New York became the 16th state to legalize adult use cannabis as lawmakers passed the MRTA (Marijuana Regulation and Tax Act) this week. The bill will now go on to Governor Cuomo to sign, which he is expected to do. It will take at least a year to establish the program and sales aren't expected until 2022. However, the original growers, or OG's, in New York will be given many advantages to the market versus new entrants.
Original Grower's Stand To Gain
Viridian Capital Advisors said that New York will quickly become the biggest cannabis market on the East Coast and it forecasts that sales will reach $1.9 billion by 2025. New York was a limited license state with just 10 licenses awarded to medical marijuana operators. They include Acreage Holdings (ACRHF) , Columbia Care (CCHWF) , Cresco (CRLBF) , Curaleaf (CURLF) , iAnthus (ITHUF) , Etain Health (private), Green Thumb Industries (GTBIF) , MedMen (MMNFF) (whose assets have mostly been sold to privately held Ascend Wellness), PharmaCann (private) and Vireo Health (VREOF) . As with many other fully legal states, the original medical license holders stand to have the early advantage.
Viridian pointed out that the existing operators will be grandfathered in with several long-term advantages, creating an unequal playing field for new entrants. The company writes, "Today, existing license holders are permitted to have four medical dispensaries and are required to be vertically integrated. Under the new law, the license holders can open four more dispensaries with three of eight to be permitted for recreational sales. All new entrants to the market will be capped at three total stores." Vertical integration for new entrants will not be allowed forcing new players to either declare themselves fully retail or wholesalers. The existing license holders will also have the opportunity to expand and increase production.
"Using rough Massachusetts pricing ($4500/lbs. flower retail and $3000 wholesale) and cost of production ($1200/lbs. flower) as a proxy for New York, the existing New York license holders can achieve a 73% gross margin on the sale of one pound of flower while a non-vertically integrated retailer achieves 33%," read a new report by Viridian. "Meanwhile, a strictly wholesale operator gets 60%. This margin comes before factoring in the states planned excise tax based on THC content level. The excise tax is the burden of the distributor and incurred by the wholesale producer but likely partially passed on as part of the wholesale price. It appears that this cost will not be incurred for inhouse sales for vertically integrated operators widening the margin gap." Wholesales in Massachusetts like Ayr Wellness and Tilt Holdings have demonstrated that this side of the business can be quite lucrative.
The current licensees in the state could expect to see the existing medical operations remain solid revenue sources, although some stores could be sold off in a hot market.
Viridian wrote, "We continue to anticipate significant interest amongst MSOs in obtaining licenses. In particular, we expect MSOs to focus either on retail operations near New York City or other populous parts of the state or to operate as wholesalers to the market." Licenses that are available for sale will no doubt command premium prices.
With all that being said Viridian analyst Jonathan DeCourcey believes there is a buying opportunity here: "Since early February cannabis stocks are down significantly (-23%) as reflected by the Alternative Harvest ETF (MJ) . This compares with a 4% decline for the Russell 2000 and a 1% gain for the S&P 500. While cannabis stocks are still very much outperforming YTD (+55%,versus 13% and 7%, respectively), we feel that the recent underperformance presents an attractive buying opportunity for investors particularly investors considering companies for which the macro improvements are significantly more attractive today than they were at the start of the year."