Florida's Marijuana 'Cartel' Ends With Issuance Of 57% More Licenses

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Includes: ACRGF, CGC, CNTMF, CRLBF, CURLF, GTBIF, HRVSF, ITHUF, LHSIF, MMNFF, TCNNF
by: James V. Baker
Summary

During his gubernatorial campaign Florida Governor Ron DeSantis has called Florida's seed-to-sale system a state-sponsored "cartel" that must end.

Florida's 2nd Judicial Circuit ruled that restrictions imposed in the 2017 state marijuana law thwarted the will of the people and was unconstitutional.

As of April 26, 2019 Florida had 213,871 qualified patients with ID cards to receive medical marijuana.

On the above date there were 14 approved Medical Marijuana Treatment Centers or MMTCs in Florida authorized to grow, process and sell medical marijuana.

On April 19, 2019 the Florida Department of Health issued eight new MMTC licenses, representing a 57% increase in the number of MMTC licenses in the state.

Florida Demographics

Florida is sometimes referred to as "God's Waiting Room" because of its heavy concentration of elderly retirees. There is about a 100% probability that these elderly residents have pain, arthritis, anxiety, sleep difficulties or any of the other qualifying conditions that allow one of the 2,214 approved physicians to prescribe marijuana. It is not surprising that 213,871 residents have already been issued their Medical Marijuana Use ID cards.

At the beginning of 2019 there were 168,981 with ID cards. Consistently since then, about 3,000 residents have received ID cards each week, and now there are 213,871 Floridians registered as medical marijuana users. At the current rate, by the end of 2019 there will be over 300,000 medical marijuana users in Florida.

The United States Census Bureau estimated Florida's mid-year 2018 population at 21.3 million; and, 4.28 million or 20.1% are aged 65 and over. The total population of Florida is also increasing at a 1.7% rate.

These demographic characteristics make Florida an ideal marketplace for purveyors of medical marijuana for the foreseeable future. It is, therefore, not surprising that multi-state-marijuana operators, or MSOs, have focused attention on Florida.

History of Medical Marijuana in Florida

The Florida legislature enacted the Compassionate Medical Cannabis Act (CUA) effective June 16, 2014, Chapter 381.986, Florida Statutes, which allowed the sale of "low-THC cannabis" (below 0.8% THC) to patients diagnosed with severe seizures or muscle spasms and cancer. Concurrently, the Florida Department of Health adopted Chapter 64-4, Florida Administrative Code, to implement the ACT.

The 2016 Florida Legislature passed House Bill 307, which among other things amended CUA to allow sales of full-strength marijuana, termed "medical cannabis," to only terminally ill patients who had been diagnosed by two physicians. That bill was codified at Sections 381.986 and 499.0295 of the Florida Statutes, effective March 25, 2016.

Florida citizens seeking treatment were not satisfied with their access to medical marijuana under the 2014 and 2016 legislation. Accordingly, an amendment to add medical marijuana access to the Florida Constitution was put on the 2016 general election ballot (Amendment 2). On November 8, 2016, 71.3% of Florida voters approved that constitutional amendment. Floridians' right of access to medical marijuana now appears in Article X, Section 29 of the Constitution, which is titled "Medical Marijuana Production, Possession and Use."

Amendment 2, along with an expanded list of conditions that qualify residents to receive medical marijuana, became effective on January 3, 2017. On November 21, 2017 the Florida Department of Health Office of Medical Marijuana Use, or OMMU, reported that it had issued 34,197 medical marijuana user IDs.

Accordingly, in the last 18 months 179,674 Florida residents have registered and been issued medical marijuana user IDs.

Medical Marijuana Treatment Centers

There were only six businesses officially known as "dispensing organizations" allowed to grow, process and sell cannabis in Florida in November 2016. Of those six, only three had received dispensing authorization: Trulieve (OTCPK:TCNNF), Surterra Therapeutics and Modern Health Concepts. Those three each provided delivery service, but had a total of only four dispensaries.

Following implementation of Amendment 2, a "dispensing organization" became known as a "Medical Marijuana Treatment Center", or MMTC. Only MMTC license holders are allowed to grow, process or sell medical marijuana in Florida. Importantly, each MMTC must receive authorization at three stages: (1) cultivation authorization, (2) processing authorization, and (3) dispensing authorization, prior to dispensing low-THC cannabis or medical marijuana.

Florida's Seed to Sale "Cartel" Ends

The legislative restriction on the number of MMTCs has been seriously questioned and attacked in numerous lawsuits. During his gubernatorial campaign Florida Governor Ron DeSantis called Florida's seed to sale system a state-sponsored "cartel" that must end.

The Florida Department of Health delivered for Governor DeSantis on April 19, 2019. On that day it issued an additional eight MMTCs, thereby effectively ending the "cartel." MMTC licenses were issued to Bill's Nursery, DeLeon's Bromeliads, Dewar Nurseries, Hart's Plant Nursery, Perkins Nursery, Redland Nursery, Spring Oaks Greenhouse and Tree King Farm Inc. These eight new MMTCs had been embroiled in lengthy lawsuits against the State of Florida, since they lost out in the first round of licensing in 2015.

The addition of eight new MMTCs to the existing 14 represents a 57% increase in the number of medical marijuana companies licensed to do business in Florida. Three additional licenses are reportedly up for grabs along with another four looming on the horizon.

Under the 2017 law, health officials were required to issue licenses to applicants that had legal challenges pending as of January 2017 or who had scored within one point of the highest-ranked applicants in five regions of the state during the initial licensing round. The law also required health officials to issue one license to a black farmer who had been involved in settled class-action lawsuits, known as the “Pigford” cases, about discrimination against black farmers by the federal government. In addition, the law required health officials to give preference to two applicants with ties to the citrus industry, a move that became the subject of a lawsuit. The state is expected to drop its appeal in the citrus case and allow the application process to move forward, according to the governor’s office.

The 2017 law also set up a schedule whereby four new MMTC licenses would be issued for every 100,000 medical marijuana user IDs issued. State health officials predict the database will trigger four new licenses as early as October 2019. Not counting the black-farmer license, that could mean health officials will have six licenses to hand out by the time legal and administrative challenges, which will almost certainly be filed in response to the new proposed regulations, are resolved. Hundreds of potential operators are expected to apply. The new application process will create two tracks: one for the black-farmer license and another track for the two licenses that will take into consideration the citrus preference and the four licenses linked to patient numbers. While applicants with ties to the citrus industry will get a boost, that doesn’t necessarily mean any of them will wind up being granted licenses, the governor’s office stressed. The settlements with the eight MMTC applicants put an end to drawn-out litigation over the “one-pointer” litigation. Also, dropping the appeal in the citrus case will be instrumental in allowing the new application process to begin, a move anxiously awaited by investors seeking entry into what is already one of the nation’s largest medical marijuana markets.

Are Acreage and Cresco the Last of the Big Buyers?

It can be expected that others will follow in the footsteps of these newly announced MMTCs. The awarding of MMTC status to these six new entrants in the Florida medical marijuana marketplace raises serious questions as to the timing of recent purchases of Florida MMTCs by Acreage Holdings (OTCQX:ACRGF) and Cresco Labs (OTCQX:CRLBF).

Acreage acquired Miami-based Nature's Way Nursery for $67 million on January 7, 2019. At the time of acquisition, Nature's Way was not growing, processing or dispensing any medical marijuana, and as of today it still has not dispensed any medical marijuana.

It is bizarre that Canopy Growth (CGC) chose to enter into a complex transaction to pay $300 million to Acreage shareholders for the right to acquire the company if such an acquisition is allowed. Acreage is a convoluted roll-up scheme designed by Wall Street financial engineers to enrich insiders who have no knowledge of cultivation or processing marijuana. How else can you explain that it has no sales in Florida four months after acquiring a nursery for $67 million?

Cresco Labs agreed to acquire VidaCann Ltd for $120 million in cash and stock on March 18, 2019. In contrast to Nature's Way, VidaCann had seven dispensaries operating and expected to have 20 by the end of 2019 along with its delivery service. If the Cresco/VidaCann deal closes it will certainly establish the high-water mark in market price for a Florida MMTC.

Florida Dispensaries Set To Soar

The 2017 law implementing Amendment 2 limited MMTCs to a maximum of 25 dispensaries, but allowed them to add five more retail locations for every 100,000 patients issued Medical Marijuana User IDs. Since there are now over 200,000 user IDs, each MMTC can now operate 35 dispensaries. Trulieve (OTCPK:TCNNF), however, can have 49 because of a recent successful court challenge that allowed 14 of its dispensaries to be grandfathered, because they were in existence before the law was passed.

It seems logical that the Trulieve grandfather exception would apply to other MMTCs as well. If so, then Surterra and Knox would each have six dispensaries grandfathered, while Curaleaf would have five. According to the aforementioned State Health Department projection of the number of expected medical marijuana user IDs, by the end of 2019 Florida every MMTCs will be able to have 40 dispensaries.

Dispensaries are only allowed to sell cannabis products derived from plants grown in Florida by licensed cultivators. There is no state-imposed limitation on the permitted size of cultivation or processing facilities, nor is there a limit on the number of plants that may be grown at a nursery. Edibles are not yet permitted; however, on March 20, 2019 Governor DeSantis signed legislation legalizing the smoking of medical marijuana and several MMTCs are now actively selling actual flower and pre-rolls.

As of April 26, 2019 the 119 operating dispensaries of approved Florida MMTCs were as follows:

All of the above MMTCs, except for Acreage Holdings, offer delivery. Within a few years, the number of medical marijuana dispensaries in Florida might even rival the number of Starbucks (NASDAQ:SBUX) (694) and McDonald's (NYSE:MCD) (728) locations currently in the state.

Conclusion and Outlook

Most of the publicly traded Florida MMTCs have announced their intentions to open a significant number of additional dispensaries in Florida this year. As they open, investors should expect increased awareness and heightened interest by residents, who will then seek medical marijuana user IDs.

The total sales of medical marijuana in Florida are bound to surge as the number of consumers increases. Companies can be expected to report astronomical percentage increases in sales given they are coming off such low levels associated with few if any dispensaries.

Investors need to insist on same store sales results and the average size of transactions as soon as such data are available. It will be difficult to assess the earning potential of individual MMTCs until the Florida market matures and such same store sales figures become available.

The level of competition is bound to soar as Florida's 20 MMTCs build out their cultivation, processing and dispensing operations. It will take the six new MMTCs several months to produce saleable medical marijuana products, but by Q4 of 2019 all 22 MMTCs should be aggressively marketing their medical marijuana products. For the next few years the MMTCs will be spending hundreds of millions of investor dollars building out their franchises.

The chance of Trulieve, Curaleaf, Surterra, Liberty Health and Knox retaining their current percentage market shares is unlikely given the emergence of new MMTC entrants, the invigorated existing MMTCs and the possibility of other MMTC licenses being awarded. Even though a company's percentage of Florida's total medical marijuana sales might decline, the growth in the number of medical marijuana users should insure profitability.

Without question, however, the awarding of eight new MMTC licenses and the looming issuance of more MMTCs has lowered the value of existing MMTC licenses. Real estate companies that cater to the MMTCs should enjoy massive financial windfalls.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.