Florida: America's Most Competitive Cannabis Market

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Includes: ACRGF, APHA, CCHWF, CGC, CNTMF, CRLBF, CURLF, GTBIF, HRVSF, ITHUF, LHSIF, MMNFF, ORHOF, SOLCF, TCNNF, VREOF
by: Jonathan Cooper
Summary

Florida's medical cannabis market is growing rapidly, with patients up 165% year-over-year and cannabis volume up 128% year-over-year.

Florida is a limited license market and virtually every major multi-state cannabis company operates or plans to operate in Florida.

Florida's growth continues today, as Florida added its second-highest number of patients during the week of May 3.

Florida Cannabis Market Growth

The Florida Market

Florida is the third-largest state by population and the second-largest state with legal cannabis. Medical cannabis was legalized in Florida in January 2017. Since then, the Florida market has grown continuously by all metrics, with patient counts rising to over 280,000 as of May 3, up from 106,000 one year ago.

This market is one of the most attractive markets for large cannabis companies due to its relatively unique set up.

Florida is a limited-license medical cannabis market, with an initial limit of 14 licensed companies although eight new licensees have recently been added after months of legal battles. Each company is limited to a single license, as with other states like Massachusetts. Each license allows companies to both cultivate cannabis and to open medical cannabis dispensaries.

One aspect that sets Florida apart from other states, like Massachusetts, is the scale allowed by a Florida license. In Massachusetts, a license-holder can open three recreational cannabis stores (and potentially three medical cannabis dispensaries). This three-store footprint allows for limited scale, typically resulting in cannabis stores selling products from a variety of companies. For example, Rise Amherst, a Green Thumb (OTCQX:GTBIF) dispensary, and The Botanist in Worcester, an Acreage (OTCQX:ACRGF) dispensary, both sell products from Howl's and Berkshire Roots.

In contrast, a Florida license allows each license-holder to open 35 cannabis dispensaries. Even that ceiling is set to expire in April 2020 and increases with increasing patient counts. This much higher limit allows for better scale, allowing larger companies to become vertically integrated and sell primarily or exclusively their own products. For example, Curaleaf Palm Harbor (OTCPK:CURLF) and Trulieve Vero Beach (OTCPK:TCNNF) both exclusively sell products created in-house. This vertical integration means that Curaleaf and Trulieve both receive 100% of the profits on the products they sell, enabling higher gross margins and increased profitability.

Florida Market Growth

Florida Growing Medical Cannabis Market

In addition to an attractive regulatory scheme, Florida's medical cannabis market is booming. Each week, the state of Florida releases weekly reports that detail statistics including patient counts, how much cannabis was dispensed, and how many dispensaries are licensed in the state. Each of these metrics has been booming.

During the fourth quarter, over 193,000 Floridians purchased 624 kilograms of medical cannabis, at a rate of about 3.2 grams/patient per quarter. In the first quarter of 2019, the average patient count rose to nearly 235,000 (up 21% QoQ) and those patients consumed 757 kilograms of medical cannabis (up 21% QoQ). On a YoY basis, cannabis sales have increased nearly 400% while patient counts have grown nearly 200%.

Florida weekly cannabis sales and new patient additions

While not shown above, each of these metrics will increase in the second quarter, with patient counts already up 16% in the first five weeks of the second quarter and cannabis/patient steady at 3.2 grams/patient per quarter.

Major Competitors

Trulieve, Curaleaf, Liberty Health, Cansortium, Cresco, Harvest, iAnthus, Green Thumb

As of May 3, 10 of Florida's 22 licensees operate at least one cannabis dispensary, while MedMen (OTCQB:MMNFF), Columbia Care (OTC:COLXF), and 3 Boys Farm (owned by Sol Global Investments, OTCQB:SOLCF) dispense cannabis via delivery. Canopy Growth (CGC) target Acreage Holdings purchased a Florida cannabis license in January for $67 million, but hasn't begun delivering cannabis or opened any stores in Florida.

Trulieve patient counts versus Florida patient counts

Trulieve is the leading cannabis company in Florida, with 23% of the state's dispensaries but dispensing 65% of medical cannabis in Florida. Trulieve recently won the right to open 49 medical cannabis dispensaries (14 over the state cap) and earned EBITDA margins of 44% in 2018. Trulieve gained 12,296 new patients in April 2019, about two thirds as many patients as the State of Florida, and their largest monthly patient growth since Trulieve began reporting the figure.

Curaleaf added six dispensaries in the past six months, bringing its total to 24 Florida dispensaries. The most recent addition was in Orange Park, Florida, and brings Curaleaf's national dispensary count up to 44 dispensaries with operations in 12 states. Last week, Curaleaf announced a $950 million all-stock purchase of the Select brand of cannabis products, bolstering the company's product catalog and west coast presence.

Over the past six months, privately-held Surterra Wellness has been growing the quickest, adding seven dispensaries and increasing their dispensary count by 44%. Beau Wrigley, former CEO of the Wrigley Jr Company, is the chairman on Surterra's board of directors.

Liberty Health Stock Price

Source: Liberty Health stock in C$, via the Canadian Securities Exchange.

Liberty Health (OTCQX:LHSIF) is the fourth-largest cannabis company in Florida by dispensary count. The former Aphria (APHA) holding added six dispensaries in the past six months as of May 3, and added a 14th dispensary on May 6 in Cape Coral. Liberty shareholders have yet to benefit from this doubled footprint, with Liberty's CEO resigning in March amidst allegations of sexual assault, and Liberty's CFO also stepping aside.

Cansortium (OTCPK:CNTMF) rounds out the top five in Florida through its Knox Medical brand. Cansortium went public on March 21 but has lost about 16% since then. Cansortium recently won a Health Canada license for its Ontario facility and will re-brand Knox Medical as Fluent Cannabis Care.

Cresco (OTCQX:CRLBF) is a new entrant into the Florida cannabis market. The multi-billion dollar MSO purchased VidaCann for $120 million in March 2019. More recently, Cresco announced a C$1.1 billion purchase of Origin House (OTCQX:ORHOF) in an all-stock deal. At the time of the deal, it was the largest public company acquisition in the history of the U.S. cannabis industry, although its size pales in comparison to the potential Acreage Holdings/Canopy Growth deal.

Harvest Health revenue growth and gross margins

Harvest Health (OTCQX:HRVSF) did not have a footprint in Florida six months ago, but today has five dispensaries in the Sunshine State. During their earnings call in April, Harvest laid out aggressive plans to expand their footprint to 92 dispensaries by the end of 2019 and to generate $900 million to $1 billion in revenue, with 30-35% EBITDA margins, in 2020. Harvest also noted they had 20-plus leases in Florida, highlighting a desire for rapid growth.

Origin House investment in AltMed

Source: Origin House Fourth Quarter Financial Statement.

AltMed Florida is a smaller player in Florida with four dispensaries. Although AltMed is privately-held, Origin House has an equity stake in the company (diluted to 4.8% as of Dec. 31). Since Florida requires that each company can only have a single Florida license, it's likely that Origin House would need to sell this stake if they're acquired by Cresco.

Both iAnthus (OTCQX:ITHUF) and Green Thumb are new entrants in the Florida market, opening their first three and two dispensaries in Florida over the past six months. iAnthus acquired GrowHealthy for $48 million in January 2018 and uses the GrowHealthy brand in Florida. Green Thumb uses its Rise dispensaries brand in Florida after acquiring KSGNF in November 2018 for $98.3 million in cash and shares.

Thoughts

Florida's cannabis market is growing rapidly and continues to grow.

During the week of May 3, Florida added 4,619 new patients. This was the second-highest number of new patients recorded, after the 5,249 new patients added on the week of March 29. Similarly, on the week of April 19, Florida sold a record 75.9 kilograms of medical cannabis. One year ago, Florida's all-time highest sales week was 20.2 kilograms during the week of April 13, 2018.

Vireo Health investor presentation

Source: Vireo Health Investor Presentation.

Investors have a variety of options for how to invest in the Florida cannabis market. Nearly every major U.S. cannabis company has a license to open 35 dispensaries in Florida, with Vireo Health (OTC:VREOF) perhaps the largest public multi-state cannabis company without a Florida presence. Trulieve and Curaleaf have the lead among public companies in Florida, but well-funded multi-state operators like Acreage Holdings and Harvest Health are likely to build a Florida presence quickly.

Legal changes also may help companies that operate in Florida. Selling dry cannabis for smoking was only legalized in March, and Florida is reportedly moving toward allowing edibles as well. Perhaps the next step after that would be legalizing recreational cannabis, although a bill to legalize recreational cannabis failed last month.

Happy investing!

Disclosure: I am/we are long CGC, TCNNF. 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.