 10, seven that are publicly traded have so far lost a cumulative $288 million in just the third quarter of 2022, according to financial reports. The only two that turned a profit in Q3 were Green Thumb Industries and MedMen.
The final New York medical licenseholder, PharmaCann, is still privately held.
In addition to the new three-year wait for recreational retail permits, the regulations stipulate that the 10 medical cannabis companies:
- Will have to pay between $14 million and $19 million in license fees, depending on the number of retail locations.
- Will be capped at 100,000 square feet of canopy for cannabis cultivation.
- Will be limited to 55,000 pounds of marijuana biomass production.
- Will only be allowed three retail locations that are both medical and recreational, and at most can have one per county or borough.
- Will have to dedicate at least 40% of shelf space for at least five years at their retail locations for brands that are not owned by the 10 medical marijuana companies.
The draft regulations were the first real glimpse of solid policy that will shape how the existing medical marijuana providers can operate in the upcoming adult-use market, though the rules may yet change dramatically before begin finalized.
Several industry insiders, however, said the draft rules are a harsh blow, given how much they have invested already in medical cannabis infrastructure in New York.
“It’s just unfair. Flat-out. These (multistate operators) have poured millions of dollars building out infrastructure,” said Matt Karnes, a principal at GreenWave Advisors in New York City, adding that the regulators are “really kicking them in the kneecaps with this.”
Karnes recalled that much of the original incentive for the 10 companies was that they would have a toehold in the New York market for when it eventually adopted recreational cannabis.
The idea was to invest in the restrictive New York medical cannabis industry – which originally didn’t even allow smokeable cannabis flower or edibles – and be willing to sacrifice huge sums for years, so long as the broader adult-use market eventually became available. The medical market launched in 2016, after the state legislature legalized medical cannabis in 2014.
“It was part of the investment thesis,” Karnes said.
Most states that converted from medical to recreational have given first crack at sales to the existing licensed medical businesses.
“Typically, you rely on the operators that you know, who are regulated, compliant, they have product,” said Michelle Bodian, a New York City cannabis attorney with Vicente Sederberg. “That’s typically who’s prioritized, and New York is taking the opposite approach, of penalizing the existing operators and making them hold and wait.”
Still, the rules are just in draft form and will go through a 60-day comment period before being finalized next year – though when exactly is still unclear.
Multiple representatives of the 10 companies declined to criticize the regulations in detail, but said they would be submitting feedback to the New York Office of Cannabis Management.
“We are disappointed and very concerned about several provisions in the rule package for all who want to participate in the total industry, and we will express these concerns in our comments to OCM,” Bryan Murray, vice president of government relations at Acreage Holdings, wrote in an email to Green Market Report.
Murray described the regulations as “highly restrictive” and added, “These rules are clearly not what we expected.”
MSO Pivots
Acreage and the nine other companies will be allowed to wholesale cannabis products into the adult-use market, Karnes said, and Bodian added three years could go by very quickly, implying that the rules may not be as big of a long-term business hit as it may initially seem.
Bodian pointed out that eventually – if the draft regulations stand – the 10 medical licenseholders will be the only vertically integrated companies in the state, which will give them an immense edge over the rest of the competition.
“Whether today or in a couple years, it’s still a huge market advantage, and something no other operator will be allowed to do,” Bodian noted.
Still, the regulatory environment is already driving down company valuations, and even before the recent draft was released, some major companies had already lost interest in the New York market, said Karnes. He pointed to the canceled acquisition of MedMen by Ascend Wellness and the called-off purchase of Goodness Growth by Verano.
Karnes also noted that the number of registered medical cannabis patients in New York has been slowly declining through 2022, down to 123,951 as of Nov. 1, from a peak of about 200,000.
That trend is likely to accelerate, Karnes said, as more patients cease renewing their registrations in favor of purchasing on the gray recreational market. That also means a shrinking customer base for Acreage, Etain, and the other medical licenseholders while they wait for their opportunity to get into the recreational market.
“This program never took off, and now they’re making it worse,” Karnes said of the regulators and the draft rules.
As Goodness Growth Holdings CEO Kyle Kingsley noted in his company’s earnings call on Nov. 15, “Per capita spending in the existing medical market is one of the lowest in the country at approximately $0.70.”
By contrast, the adult-use market is expected to be worth $5 billion once it’s matured, Kingsley said.
In the meantime, at least some of the 10 licensed companies appear to be pivoting to the recreational wholesale side of the industry.
“It’s becoming increasingly clear from our perspective that New York is going to be a wholesale market, where the most successful companies will be those that can build the strongest brands,” Sims, the CEO of RIV Capital, said in the company’s recent earnings call.
Sims said the company is focused on quadrupling Etain’s existing cultivation footprint, and he thinks the New York market is still a prime launchpad with which to build a national cannabis brand.
“Our long-term strategy remains the same,” Sims said.
