- Cannabis companies are eyeing New York’s new legal marijuana market.
- Many of the big players already operate in the state’s medical program.
- But those that aren’t say they’re mostly looking to enter as cultivators, not retailers.
- See more stories on Insider’s business page.
New York’s new legal marijuana market could be worth billions, creating a massive opportunity for some of the biggest cannabis companies in the US.
The state legalized cannabis for adults over the age of 21 on Wednesday. Regulations for retail sales are still being formulated, meaning you may not be able to buy a pre-roll or a gummy in stores before next year.
Once the market ramps up, annual sales could reach $5 billion to $7 billion, according to estimates from analysts at Stifel and Cantor Fitzgerald, respectively. Now, a gold rush is shaping up as major firms eye what could be the one of the biggest US cannabis markets, fueled by the state’s large and relatively wealthy population and plenty of tourism.
Other large players that don’t yet have a footprint in New York told Insider they’re waiting for regulations to roll out, but emphasized their excitement over the potential to serve the state. Some said they’re already drawing up early plans to enter New York.
“We think it’s a huge market. We’re very interested in it. We’d love to be there and bring our product there,” said Sam Ghods, the CEO of Connected, a cannabis firm that operates in California and Arizona. “We really hope and anticipate that New York takes a fair and competitive process to enable people to grow and sell weed.”
New York’s current cannabis companies have big advantages over newcomers
Incumbent cannabis operators in New York have two distinct advantages over newcomers: they already have the infrastructure set up to somewhat supply the new marketplace and they’ll be allowed to both grow and sell cannabis in the recreational market if they choose to.
Newcomers will have to decide whether to be cultivators (allowed to process and distribute their own products) or retailers (barred from cultivation).
Big cannabis companies in the US typically both grow and sell marijuana, so New York’s rules represent a departure. Cannabis is legal for recreational use in 16 states, and for medical use in 36, though the drug remains federally illegal.
Analysts at Viridian Capital Advisors and Bloomberg Intelligence say that cultivation is a good option for operators with deep pockets and abundant operating experience who are looking to enter New York.
Operating stores in New York City or other populous parts of the state is also an attractive option for big companies, said Viridian, though the firm added that cultivation alone is likely to be more profitable than cannabis retail.
Vertically integrated companies could be about twice as profitable as retailers in New York, as measured by gross margin, Viridian said.
“For the existing operators, we expect competitive advantages combined with the scale of market sales to translate to disproportionate top line growth and profitability,” Viridian said in a March 31 note.
How outsiders plan to enter the Empire State
Insider reached out to six large cannabis firms to ask about their plans to enter New York. Four companies — Verano, Jushi, Connected, and Candescent — responded. All said they were still waiting for more regulatory details before jumping in, but emphasized their interest in the state, and two of them said they’d probably enter the state as a grower.
The advantages that New York’s 10 current cannabis companies will enjoy could make them enticing acquisition targets. Nine of them are already owned by large companies that sell cannabis in several US states, which are called multistate operators or MSOs. One is independent and operates in New York alone.
Insider previously reported that a handful of these companies are likely deal targets because they’re privately owned or financially struggling, according to cannabis attorneys who work on such deals. One deal has already been struck: Ascend Wellness Holdings has agreed to buy MedMen’s New York assets.
Of course, the rules could change, said Jay Czarkowski, cofounder of Canna Advisors, a cannabis business consultancy. He told Insider that the prohibition on vertical integration in New York may act as a deterrent for some of the larger companies, but that it could be lifted as cannabis regulations often change.
Verano, a US cannabis company with a footprint in 14 states, is keeping an eye on New York. If the company were to enter the state, Verano would opt to both grow and sell cannabis, said Aaron Miles, the head of investor relations.
That could require Verano to make a deal for a New York operator, or the company could wait to see if regulations change to allow it to be vertically integrated. Verano has recently announced a slew of deals across several states.
‘Very strong on the M&A front’
“Nothing is off the table,” Miles said. “We’ll wait to see how this develops, but I think you can see the reputation that we’re developing, which is that we’ve been very strong on the M&A front and we’re continuing to evaluate opportunities.”
Candescent, the biggest supplier of flower pre-rolls in California, is evaluating the best way to enter New York, CEO Adrian Sedlin said.
“We’ll look at all reasonable opportunities, whether we’d be applying, acquiring, potentially partnering,” he said.
Sedlin said that if Candescent were to enter New York, it would be “cultivation driven,” because the company focuses on flower products and branding over retail presence.
Sedlin added that he’s also interested in the possibility of a joint venture with a social equity applicant if those partnerships are permissible under the regulatory framework.
New York’s recreational cannabis framework has a goal of 50% of licenses going to equity applicants. Cantor Fitzgerald analyst Pablo Zuanic said in a March 31 note that he expects most social equity applicants to focus on retail rather than cultivation. Cultivation requires immense amounts of capital and time before it becomes profitable.
Social equity applicants in New York include individuals from communities disproportionately impacted by the drug war, minorities, women, small or distressed farmers, and service-disabled veterans.
Erich Mauff, co-founder and president of Jushi, told Insider that while he thinks New York could be a great market for the company, he’s waiting on more regulations before making a move. Jushi operates in Pennsylvania, Illinois, California, and Virginia. He added that he’s not a fan of the state’s rule that limits new retailers to three locations.
“I think that’s a train wreck,” he said. “Name another business where you’re only allowed to open three distribution points. How many CVSs are there in New York? How many Walgreens, how many Chuck E. Cheeses are there in New York?”
Connected is planning to enter New York as a cultivator, Ghods said. He said the company is focused on developing its cannabis brand.
“Basically, as long as we’d be able to get a cultivation license, we would be looking very closely at operating there,” he said.
He added Connected could “very easily be one of the first in line for a cultivation license, assuming that that process opens up and becomes available.”
Canadian cannabis giants could enter New York, one day
Canadian companies may also choose to enter New York, eventually. Right now, it’s against US law for Canadian companies to own US cannabis operators.
Canadian cannabis giant Canopy Growth has the option to acquire US company Acreage as soon as that’s federally permissible, which would give Canopy access to New York.
Kenneth Shea, an analyst at Bloomberg Intelligence, said that he expected similar deals between Canadian companies and US firms, but they haven’t happened yet.
He added, however, that the other Canadian cannabis companies “understand that first mover advantage matters.”
“Time is of the essence, and there’s going to be lots of competition and consumers who aren’t going to wait around for their products. They’re going to just going to buy what’s what’s available,” he said. “And so I think Canopy is smart by putting itself in a really good position when it does legalize federally.”