Marijuana means business: Everything you need to know about the cannabis industry
Overview
Although it remains illegal at a federal level, marijuana is one of the most exciting growth industries in the US as it becomes legal in some states, attracts investment, and becomes a vertical that can utilize multiple technologies ranging from the internet of things to cloud to analytics.
In a majority of US states, medical marijuana programs serve as a natural alternative to traditional pharmaceuticals for treating numerous conditions, like neurological and psychiatric disorders, pain control, and cancer. And marijuana has the potential to be the next big legal recreational substance after tobacco, alcohol, and caffeine. Canada has been among the countries leading the way to develop the marijuana industry.
The byproducts of marijuana being grown and processed in industries that have real economic potential include hemp fibers for clothing, upholstery, and other fabric use, as well as sources for biofuel, cooking oils, and green plastics.
New research shows that there are potentially hundreds of uses of cannabis and hemp beyond pharmacology, natural medicine, and recreational drug use. Many complementary industries in the agricultural, industrial, technology, and services sectors will support the overall marijuana growth industry.
Explosive growth
According to Arcview Market Research and its research partner BDS Analytics, over the next 10 years, the legal cannabis industry is poised for explosive growth. Total spend on on legal marijuana worldwide is expected to hit $57 billion by 2027. The recreational market is expected to cover 67 percent of this overall number, whereas medical marijuana is expected to comprise the remaining 33 percent.
The largest group of legal consumers of marijuana will be in North America, going from $9.2 billion market in 2017 to an estimated $47.3 billion in 2027. Here's what you need to know as this industry grows.
Also: The legal marijuana market is catching up to beer and wine
What's the legal status of marijuana?
The legal status of marijuana is a moving target.
Schedule 1 restricted substance
While there is draft legislation in congress to legalize or decriminalize marijuana, the cultivation, distribution, and processing of Cannabis Sativa (marijuana) currently remains illegal at a federal level. As such, it is currently classified as a Schedule 1 restricted substance, with the Justice Department's Drug Enforcement Agency (DEA), assigning it in the same legal status as narcotic drugs like heroin and LSD -- and in a more restrictive category than cocaine, which is Schedule 2.
Marijuana cannot be transported across state lines, even if the states in question have medical or recreational marijuana programs.
However, there are certain legal protections afforded by states that have medical and recreational marijuana programs. There are no national marijuana firms per se in North America -- with the exception of those based in Canada that have US based subsidiaries operating on a state-by-state basis. However, individual companies in specific states -- those that have legalized the use of cannabis for medical and/or recreational use -- are protected by specific federal legislation.
Rohrabacher-Blumenauer Amendment
The main legal instrument that protects state medical and recreational marijuana programs is the Rohrabacher-Blumenauer Amendment. This legislation, included in congressional omnibus spending bills since 2014, prohibits the DEA from spending funds to interfere with state medical cannabis laws. Consequently, cannabis companies, employees of those companies, and medical marijuana patients in those states are immune from federal prosecution. As Rohrabacher-Blumenauer is part of a congressional spending bill, it must be renewed for every congressional year.
The amendment was renewed for FY 2018 under the $1.3 trillion omnibus spending bill on March 22, 2018. Newer legislation that would make the essential verbiage of Rohrabacher-Blumenauer permanent is currently in draft and is expected to be voted on during the next major session of Congress.
When will it become legal?
There's more room for optimism.
The STATES Act (S.3032), a draft bill sponsored by Sen. Elizabeth Warren (D, MA), would amend the Controlled Substances Act of 1970 and add permanent protection to businesses and individuals in compliance with state marijuana laws. President Trump has indicated that if such a bill were introduced, it would have his probable support. Additional draft legislation, such as the McClintock-Polis Amendment, would remove the word "medical" from the Rohrabacher-Blumenauer protections so as to include recreational use.
As of November 2018, 33 states have passed marijuana legislation which legalizes it in some form. Since every state with a medical or a recreational program has different laws, consult your jurisdiction for specific guidance as to who qualifies for its use and how the specific industry in that state or territory is organized.
Additional reading:
- State medical marijuana laws
- The 4 most anti-marijuana states
- Legal Cannabis: Which Marijuana Companies Are Worth Considering for Your Portfolio?
What are the products?
There are precious few standards in the type and potency of marijuana products available for sale. The number of possible variants is dizzying.
Varying conditions
Because each state has it own policies and programs, and because plants must be grown and processed in the state in which the program originates, there is wide variation from one dispensary to another in the nature of their products.
Also, there are potency variations among growers that produce different yields of the same product during different harvests. Unlike pharmaceuticals that are manufactured to yield a consistent product, marijuana is an organic material cultivated under varying conditions.
For example, a 300mg vape cartridge at one dispensary using one particular strain might contain 96 percent THC, whereas another 300mg cartridge at another dispensary using the identical strain but from a different grower might be 80 percent THC. But because of competition, the price per milligram between dispensaries is largely consistent in vertically integrated markets.
In Florida, THC is priced at about 12 cents per milligram for a typical vape cartridge. When purchased as raw distillate or concentrate, that price can drop down to about 7 cents per milligram.
Anything goes
In horizontally integrated markets, anything goes as far as pricing, because of much wider availability of product and differences in processing methods and technology.
In addition to the selling of marijuana flower in states that permit it, the products sold at a marijuana dispensary are manufactured and packaged as a result of processing the marijuana flower into extracts or powders.
How are extracts created?
There are multiple ways of creating extracts, but the two most common methods are BHO (Butane Hash Oil) or SCE (Supercritical CO2 Extract). BHO is much more common in states with highly established programs such as California and involves the use of butane solvents. SCE is an all-natural process involving the use of high pressures and carbon dioxide gas.
Tree Sap
SCE is becoming more popular and is the exclusive process in many states, such as Florida, that have recently introduced marijuana programs. In the SCE process, the whole plant flower is first carboxylated (heated), pulverized, placed into canisters filled with extremely cold (supercritical) carbon dioxide, and agitated. All the oils, resin, and terpenes (natural organic compounds also present in other plants such as citrus, dill, and hops) are extracted, producing a sticky, gooey substance that resembles a thick tree sap.
This extract -- which is often referred to as a "full spectrum" extract, because it contains all the essential phytocannabinoids, not just THC -- can be sold in its pure form, placed into capsules, or blended with cutting agents to produce vape cartridges for use in vape pens.
Shatter
Using the BHO method, the extract can also be hardened into a substance called "shatter," which provides for an extremely potent and high-quality inhalation using a specialized vaporizer. It can also be used to make thick pastes and other derivative products.
Ground flower
Some dispensaries sell medical marijuana products in proprietary cups or "pods," which contain ground marijuana flower that can be used with specialized vaporizers. (This is the only way the whole flower can currently be used legally, for example, in Florida.) The ground flowers can also be made into pills for oral use.
Cutting agents
Alcohol can also be added as a solvent to carboxylated flower in order to create tinctures that can be taken orally, and heat-activated marijuana can be added to cocoa butter for topical use.
In addition to different packaging types and delivery systems for routes of use (oral, sublingual, topical, vaporized, or rectal), the THC and CBD percentage potency for each product, and the cutting agents used in products, there are differences between strains of marijuana used in the products between dispensaries.
The types of marijuana plants
Just as there are many different varieties of grapes used in making wine or different countries of origin where coffee comes from that contributes to differences in flavor, there are many varieties of marijuana used in the production of medical marijuana medications.
Sativa vs Indica
Generally speaking, marijuana plants can be classified into two genetic types: Cannabis Sativa or Cannabis Sativa forma Indica. Sativa plants, which mostly originate from South America, are taller and have longer leaves, and typically have a more energetic high. Indica plants, which originate in various parts of Asia, are shorter and have wider leaves, and have a more calming, sedative effect. It's not uncommon to see Indica recommended as a sleep aid.
Hybrids
Most marijuana products sold in states with medical or recreational programs are hybrids of different varieties of sativa and indica genetics that were created by breeders to produce different therapeutic effects. These plants all have different levels of THC, CBD, other cannabinoids and mixes of terpenes (which also have their therapeutic effects, and are far less understood at this time).
When the names of these hybrids are used in the product marketing, they will have funny names like "Tillamook Strawberry" or "Glass Slipper." The names will often reflect the source of the seeds and even their country of origin. There are hundreds of marijuana strains, and depending on the state, any dispensary may have several dozen on offer at any time.
No true genetic testing standards
Some providers -- such as Surterra in Florida, with its non strain-based product line -- do not publicize the origins of their strains, and there are no true genetic testing standards in place in these states to prove what a plant actually is.
A marijuana producer will create unique brand names in order to try to differentiate themselves, and every dispensary has different products and has areas of differentiation that set them aside from other companies. VidaCann, for example, is a Florida exclusive licensee of the proprietary marijuana strains from Tikun Olam, which participates in the 20-year-old Israeli medical marijuana program, and also a proprietary marijuana strain licensee of the Stanley Brothers Charlotte's Web CBD-rich hemp/marijuana hybrid from Colorado.
Also: Harvesting marijuana with robots is hard. Here's how one company figured it out
What about CBD?
Another growing market in the marijuana/hemp industry are products that contain CBD (cannabidiol). Unlike THC, the main psychoactive compound in marijuana, CBD has no psychoactive effects. However, CBD does have many therapeutic properties: It's been used to treat inflammation and anxiety, as well as rare forms of child epilepsy and other neurological disorders.
CBD can be extracted from both marijuana and industrial hemp, which -- unlike marijuana -- is non-psychoactive, legal to grow in a large number of US states, and heavily cultivated in Canada.
The CBD industry is estimated to grow to $2.1 billion by 2020, according to a report by Hemp Business Journal.
What's it like inside a dispensary?
If you can actually get to a dispensary, what you will find is totally different from what you might imagine a marijuana store looks like. Dispensaries in vertically integrated states like Florida are not "head shops" with black light posters, glass paraphernalia, and other trappings straight out of a Cheech & Chong movie.
Inside a medical marijuana dispensary
While you can still find this type of environment in California, it is becoming less the norm as these facilities target the more upscale and sophisticated customer. These dispensaries resemble high-end cosmetic boutiques, and some even emulate Apple's retail model, with "geniuses" dressed in golf shirts and carrying iPads.
Some dispensaries such as MedMen, based in Los Angeles, have gone extremely upmarket and opened incredibly lavish facilities that make even Apple's retail facilities seem austere by comparison, with wood paneled walls and high-end strains. It provides an experience closer to shopping at Louis Vuitton, Gucci, or an expensive cigar store versus a head shop. MedMen has opened a number of facilities not just in California, but also in Nevada and New York as well, straddling both the recreational and medical marijuana worlds.
But even MedMen's high-end experience is dwarfed by NuWu on the Las Vegas strip, which at 16,000 square feet is the largest dispensary in the world. Inside a cavernous glass-windowed facility with over 170 display counters, it's a marijuana superstore.
All these are secure facilities that require private security personnel, video surveillance, and locked-out reception areas from the main dispensary operation, as well as physical security for the medication. For example, KNOX, in Lake Worth, Fla., is situated on the site of a former bank and secures the medication in a bank vault.
Also: How weed dispensaries fight for higher awareness through tech (CNET)
Products for sale
While MedMen and NuWu provide over-the-top types of recreational experiences, they are not the norm. In vertically integrated medical marijuana states, what you will find are, for the most part, completely sterile surroundings, with glass cabinets displaying generic-looking packaging. For sale are pills, cartridges and other vaporizer supplies, tinctures, and topical creams. You'll also find edibles in the states that permit them, such as THC and CBD-infused chocolates, gummy bears, hard candies, waters, energy drinks, etc.
Still, your local supermarket pharmacy or Wal-Mart has more interesting-looking products in their over-the-counter sections.
What these products lack in curb appeal, however, they make up for in their ability to heal people and provide relief for chronic conditions that nothing else can address, or improve the overall quality of life for the patients who need them.
Certainly, in recreational states, and medical states where flower is permitted, there are big jars of marijuana flower, pre-rolled marijuana cigarettes ("joints"), and more interesting edibles. And you will find large displays of vaporizer systems, which can cost anywhere between $50 for the most simple pens to $1,000 for the most sophisticated rigs ("e-nails") that use blown glass pipes.
Customer education
Most importantly, the dispensaries employ wellness consultants (also called "budtenders") who are knowledgeable in the actual products. Many of these employees are patients themselves and therefore intimately familiar with medical conditions addressed by the products they carry. This personal touch is important for the medical or recreational marijuana neophyte who may have no idea how to navigate the array of products a dispensary offers.
Many of these facilities also run educational seminars and classes on various aspects of medical marijuana wellness, including specific conditions such as PTSD or the needs of senior citizens.
But because of the NIMBYism and the lack of locations, many of these dispensaries have logistical issues and run out of product quickly. And the wait to get into these facilities can also be very long, frequently over an hour.
Due to these shortcomings, once a patient has had their initial visit, and is able to get a better grip on the type of products they need to address their condition, it may be preferable to opt for home delivery instead and to interact with dispensary consultants over the phone when new products are released.
Who are the industry movers and shakers?
To get a glimpse of the overall size of the marijuana industry, the best place to start is the Marijuana Index. This site tracks 374 separate securities -- present on both US and Canadian exchanges -- that represent multiple industry sectors, including cultivation, retail, AgTech, biotechnology, consumption devices, and hemp products, as well as investing and finance, which specialize in portfolio management of marijuana-related companies.
The largest performers in terms of market capitalization, volume and overall growth are Canadian firms such as Canopy Growth, Aphria, Aurora, Cronos, and Tilray, all of which are in cultivation and retail.
What gives Canada an edge?
Canadian marijuana firms have a strong competitive advantage because of the significant investment they are making in US-based marijuana companies, and the ease with which they are able to use the international banking system to transfer funds into banks residing in different US states where marijuana programs exist.
Unique banking advantage
In Florida, for example, several of the vertically integrated marijuana companies are Canadian-owned or have substantial Canadian investment: Trulieve (currently the largest, with 22 dispensary locations) has merged with Toronto-based Schyan Exploration; Liberty Health Sciences is a division of Aphria; and GrowHealthy, which is a division of iAnthus Capital Holdings, a New York-based corporation that has been aggressively seeking and cultivating Canadian investment.
This unique banking advantage enables these Canadian-owned firms based in the US to transact with non-marijuana companies in the US and also purchase and ship non-cannabis supplies from Canada, such as packaging, so it allows these companies to be much more agile than their purely American counterparts.
Agriculture industry
Not all the top performers are necessarily Canadian or cultivators, though. A number are traditional suppliers to the agriculture industry (AgTech), such as Scott's Miracle-Gro, which is a large manufacturer of fertilizer products and has made a number of investments in companies connected with the marijuana industry, including hydroponics firms like Sunlight Supply.
Device companies
Accessories and consumption device companies, such as PAX Labs -- often referred to as the Apple of vaporizer companies -- and its spinoff, JUUL Labs, are also experiencing significant growth. JUUL itself is valuated at about $15 billion due to its participation in the nicotine vaping industry and with its disposable pod system similar to that of the PAX Era, which was designed originally for cannabis oils and concentrates. The Bluetooth-connected Era itself is becoming increasingly popular as a user-friendly vaping device and the pods are licensed to a number of dispensary companies in legal states, such as Florida's Aphria.
Additionally, many companies are considered key support players in the overall space, such as Kush Bottles, and its competitor Acology, which manufacture packaging used in marijuana products.
Any role for Big Pharma and tobacco companies?
There has been ongoing speculation that the alcoholic and soft drink beverage industry may be looking to jump into marijuana-related products at some point, although most of this is related to using CBD as an additive to beer and soft drinks. While some companies like Coca Cola are closely watching the space, others such as Constellation Brands, which is the parent company of Corona beer, Robert Mondavi and Svedka Vodka, recently invested $4 billion in Canopy Growth in Canada.
No large moves yet
The tobacco industry as a whole has not made any large moves as of yet, but UK-based Imperial Brands, which owns the Winston and Kool cigarette brands, recently announced that it had joined with seed investment firm Casa Verde (backed by rap musician Snoop Dogg) to invest in British medical marijuana research firm Oxford Cannabinoid Technologies, to the tune of $10 million.
Traditional pharmaceutical players should also not be ruled out, though they so far have avoided direct participation in the industry ecosystem due to marijuana's federal legal status. Many are waiting in the wings to see when they can jump in as cultivators and manufacturers of medical marijuana (and presumably recreational) products.
Possible investment in the future
Johnson and Johnson may not be actively investing in marijuana, but it has recently allowed two Canadian marijuana firms, Avicanna and Vapium Medical, access to its Canadian JLABS Innovation network, in order to pick the minds of its top researchers -- which could lead to possible investment in the future.
Some, like UK-based GW Pharmaceuticals, are straddling the line with developing cannabis-based drugs such as Sativex, for treatment of multiple sclerosis, and Epidolex, for epilepsy, which was recently granted FDA approval in the US. It's the first such drug to use naturally-derived cannabinoids, unlike Dronabinol (Marinol), which is a synthetic THC drug produced by Chicago-based Abbott Laboratories used to treat cancer and AIDS-related nausea.
Who are the technology players?
On the technology side, large players like Microsoft and HP are partnering with companies such as Kind Financial and Flowhub, which work in sales tracking and point of sale. LED light manufacturers like Cree are seeing a boom in sales from their heavy use in indoor hydroponic grow systems.
As with any growing industry, there are the app startups. Weedmaps is a popular mobile app that allows medical and recreational users to find dispensaries and specific products, and Leafly is a marijuana strain database with Amazon-style reviews, news feeds, unique video content, and a product locator.
Cloud, machine analytics, and big data are also key areas where technology can be applied in the marijuana industry, specifically as it relates to streamlining regulatory approval for marijuana drugs, product distribution, delivery logistics, and inventory management.
Also: How IT can spark the budding cannabis industry
Banking and finance challenges
Addressing the specific logistical and operational challenges faced by marijuana firms is a niche where companies in the cannabis industry can differentiate and provide unique value.
The main challenge is banking -- because FDIC-insured institutions cannot legally do business with a marijuana business. Marijuana businesses typically have to work with private, state-chartered banks, such as Seattle-based GRN Funds, which handles over $500 million in deposits from marijuana companies on the West Coast and has recently entered the Florida market.
Additionally, in order to receive payment from patients or recreational users, these businesses must either work in cash, or utilize specialized payment apps. In Florida and 16 other states, for example, the app CanPay is used as a middle-man so that patients can purchase medication from a dispensary. Patients register their bank information with CanPay, and when it is time to make a purchase, a QR code is generated by the app that the dispensary or a delivery courier equipped with a mobile device can use to withdraw funds from that patient's bank account for that specific purchase, like an ATM or debit card transaction.
Opportunities and risks
Investing in or starting a marijuana company is not without its risks, although they are not necessarily legal ones from a personal exposure standpoint -- there are long term financial risks.
Ironically, the federal illegality of marijuana actually benefits current and prospective growers and dispensary owners, because it discourages big pharmaceutical and tobacco companies and retail chains from entering the industry.
Also: How the seeds of innovation will grow a bumper crop of weed startups TechRepublic
Smaller businesses could be forced out
If the federal government were to lift marijuana's illegal classification, the smaller businesses could be forced out -- via aggressive pricing or through acquisition. Alternatively, they may have to become highly specialized, focusing on boutique types of products like organically grown marijuana or specialty strains for more discerning customers.
However, federal legalization is not expected to be a real possibility for at least five years, as decriminalization and rescheduling would have to occur first -- so the "gold rush" for marijuana businesses and companies that fill the services gaps for financial and other specialized needs is very much in play until then.
Limitations
Marijuana businesses cannot take tax deductions for expenses, given that they are trafficking in controlled substances. Advertising opportunities are extremely limited as well, especially in vertically integrated states. While mailing list promotions to existing customer bases by dispensaries is common, it is difficult for marijuana companies to operate on social media platforms, as illegal drugs are against their terms of service. Facebook has been known to even take down fan pages and support communities for medical marijuana dispensaries with no notice.
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