Pubdate: Sat, 16 Apr 2016
Source: Pittsburgh Post-Gazette (PA)
Copyright: 2016 PG Publishing Co., Inc.
Author: Scott Kraus, Allentown Morning Call


Medical marijuana might seem like a cottage industry, but with 
Pennsylvania the nation's sixth-largest potential market, it's more 
likely to be big business.

Think guys in suits, or maybe lab coats, not dreadlocks and striped 
baja hoodies.

"I've heard estimates that the investment has to be $5 million to $10 
million to be a grower-processor," said Dan Clearfield, a Harrisburg 
attorney who specializes in regulated substances. "This is not a 
small-business operation."

It won't happen overnight, either. It could be anywhere from 18 
months to two years before Pennsylvania residents seeking to treat 
their medical conditions with cannabis will be able to walk into a 
dispensary and slap a prescription on the counter.

The state Department of Health has six months to develop regulations 
that will set up initial ground rules for the grower-processors who 
produce the marijuana, the retailers who fill prescriptions and the 
doctors who get licensed to prescribe it.

Then the state will have to draw up a request for proposals and 
accept applications for a limited number of permits available for 
each segment of the industry. and evaluate them. The winners will 
need several months to grow and process their first crops.

At least one industry player, Minneapolis-based Vireo Health, which 
also operates in New York state, is actively scouting grower/ 
processor sites in the Lehigh Valley, said CEO Kyle Kingsley.

"It is at the top of our list as a potential location," Dr. Kingsley said.

"This type of law is going to draw the highest-functioning, the most 
professional groups," Dr. Kingsley said. "We are a group of 
physicians and scientists and horticulturalists. We have actually 
been raising funds and had boots on the ground in Pennsylvania for 
the last year or so."

It's a rapidly growing industry that has investors salivating.

Market research firm ArcView Group estimated legal U.S. cannabis 
sales at $5.7 billion in 2015, projected to grow to $7.1 billion in 
2016, and to top $22 billion by 2020, figures that include sales in 
states such as Colorado that have legalized pot for recreational use.

Pennsylvania's relatively limited market is estimated to start at 
$125 million and grow at an annual rate of 180 percent until it makes 
up 9.2 percent of the U.S. market share by 2020.

"The data in this report confirms what pioneer investors and 
entrepreneurs suspected: legalization of cannabis is one of the 
greatest business opportunities of our time and it's still early 
enough to see huge growth," wrote ArcView CEO Troy Dayton in the 
introduction to the company's report on the industry.

The road to legalization has been bumpy. States that have legalized 
marijuana for medicinal use have seen mixed results, and their 
methods of regulating the drug vary widely. New Jersey, for example, 
has licensed only six dispensaries. Pennsylvania's law would allow up to 150.

In Pennsylvania, patients will need a license to purchase the drug 
and doctors will need to undergo training and apply for a license to 
prescribe it. Patients won't be able to smoke the drug, it will be 
available only in the form of pills, oils, topical gels, creams or 
ointments. The plant's active ingredient could also be prescribed in 
liquid form with a vaporizer or nebulizer.

That's a potential downside, said Taylor West, spokeswoman for the 
National Cannabis Industry Association. "That is not a deal-breaker, 
but in general our position is that if you want patients to have 
access to the benefit of medical marijuana, you shouldn't be limiting 
the type of product that provides them with relief."

The state's marijuana industry will benefit from a list of 17 health 
conditions that qualify for medical marijuana prescriptions, said 
Cara Cordoni, director of business development for Green Rush 
Consulting, a California-based firm that advises the medical marijuana sector.

In many of the 23 other states that have legalized medical marijuana, 
the lists are shorter, she said. In Texas, for example, cannabis 
prescriptions are limited to one medical condition, a form of 
epilepsy. But there are other states that give doctors more leeway or 
have longer lists of ailments.

The more conditions that can be legally treated with marijuana, the 
larger the market.

It's not a business that can be entered lightly, Ms. Cordoni said. 
Simply to apply for a license, an applicant should have $250,000 on hand.

Most banks won't do business with marijuana-based companies, she 
said, so most financing is private and most business is conducted in 
cash. Businesses that find a financial institution they can work with 
are in constant fear of being dropped.

Pennsylvania's law has some strict financial requirements for pot 
entrepreneurs, Ms. Cordoni said. To win one of 25 grower/ processor 
licenses, applicants need to show access to $2 million in capital and 
$500,000 in the bank.

The bar for the up to 50 retailers, or dispensaries, is lower, 
requiring just $150,000 in capital at entry. Each dispensary license 
allows for up to three locations.

Only five entities will be permitted to have both dispensary and 
grower/ processor licenses, a sought-after combination.

"They are going to be very coveted because they are the best 
opportunity to keep costs down and maximize your profit," Mr. 
Clearfield said. "You are growing and selling and dispensing. With 
vertical integration you are sharing employees, an accounting system. 
There are economies of scale and scope."

The Pennsylvania Department of Health is faced with drawing up 
regulations that protect patients, and prevent medical marijuana from 
being diverted to the black market, but aren't so onerous that the 
industry is forced to charge astronomical prices to turn a profit.

That could be a challenge under Pennsylvania's law, said Chris Beals, 
CEO and general counsel of Weedmaps, a company that provides 
technology services to the marijuana industry and operates a consumer 
website offering testing data, menus and other information about retailers.

Mr. Beals worries that strict security requirements for growers and a 
law that calls for detailed "seed to sale" tracking of medical 
marijuana will drive up production costs, limiting the number of 
entities that can afford to get into the business and potentially 
driving up the cost of the prescriptions.

Medical marijuana isn't typically covered by insurance and 
Pennsylvania's law specifically exempts insurance companies from 
having to cover it. That means patients pay for the drug out of 
pocket, typically spending hundreds of dollars a month.
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MAP posted-by: Jay Bergstrom