Crain's recap of the "Business of Pot - The Stakes are High"
A cannabusiness panel at John Jay College of Criminal Justice? Times sure have changed for New York City. Walking in I couldn't help but wonder if it was a setup, if pot-sniffing dogs and so-called "Drug Recognition Experts" would be rolling out the red carpet for this crowd, taking the mailing list, and collecting admission tickets. To my relief, nothing of the sort occurred, in fact, the panel was actually quite inviting. One would never guess cannabis could feel so welcome in a school that produces career oriented professionals soon to get paid to sniff the weed out of New York City. That said I was ecstatic because to my knowledge this would be the first public appearance by Senator Savino to discuss the Compassionate Care Act, an Act much maligned by my peers. An Act deemed a failure by long time activists in my circle. I felt strongly about the bill for a number of reasons; I liked that the health commissioner was given power over the disease list, the fact that New York would have legal cannabis, and the "seed-to-sale" model would ensure patients are getting high quality medicine. I wasn't one of the pro-cannabis advocates pulling for a medicinal program that would be loose out of the gate. I, like many, have some concerns about cannabis legalization. I have seen too many irresponsible stoners who don't know enough about the substance and I have concerns about irresponsible use. I've seen people blow cannabis smoke into babies faces thinking its funny. I believe cannabis competency is a real issue that faces society and a ramp up period of medical cannabis is helpful. I've been arrested for minor cannabis offenses a few times, so I am very sensitive to this topic, but I realize that my own self-interest may not necessarily be the greater good and when it comes to cannabis, I think society needs a good degree of education. I run a cannabis trade association and I can tell you that even the most experienced cannabis users know very little about its effects on the body's biology, both positive and negative.
Kudos to Crain's magazine who put the event together, giving over 200 potential cannabis entrepreneurs first hand access to hear Senator Savino explain what the New York business climate will look like in just a few months. The crowd was excited and curious about this new business, many attorneys were present, consultants, I met a person looking to rent his warehouse for a cannabis grow operation, an activist group, along with plenty of lobbyists. In the end it seemed like many people trying to figure out how to break into the "green rush" more than people currently active in the industry.
The panel featured four key industry players, Hanan Kolko an attorney, partner of Meyer, Suozzi, English, & Klein, Derek Peterson, Chief Executive of Terra Tech Corp; Megan Sanders, a general partner at Marimind Cannabis Engineering, and State Senator Diane Savino, who took stewardship of the Compassionate Care Act from a predecessor and was responsible for convincing Gov. Andrew Cuomo to sign the bill.
The session began with Senator Diane Savino's opening remarks in which she was asked to tell everyone what the CCA is, what's allowed and not allowed. The Senator didn't waste any time diving into the the Compassionate Care Act's 18 year history, sponsored by Assemblyman Richard Gottfried and entrusted to her by State Senator Tom Duane two years ago when he left office. She said, "While New York is regarded as a progressive liberal state, in many ways, it has never been progressive when it comes to drug policy. In fact we had the most Draconian drug laws in the nation up until four years ago with the Rockefeller drug laws." Senator Savino worked tirelessly to revise the Compassionate Care Act into something that was reflective of what was working and not working among the hodgepodge of state laws in the 22 states that already had a medical cannabis program. The original version, she was adamant, had no chance of gaining the John Handcock of Gov. Andrew Cuomo as it was written with provisions giving patients the right to grow their own medicine, hospitals permission to cultivate and administer, and pharmacies the right to dispense.
The Senator explained why the bill had to be updated,
"There were so many things about that bill that were inconsistent with the (current) industry as we knew it. When I took over the bill I started rewriting it to accurately reflect what medical marijuana should be and could be. One of the first things I did was look at what medical marijuana in a state that had a program that was legal. First place I went to was Colorado. I got to see Colorado before recreational use was legal, it was purely the medical marijuana product. I researched New Jersey and other states and that helped me draft the bill." She continued, " I set out to make the bill the most tightly regulated bill in the country, partly because I knew that Andrew Cuomo would not sign the bill, if it were not the most tightly regulated bill in the country."
Senator Savino called New York a "watershed state" and believes that the current version of the CCA will become the standard template for the rest of the country. The moderator asked Savino about the program's inception, set to begin in 18 months and he was quickly corrected that we are only 16 months away. She stated the Department of Health and State Police Commission are developing the draft of regulations "relatively soon" and they are looking at other states best practices to do so.
Upon completion of the draft of regulations there will be a "Public Comment Period" where they will want to hear from people in the industry. She said "When the Public Commentary Period begins it is imperitive that those who want to be in the industry or are in the industry weigh in on this. The risk takers should really come in and say 'we like the idea, but the model is too restrictive and as a result of that I may not be interested in investing. It's hard to run this industry."
The question arose regarding those in need of emergency care and the Senator claimed that due to Federal laws and CSA scheduling that the Federal government denied any sort of emergency access permits which would involve the transport of cannabis across state lines, so for now it sounds like the suffering will continue to suffer thanks to the Federal Government. The Senator mentioned that the business climate is designed to keep cannabis prices low enough so that patients won't seek the black market for relief, but admitted the environment for entrepreneurs isn't exactly welcoming.
One point the Senator wanted to emphasize was that having cannabis as an alternative medicine for sufferers would reduce the need for other prescriptions, putting co-pay funds back into the patient's pocket to use that money to purchase cannabis. She said, "We will start with 5 license holders, in my opinion that's not enough, but that's what we are going with. There is a chance that we will look at the license holders like liquor licences and a possibility that we will allow the 5 licence holders to open four dispensaries and there should be some consideration to geographic diversity."
Savino was asked about the MRTA bill (Marijuana Recreational Tax Act) proposed by Senator Liz Kruger and she seemed to be bearish on the bill getting through citing how difficult it was just to get the medical cannabis bill approved. "I know intimately from my conversations with the senate that there is not enough support for recreational legalization and I also think that those of us who support legalization for recreational use are looking at Colorado and Washington saying 'we should be there' but they forget it took Colorado almost 13 years to get from medical marijuana to recreational marijuana. Part of the problem is we need to resocialize the way people feel about marijuana and changing the way we talk about it might help. Like to call this panel 'The Business of Pot' while it may be fun it trivializes the issue in some ways. I think we need to start talking about it differently. Those of us who are serious about marijuana for medicinal purposes have started calling it cannabis. Because there is a stigma still associated with marijuana, even though it is changing generationally. I don't think we are anywhere near [recreational use] yet."
Derek Peterson was in agreement with Savino in that he would like to see the medical pi grow before the recreational opens up. His company Terra Tech maintains a $5,000,000 greenhouse in New Jersey, just biding time for the industry regulations to loosten enough to make it palatable to enter the market. He cited New Jersey as a failed operation and not economically friendly, leading to his company's choice to stay on the sidelines for now. The main reason he cited for wanting to see medical develop over recreational was infrastructure, claiming to go strait into recreational would cause confusion, overflow, and without a developed set of best practices, protocols, and regulations it could be chaotic and a flop.
After the Senator's opening remarks Megan Sanders had the chance to speak and quickly displayed optimism in her belief in the growth potential of the industry in New York. Megan cautioned about the importance of people with commercial cultivation experience and that the industry is truly still in its infancy. She stressed the complexity of the industry and risk management, but there was no mistake in her belief in New York as a major market for cannabis and she was quickly backed up by fellow panelist Derek Peterson who estimates 1%-3% of the population in NY would try medical cannabis to the tune of 500,000 potential patients. He said, "People criticize California for their medical marijuana laws because they haven't developed them. It's like the wild west out there, but at the same time its a great litmus test for the rest of the country. They left it up to the entrepreneurs to decide how the laws are going to go up there." Both Sanders and Peterson emphasized the difficulty of running a dispensary, the importance of having experienced people handling the licences, that alot can go wrong and ruin the crop.
In a "seed-to-sale" aka "vertically integrated" market, which is what New York will be, it is critical that the licencee is astute at growing cannabis because they will be unable to source product from the outside and mistakes could destroy an entire crop. This model technically known as the "vertically integrated" model under the CCA, states that all Registered Organizations (the technical name New York State is coining as cannabis dispensary operations) must grow their own product, meaning they must cultivate and distribute. He finished by saying "16 months, 18 months seems like a long time to get started but it takes time to draft a set of regulations to define an industry. At the same time we need to make sure it is economically friendly, many states programs are not economically friendly for the businesses to operate and there is no upside there. Jersey has been a victim of that." The moderator went on to ask about banking and how the companies are operating with all cash and Megan said security and protocols are the highest priority. There is no credit, everything is paid in cash from the mortgage on down and as a result jobs are created in accounting, security, and cash management.
On the way into the event I had the pleasure of running into Mr. Kolko in the elevator and we discussed how we got into the business, his story goes like this "one day me and the partners of the firm were out to lunch and I brought up medical marijuana. I asked them if they wanted to get involved and they all did, from that day forward, here we are." Mr. Kolko was very outspoken and passionate on the subject. When asked about insurance coverage Kolko said, "Well you wouldn't have a prescription you would have a recommendation. At this point insurers are not compelled to cover medical marijuana although they are free to do that, but I feel they will recognize that medical marijuana is a safer and cheaper treatment in the long run. So I suspect insurance companies will ultimately realize they are better off covering medical marijuana than not." Kolko mentioned that a recent article in the Journal of American Medical Association that opioid use is down in states that have a medical cannabis program and that insurers look at those statistics. He went to emphasize the climate for cannabis as a budding industry has many challenges specifically the "7 year sunset" clause and the "kill switch" and these regulations are not entrepreneur friendly. Kolko went on to emphasize the sheer large geographic size of New York State and the provisioning in the CCA that allows for expansion beyond 5 dispensaries. I got the sense that he was of the belief that upon execution of the program, there would be immediate public outcry for more licenses to get delved out due to a lack of access geographically to the medicine. In fact, when asked where the program would be 3 years from now, Senator Savino hoped to see 15 licenses granted to the field. Peterson concurred that once implemented, public demand will force more outlets as sick and terminally ill patients won't be able to drive great distances to get to dispensaries.
The topic of profit margins was raised by the moderator to Derek Peterson and Megan Sanders they gave the following information:
One of the major topics discussed was security of the dispensaries and "diversion" or the amount of leakage of the medicine into the black market. The Senator emphasized that diversion would be a critical piece to continuation of the program beyond the 7-year window and Kolko pointed out the Cole Memorandum and heavily recommended reading it to understand how the Department of Justice is dealing with diversion under the consideration of Federal laws which prohibit the Federal government from using tax payer money to go after state licensed medical cannabis businesses. Sanders also chimed in on the Cole memo stating the importance of compliance especially in New York if we hope to get recreational cannabis at some point down the road.
In closing, Kolko got a round of applause when he convincingly exclaimed "We ought to remember the Controlled Substances Act is the law we are operating under, it is a 40 year old failure, but it is a bad law we are operating under!"
Senator Savino was asked her opinion and she said, "I totally agree, if we spent half the money we spent on trying to control the supply, maybe we could figure out how to control the demand."
At the end of the discussion Senator Savino said that mailing cannabis across the state would be illegal under the CSA and that a courier service would be a "cottage industry" that would develop. I perceived this as a nudge to would-be entrepreneurs to focus on the courier end of the business instead of the dispensary end. I am able to read between the lines fairly intuitively and I believe that Savino was intimating that the business you want to be in New York is the delivery of cannabis to medical patients. It would appear to me that New York wants a few big companies controlling the supply and free market of competition in the transport of medicine to clients. This appears to be a loop-hole and an area I suggest potential cannabis entrepreneurs explore.
Crain's did a feature on Terra Tech Corp's New Jersey $5,000,000 greenhouse facility aimed at producing cannabis and betting on their brand to win a coveted licence in New York. Currently produce is developed in the greenhouse and sold through Shop Rite, according to Derek Peterson, Chief Executive of the company.
Governor Andrew Cuomo insisted the Compassionate Care Act include only infused products and concentrates, put a 7-year term on the bill requiring renewal, and reserved a "kill switch" into the program, in which he could end the program at any time. Perhaps the most tricky provision in the bill allows a mere five licence holders to open four dispensaries and put up a $2,000,000 bond or have assets or land of its equivalent. Not what I would call an environmentally friendly market for business owners. Only wealthy risk-takers need apply this round, New York.
Frequently Asked Questions for future Cannabis Industry Professionals on the CCA.
Final Draft of the Compassionate Care Act