New York's move to recreational cannabis will give the state's 10 existing operators a big leg up — and that could be good news for investors

  • New York currently has 10 companies serving its medical cannabis market.
  • The latest version of cannabis legalization would let these operators transition into recreational.
  • They’ll also be able to stay vertically integrated and sell wholesale to incoming players.
  • See more stories on Insider’s business page.

As New York’s adult-use cannabis regulations shape up, the 10 companies that entered the state as medical operators are set to be the clear winners.

Last week, New York lawmakers reached a deal to legalize marijuana. Text of the bill was released on Saturday and a vote is expected to happen this week, making New York the 15th state to legalize cannabis.

The language of the bill emphasizes social equity (it has a goal of 50% of licenses going to equity applicants) and its contents have been lauded by activists who have long pushed for a recreational cannabis market that would work to benefit the communities most disproportionately affected by the war on drugs. 

But still, as any state transitions from medical to adult use, it’s unavoidable that the market will depend on early players to supply the market in the first few years as other cultivators take time to grow their harvest. This gives a huge advantage to the companies that entered New York early on, having already built out the infrastructure to supply the state’s 140,000 medical marijuana patients. 

Most of New York’s 10 current players are also  with deep pockets and steady balance sheets.

Ten cannabis companies currently operate in New York’s medical marijuana market. Nine of them are 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. 

All ten of these operators are vertically integrated, meaning they control every part of the supply chain from seed to storefront. None of the incoming players into New York’s market — aside from a small class of operators called “micro-businesses” — will be able to do the same according to the language in the bill, giving incumbents room to supply the market, which will lead to bigger market share initially.

This has the potential to boost the balance sheets as well as stocks of the eight public companies current in New York, said Dan Ahrens, portfolio manager for MSOS, an ETF focused on public cannabis companies. MSOS has millions of shares of stock in companies like Curaleaf, Green Thumb Industries, and Cresco, which have operations in New York.

Medmen, a public cannabis company that operates in New York, may be the exception to this trend as its New York assets are now held by private cannabis MSO Ascend Wellness Holdings.

“The impact is huge,” Ahrens said, adding that once the market realizes the ramifications of New York’s market on these companies he expects stocks to see an uptick.

Cannabis stocks moved aggressively after the presidential election and again after a runoff in Georgia gave Democrats the majority in the Senate (not to mention after reddit forum Wall Street Bets turned to cannabis stocks in February). However, since then, they’ve slid back down. 

Ahrens says that it’s no secret that cannabis stocks can be volatile but that he thinks that once cannabis legalization is signed into law and the market digests the information, the public companies with footing in New York will gain momentum in the market. 

“Sometime soon the market will realize the fundamentals of these companies built to truly digest the huge New York opportunity and these stocks will act more correctly in my opinion,” he said. 

But adult-use cannabis won’t be available immediately, even after the bill passes through the state legislature and is signed by New York Governor Andrew Cuomo.

Andrew Carter, an analyst at Stifel, said he expects adult-use sales to begin in late 2022. Analysts from Cantor Fitzgerald and Stifel estimated that New York could become a $5 billion cannabis market by 2025.

Here are the four ways current operators in will New York will benefit from legalization:

They will be “grandfathered in” from the state’s medical to adult-use market

Current operators, who have long supplied New York’s medical marijuana patients, will be allowed to sell cannabis once recreational sales begin. 

Running a cannabis business can be extremely capital-intensive, which means that public companies with deep pockets and money on their balance sheets — like Curaleaf, Green Thumb Industries, and other large public operators in New York — will have an advantage over newer players, around half of whom will be social equity applicants, according to the goals laid out in the legislation.

The fee that existing license holders will have to pay to make this transition is yet to be published, but the bill outlines that the proceeds from these fees will help support social equity applicants in the state.

Current operators can increase their dispensary locations and add recreational sales

Medical cannabis businesses are currently allowed four dispensary locations around New York. Under the bill, they would be allowed to build out four more and use three of their total eight locations to colocate, meaning they would be able to sell both medical and recreational cannabis at the location.

New players will be allowed a total of three adult-use locations.

Vertical integration would allow operators to control their entire supply chains and supply others

Because the ten companies currently in New York are required to be vertically integrated, they control every part of their own supply chains. This gives them a huge advantage over new entrants, who will operate under a two-tier system where operators may either be cultivators (allowed to process and distribute their own products) or retailers (barred from cultivation). Micro-businesses will be exempt from this rule.

This means that current operators will be able to not only sell their own products in their shops but also be able to sell wholesale to other retailers across the state and gain revenue from that. 

Supply will rely heavily on the cultivation capacity of current companies

For the first few years of legalization, current operators are expected to be the main source of cannabis supply for the New York market as other cultivators ramp up production (after all, cannabis is a plant and plants need time to grow and be harvested).

In colder states like New York, cannabis crops are harvested indoors in warehouses or in greenhouses, which means operators will have to invest heavily in infrastructure, lighting, and other technology to be able to successfully cultivate the plants.  

It’s extremely capital-intensive to build out cultivation capacity for cannabis and everything needs to be grown within New York borders because moving cannabis products across state lines is still federally illegal. Current operators already have much of that infrastructure set up, though most are expected to ramp up production to be able to supply the adult-use market in the coming months. 

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