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These Two States Are Poised To Be The Next Big Marijuana Markets

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With federal prohibition still alive and well despite record public support for marijuana legalization, the cannabis industry in the United States remains a state-by-state business. The inability to cross state lines has led to a web of complex and disparate state laws and regulations for businesses to navigate. This forces cannabis producers to recreate their entire infrastructure in every new state, rather than scaling up production and shipping products across the country, which impedes their ability to build economies of scale enjoyed by all other businesses. Retailers generally pay higher wholesale prices because of this, leading to higher prices for consumers at the register.

The state-by-state nature of the U.S. industry has created huge differences in market dynamics from state to state. A number of factors contribute to the attractiveness of a state market for businesses. Does the state have a limited number of licenses or can any qualified applicant obtain one? Does the state allow for medical or adult-use sales? Does the state ban the sale of smokeable products? If it is a medical marijuana state, what are the medical conditions that qualify someone to become a patient, and does that list include chronic pain? Is the market saturated or is there room for growth?

As I’ve written about in a previous column—“Looking For Big Returns In The Cannabis Market? Look East, Not West”—while much of the media attention goes to highly developed and saturated adult-use markets like Colorado, California, and Washington, the public markets tend to offer the highest valuations to companies with operations in more limited-license states, often with medical marijuana laws that have room for growth and expansion. It is why companies with operations in places like Florida and New York tend to enjoy higher valuations than their counterparts on the West Coast, despite generally showing lower annual revenue in more restricted markets.

So what are the next state-legal markets likely to excite the capital markets?

To determine the best candidates, I considered states that have medical marijuana laws with limited licenses available to operators, and a clear path to expanding the medical program and/or adopting full legalization.

Looking ahead to the next couple of years, two states stand out as likely the next big marijuana markets: New Jersey and Illinois.

Both states have followed a remarkably similar path toward full legalization, with Illinois a near mirror of the process in New Jersey, only one year behind.

New Jersey

Let’s start with the Garden State, as it has gotten the bulk of the media attention between the two over the past year. New Jersey has had a medical marijuana law on the books going back to 2010 when outgoing governor Jon Corzine signed the bill on his last day in office. Unfortunately his successor, noted prohibitionist Chris Christie, did everything he could to stifle the program and ensure that it was viewed as a virtual failure. The state did grant six vertically integrated licenses, but the businesses stagnated under a highly restrictive program with no expansion during Christie’s tenure in office.

All of that changed early this year when New Jersey elected a new governor, Phil Murphy, who had campaigned on legalization as a major plank in his platform. He entered the governorship with strong support on this issue from powerful members of the New Jersey Legislature like Senate Judiciary Committee Chair Nicholas Scutari, who had been working behind the scenes to ensure that the Legislature was ready to expand the medical marijuana program and pass legalization once Chris Christie and his guaranteed veto had vacated the governor’s office.

Since Gov. Murphy was sworn in earlier this year the state has already seen meaningful growth in its medical program, and attracted significant attention, both from the media and cannabis companies looking to enter the state. The administration quickly expanded the list of qualifying conditions, leading to roughly 10,000 new patients in the first half of 2018, nearly as many patients as joined the program in all of 2017.

To meet the rapidly increasing patient demand, Gov. Murphy’s Department of Health announced that they would award six new “emergency” vertically integrated licenses this year. The application process wrapped up in September, with 145 applications for these six licenses, demonstrating how attractive New Jersey has become to cannabis companies. We’ve already seen a national operator, Acreage, enter the market through the acquisition—with a purchase price rumored to be upwards of $40 million—of one of the original six licenses.

Later this year, the New Jersey Legislature is expected to take up legislation that would further expand the medical marijuana program, with an expectation that even more licenses will be granted by early 2019. More significantly, the Legislature is expected to vote on, and likely pass, a bill that would make New Jersey the first state legislature in the country to fully legalize cannabis for adults with a regulated market. Those who have managed to get into the medical market in New Jersey early will have a significant first mover advantage in this transition to adult use.

Illinois

Receiving far less attention than New Jersey is the largest state in the Midwest: Illinois. Yet the two states look remarkably similar in their trajectories towards a legal and regulated cannabis market. Illinois has one of the more restrictive medical marijuana laws in the country, signed into law in 2013 by then-Democratic governor Pat Quinn, who lost his reelection bid to Republican Bruce Rauner while license applications were pending in November 2014. Like New Jersey, the GOP governor in an otherwise deep blue state has done nearly everything in his power to undermine the program, refusing to add chronic pain as a qualifying condition against the advice of his own medical marijuana commission. This has left Illinois largely overlooked as a major player in the industry to date.

But much like New Jersey, Illinois is on the precipice of a major change. Much like Chris Christie in the waning days of his administration, Gov. Rauner is deeply unpopular in Illinois, and trailing in the polls in his November reelection bid. Just like Phil Murphy campaigned on a promise to legalize marijuana, the Democratic candidate for governor of Illinois, J.B. Pritzker, has also made legalization a key component of his campaign. And just like in New Jersey, the Illinois Legislature has been preparing itself for a legalization bill, with the effort being led by powerful state senator Heather Steans, who has had a full-time staffer working on legalization for over a year. With Michigan expected to be the first Midwestern state to legalize marijuana for adults through a ballot initiative this November, it will only add political cover to Illinois legislators who will not want to lose out on cannabis tax revenue to a rival state in the region.

The state has already taken steps to expand its medical marijuana program, passing a bill this year designed to curb the opiate crisis that expanded medical marijuana to anyone with a condition for which an opiate could be prescribed. Even staunch prohibitionist Bruce Rauner could not veto such a bill and be seen as an opponent of an effort to curb opiate addiction in an election year. But more expansion is expected after November should Pritzker take over the governor’s office as expected.

Capital markets and national cannabis companies have already taken notice. (Full disclosure: My company, 4Front, operates a dispensary under its Mission brand in Chicago’s South Shore neighborhood.) Just recently, national player MedMen purchased the Seven Point dispensary in Chicago, while other deals involving national players are reportedly in the works. In a state of nearly 13 million people and only 60 retail licenses and 19 cultivation licenses, the values of these licenses are expected to rival those we’ve seen in Florida and New York, making them some of the most valuable in the country. While expansion of the number of licenses is expected with legalization, the current license holders are expected to be given a significant head start and first-mover advantage as the program grows.

Over the next couple of years, New Jersey and Illinois will be closely watched by industry insiders and operators alike. Not only will they provide valuable business opportunities themselves, they could usher in further reform in their regions. We’ve already seen significant movement towards legalization in New York from previously skeptical governor Andrew Cuomo, spurred largely by New Jersey’s move to legalize just next door. Meanwhile Illinois serves as the de facto capital of the Midwest. Its passage of legalization through the legislature, coupled with Michigan voters doing the same this November, could lead to other states in the region—for example, Wisconsin, Ohio, and Minnesota—adopting their own legalization laws in the years to come.

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