by Mike Vogel
Updated 4 months ago
A Washington, D.C., area native, Nicholas Vita is the very model of the modern marijuana mogul.
A graduate of the Ivy League’s Columbia University, where he was a varsity rower, Vita worked for Goldman Sachs and went on to co-found an investment firm. He now heads a publicly traded company, Columbia Care, which by year-end will have spent an estimated $31 million to establish a business growing and selling marijuana in Florida.
By voting in 2016 to approve a constitutional amendment that legalized medical marijuana, Florida voters have birthed both a marijuana industry and a rush to dominate it that Vita — and his competitors would agree — calls an “amazing opportunity.”
The state initially tried to limit the number of operators to five vertically integrated companies that would handle medical pot from “seed to sale” — growing marijuana in partnership with long-established plant nurseries, then processing it and selling through stores that the companies own and operate themselves.
Court actions, legislation, rule changes and market forces have shredded that regulatory structure, however. As of August, Florida had 22 licensed marijuana grower-retailers, each with the authority to open at least 35 stores. At the end of August, 157 stores were operating. At the maximum allowed number, 770, Florida will have nearly as many marijuana stores as it has Publix supermarkets.
It won’t end there. The 35-store cap jumps to 40 as soon as the number of “qualified patients” hits 300,000, which could happen any day now. The cap on store counts disappears altogether next year.
Meanwhile, the Florida Department of Health, which regulates the industry, is expected to issue more licenses this month, including one set aside for an African-American farmer and another tailored to go to a citrus farmer. The state is under pressure to allow even more operators and dispense with the requirement that each grow its own.
Then there’s the possibility voters will approve the legalization of recreational marijuana in the 2020 election. Polls show support for the idea. The state Supreme Court will have to approve the ballot language, and backers need to secure a total of 766,200 voter signatures to make the ballot. Meanwhile, a competing, industry-sponsored constitutional amendment effort, which would protect the existing marijuana licensees, launched in August.
Amid all that flux, the 22 current players are racing to establish their retail footprints, vying to determine whose brand will become the Coca-Cola of marijuana and whose will become Shasta.
It’s a market worth the fight. Florida, third in population nationally, ranks second as a medical marijuana market. Marijuana industry research firm New Frontier Data projects the medical marijuana market in Florida next year will reach $1.6 billion.
Andrew Livingston, director of economics and research for Denver-based law firm Vicente Sederberg, a marijuana-focused firm with an office in Florida, says the customer growth rate in Florida’s medical marijuana market is one of the fastest in the country. A total of 2,466 doctors in Florida are now authorized to recommend cannabis as therapy. And as of August, they’ve given some 260,725 people in Florida the recommendation for a medical marijuana card that’s required to purchase medical pot. According to some estimates, as many as 1.7 million Floridians could ultimately qualify.
For the moment at least, Columbia Care is playing Shasta in the medical marijuana market.
Vita, who spent time as a youth on Sanibel Island on the Gulf, says he never smoked marijuana but began to consider the industry as a business opportunity in 2011. Hearing about the potential, he gave cannabis cream to his mother, who has rheumatoid arthritis. She felt better enough to resume hobbies and pastimes. He called it his “aha moment.”
Columbia Care was late to Florida, buying its way into the state by purchasing Sun Bulb, a nursery that wasn’t among the initial five licensees but got a license in 2017. (Sun Bulb, in business since 1956, grows orchids in Arcadia for Home Depot and Lowe’s.)
Columbia Care opened its first store in Florida in July and had opened only one other store as of Sept. 1. The company hopes to open 20 stores — at a cost of about $1 million apiece — by year-end. (Columbia Care has just four in New York, its next largest state.)
Two to five stores is typical for an operator in much of the country, but in Florida it makes Columbia Care the second smallest. Unusual in states that have legalized marijuana in some form, Florida’s industry is dominated by a few very large players — a legacy of the regulatory scheme that created the original five license winners, a group that Gov. Ron DeSantis and other state leaders have called “the cartel.”
The dominant player is Trulieve, a Tallahassee-based, publicly held company that’s one of the most profitable operators in the world. Trulieve, one of the original five, has a majority of the Florida market for sales of smokable marijuana and other marijuana products containing THC, the psychoactive, “get high” compound marijuana users seek. Trulieve has 31 stores in Florida. It and the rest of the “cartel” accounted for 116 of the 157 stores open in Florida at the end of August.
Even as the number of licensees has grown, the value of a marijuana license in Florida has remained high. Florida voters in 2016 may have envisioned creating a way to bring good quality marijuana to the ill, but in doing so they “created an extremely valuable limited licensing system that has enriched a large number of publicly traded companies traded on the Canadian Securities Exchange,” says Livingston, the law firm economist.
Compare Florida and its 22 license-holders with Oklahoma, which has given out 7,300. Livingston evaluated the Florida market with an index tool commonly used by economists to judge market concentration and found Florida’s medical marijuana market more concentrated than the nation’s breakfast cereal business, which is dominated by just Kellogg, General Mills and Post.
The relatively small number of licenses in Florida has inflated their value — and enabled many license holders to flip their licenses.
Columbia Care paid $11 million for Sun Bulb in 2018, but other sale prices for flipped licenses have been considerably higher. Spring Oaks Greenhouses, which won a license in April, flipped it for $54 million to Canada’s Green Growth Brands. A New York-based publicly traded company called Acreage Holdings acquired license holder Nature’s Way Nursery, which hadn’t even begun to sell marijuana, for $67 million in January. Publicly held, Chicago-based Cresco has agreed to acquire Jacksonville-based VidaCann, which already has significant operations, for $120 million.
The limited supply of licenses also accounts for the litigation that’s followed license denials. “When you’re looking at a license in a state like Florida that’s worth $50 million, it makes sense to spend $5 million on a lawsuit,” Livingston says.
The state charges $65,000 to apply for a license and requires winning applicants to post a $5-million bond. For the time being, those who get licenses must maintain their own cultivation facilities. “It makes the license very expensive to operate,” says Sally Peebles, a Vicente Sederberg partner who runs the cannabis law firm’s Florida office in Jacksonville.
And so as it opens retail stores, Columbia Care also is investing millions in Florida for cultivation and processing facilities. Company-wide, it can have up to 760,000 square feet of cultivation space to grow pot for its stores. The company operates in 15 jurisdictions from California to New York and the European Union. In Florida, it has 180,000 square feet in Arcadia and another 40,000 square feet in Lakeland. The company reported that its revenue doubled in its second quarter. Its average Florida customer purchase was $56.
Margins remain attractive to investors. Trulieve reported a gross margin of 65% in a recent quarter, though that was down from 74% in the year earlier. By comparison, gross margins in the alcohol, tobacco and pharma industries are 48%, 59% and 69%, respectively.
Given the youth of many companies, same-store evaluations aren’t relevant at present. Most players have small revenue and large losses as they expand, along with outsized market caps. Those market caps reflect bets by traders that growth will boom — and that pharmaceutical firms, tobacco and liquor companies or other buyers will vie to acquire the firms if the marijuana stigma dissipates.
Muddying the investment picture in Florida is the unsettled regulatory and legislative landscape. In July, the 1st District Court of Appeal tossed out as unconstitutional the state’s requirement that all marijuana operators be vertically integrated — “seed to sale.” The state Supreme Court will have to settle the issue. The “ambiguity needs to be cleared up,” says attorney Colin Roopnarine, a partner at Berger Singerman. “We’re at something of a standstill.”
In some states, the market for operators collapsed when more competition came. But Florida licenses still will be valuable, predicts Peebles. She says 22 operators is too few for Florida. “We’re not going to see the prices go down until we have more competition,” she says.
Amid the competition, operators are seeking to differentiate themselves by brands, formulations, advice, health claims and delivery systems — from vape pens to transdermal patches. VidaCann, for example, has the Florida rights to Charlotte’s Web medical marijuana, a prominent brand, and to Tikum Olam, an Israeli brand that touts its status as research-supported. “We have these proven brands,” says Peyton Moseley, VidaCann’s vice president of product development.
Legal in Florida only since March, smokable marijuana has quickly taken off. It comprises 40% to 60% of sales nationally in markets where it’s legal, says Livingston, the industry researcher. The problem for operators is that it has less value added than THC processed and delivered in other forms. Medical marijuana generally sells at 14 cents per milligram, says Livingston.
Vita says Columbia Care’s focus is on consumers interested in patentable products and willing to pay a premium for quality. He has said the company’s fastest-growing segments are women and Baby Boomers.
“Health and wellness consumers and medical consumers are accustomed to paying for that type of value. More so than somebody who’s just looking to have a good time at the Pink Floyd laser show,” Vita told analysts in August. Vita also promotes his company as having the “first legal credit card” for buying marijuana. Since marijuana remains prohibited federally, customers and operators have to conduct business in cash or find a work-around.
Vita — as do other operators — predicts Columbia Care will be competitive even if Florida hands out more licenses or eliminates the requirement to own cultivation or if voters approve recreational marijuana. “We are fortunate to be in Florida,” he says.
The Evolution of the Revolution
Then: In 2015, the state handed out licenses to just five companies and required them to grow, process and sell medical marijuana in their own facilities — “seed to sale.”
Now: There are 22 companies, and more want in. The “seed-to-sale” requirement is under challenge.
Then: The state law authorizing medical marijuana required it to be low in THC, the compound that produces a “high.”
Now: A voter-approved constitutional amendment in 2016 expanded the definition of medical marijuana to include cannabis with higher levels of THC.
Then: The initial law outlawed smoking medical marijuana, requiring it to be consumed via vaping devices, pills or cream.
Now: Under Gov. Ron DeSantis, the state stopped fighting litigation over whether users of medical marijuana could smoke the products. In 2019, the Legislature passed a law that allows smoking.
Then: In 2017, the first year that medical marijuana stores opened, 34,197 people were approved by the state for medical marijuana cards.
Now: As of September, some 260,725 people in Florida had obtained the necessary qualification for a medical marijuana card from the 2,466 doctors in Florida authorized to do so.
Retail Wrinkles: Inside the Dispensaries
Since marijuana remains prohibited federally, banks could be subject to money-laundering charges if they do business with the firms that sell it. Most banks won’t offer services to marijuana companies and won’t loan money to them. That means customers have to pay cash or find a work-around such as a pre-paid card, though at least one company says it offers a true credit card.
Stores may have security, armed or unarmed, depending on the operator. Displays will have only dummy product packaging. Some segregate reception areas from the display and dispensing areas. Only the customer with the medical marijuana card can place a product order and then receive it at the counter, as at a pharmacy.
Sally Peebles, a Vicente Sederberg partner in Jacksonville, says there is promising support for the SAFE Banking Act of 2019 that is making its way through Congress, which would open up traditional banking services to those in the marijuana industry at the federal level.
According to federal law, marijuana is still illegal, so companies that want to go public tend to do so in Canada. Four of the five companies holding the original licenses to produce and sell marijuana in Florida and a number of newer competitors here have their original stock listings in Canada.
There are no prescriptions to obtain medical marijuana. Doctors who have completed training through a state program can provide patients with a “certification” for medical marijuana for certain conditions: Cancer, glaucoma, HIV, AIDS, PTSD, ALS, Crohn’s, Parkinson’s, MS, epilepsy, similar illnesses, terminal illness, chronic non-malignant pain.
Medical Marijuana vs. CBD
Medical marijuana is sold only through state-licensed dispensaries to those with certain medical conditions who get recommendations from physicians. Other stores now sell products containing CBD — cannabidiol. CBD is derived from hemp, which has only a trace amount of THC, the ingredient that produces the “high” in marijuana. (It’s been legal to grow hemp in Florida since July 1.) CBD creams, pills, and oils are marketed as treatments for numerous conditions, from pain to insomnia to anxiety. CBD products are not licensed or regulated by the state, which is drafting regulations for product makers and cultivators. The Florida Department of Agriculture’s website warns that products currently for sale are “unregulated, untested and without standards on what consumers are putting into their bodies.” It notes reports of harmful additives in products and false advertising.
Read more in our October issue.
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