Pubdate: Tue, 07 Apr 2015
Source: Boston Globe (MA)
Copyright: 2015 Globe Newspaper Company
Author: Kay Lazar


Months of controversy and bureaucratic delays in the Massachusetts 
medical marijuana program have driven away some investors, stranding 
several of the companies awarded the first dispensary licenses and 
leaving them short on cash.

The uncertainty and mounting costs have pushed back the opening of 
the first dispensaries - originally expected last summer - to this 
summer, with some owners now saying they are unlikely to be ready 
until late this year.

The delay leaves thousands of patients in limbo. State figures show 
roughly 14,000 patients have received doctor certifications to use 
marijuana medicinally, and 7,100 of them have completed the state's 
registration process, paying their $50 annual fee to legally shop in 
the dispensaries.

"It's despicable," said Nichole Snow, deputy director of the 
Massachusetts Patient Advocacy Alliance. "We need our medicine for 
relief from serious conditions."

Twenty provisional dispensary licenses were initially awarded by the 
administration of Governor Deval Patrick in January 2014, but 
regulators were forced to freeze the process soon after, amid 
questions about applicants' finances and misrepresentations, along 
with concerns about potential conflicts of interest and political influence.

Massachusetts had intrigued many potential investors with its 2012 
voter-approved law that made the state among the first to adopt a 
medical marijuana dispensary system. But during the five months the 
licensing process was put on hold amid controversy last year, at 
least five other states adopted medical marijuana laws or regulations 
for dispensary systems.

"We started looking around, and other investors started looking, and 
they said Massachusetts is a pain. People got fed up with it, walked 
away, and went to friendly states, like Illinois," said Douglas 
Leighton, managing director of Dutchess Capital, a Boston venture capital fund.

Leighton has personally bankrolled dispensaries in Washington state, 
Vermont, and one in Massachusetts, Coastal Compassion Inc. in 
Fairhaven, which is expected to open in late December.

In addition to the state's contentious licensing process, its 
regulations require dispensary companies to operate as nonprofit 
organizations, further discouraging investors, Leighton said.

"If I didn't live in the state of Massachusetts my entire life, I 
wouldn't invest [in marijuana companies] here," he said.

The dispensary licensing system crafted by the Patrick 
administration's health department is distinctly different from the 
process the department uses to license other health facilities, such 
as hospitals. The system for hospitals scrutinizes a facility's 
proposed health services and the need for those services in 
surrounding communities.

But with dispensaries, potential health services took a back seat to 
zoning, security, and other considerations, and companies were 
required to bid for a license the way vendors selling the state 
computers would vie for the business, known as a government 
procurement process.

Patrick's successor, Governor Charlie Baker, is expected to revamp 
the medical marijuana program soon.

"The current administration faults the use of a procurement process, 
as opposed to a licensing process, faults it for the delay in getting 
these places open, and getting patients served, and the overall 
negative public perception that many folks see as an insider's game," 
said Tim Buckley, Baker's communication director.

William Noyes Webster Foundation Inc. in Dennis is among the 
marijuana companies dealing with the fallout from the delays. The 
company received one of the 15 licenses ultimately awarded by the 
health department last year. Regulators revoked several other 
provisional licenses after more carefully vetting the applicants.

William Noyes's business plan, similar to those of other applicants, 
assumed the state would award the full 35 licenses allowed by law, 
which called for up to five licenses per county. But William Noyes 
ended up with the only license in Barnstable County.

Scarcity often makes a commodity more valuable - and more attractive 
for investors - but for several of the marijuana companies with 
Massachusetts licenses, it has had unintended consequences.

William Noyes suddenly found itself unprepared to grow the amount of 
marijuana needed to serve many more patients. The company realized it 
would need a cultivation facility at least three times as large.

"All of a sudden, the cost of putting the whole thing together 
escalated, and when it did, our backers didn't have the money to do 
the deal," said Paul Covell, William Noyes's chief executive.

The company is talking to potential investors, and Covell said the 
prospect of a 2016 state ballot initiative to legalize marijuana for 
recreational use has intrigued investors. Many observers expect the 
initiative to include a provision that will give preference to 
existing medicinal dispensaries to win licenses for recreational sales.

Despite its setback, William Noyes expects to open later this year.

Executives at two other dispensary companies declined to speak 
publicly about their financing challenges, saying they feared any 
publicity after last year's tumultuous process might jeopardize their 
company's license.

But a consultant who advised four successful Massachusetts applicants 
said that the financing problems William Noyes faced were not unusual.

"Even groups that were fully capitalized have had to raise 
significantly more money," to expand cultivation centers, said Kris 
Krane, managing partner of 4Front Advisors, a consulting company.

Krane said cultivation centers are the most expensive part of the 
business because they require sophisticated lighting, heating, and 
air conditioning systems. The state's licensing process under the 
Patrick administration awarded extra points to applicants who had 
secured a cultivation site when they applied. Several companies 
leased buildings during the application process, without having the 
chance to scrutinize the buildings' infrastructure, Krane said.

Many discovered that structures were in worse shape than previously 
thought and faced upgrades of $1 million more than anticipated, Krane said.

"There is generally more erosion in buildings in the Northeast," said 
Krane, who previously advised marijuana companies in more temperate climates.

"Some of this is new, even for industry veterans," Krane said. "It's 
been a pretty universal challenge here."

Still, industry leaders said they believe the worst of the 
licensing-related problems are behind them.

"All new industries face challenges, but Commonwealth Dispensary 
Association members are confident that the process is moving forward 
in a responsible manner," Kevin Gilnack, the trade association's 
executive director, said in a statement.

"In the coming months, we expect that some dispensaries will be in a 
position to begin providing patients with medicine, and more will 
complete the licensing process," he said.
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MAP posted-by: Jay Bergstrom