Cannabis legalization in the Empire State could spell a multi-billion dollar market opportunity, and some of the biggest names in U.S. cannabis already have front-row seats.
“New York is a bellwether in the United States and globally. New York City is the capital of the world, and I think that we're looking at arguably the second largest if not the largest cannabis market on the planet becoming legalized. So, I think it has so many implications not only for New Yorkers but for the rest of the country,” Columbia Care CEO Nick Vita said.
The Marijuana Regulation and Taxation Act, signed into law by New York Gov. Andrew Cuomo on March 31, contains provisions designed to hinder monopolies and encourage a wide variety of entrepreneurs and companies to participate in the market. The social equity program, for example, seeks to reserve 50 percent of licenses for minority- and women-owned businesses, distressed farmers and disabled veterans, giving extra priority to applicants from low-income or over-policed communities, or who have been directly impacted by cannabis criminalization through a personal conviction or the conviction of a close family member. Plus, the plan establishes a two-tier licensing system that prohibits vertical corporate integration by restricting companies that cultivate and process cannabis from investing in retail and vice versa.
Simon Malinowski, managing attorney of cannabis-focused law firm Harris Bricken’s New York office, wrote in a blog post that the language of the bill makes it clear lawmakers wanted to discourage anti-competitive behaviors. 
“The legislature’s motivation for prohibiting vertical integration is woven into the language of the MRTA: to provide industry newcomers – especially social and economic equity applicants — a better chance to thrive, while also preventing monopolies,” he wrote.

Exceptions to the Rule

The bill does, however, grant some key exceptions to the vertical integration ban.  Microbusinesses, which have yet to be defined, can be vertically integrated, as can existing medical marijuana operators in the state. Many of the 10 medical marijuana operators in New York are multistate operators (MSOs) and include some of the biggest names in the U.S. Existing operators include Acreage Holdings, Columbia Care, Cresco Labs, Curaleaf, family-owned Etain Health, Green Thumb Industries, iAnthus Capital, MedMen, PharmaCann, and Vireo Health.  
“The New York lawmakers want to make an extremely competitive system but at the same time they're giving the existing operators a nice head start,” said Stifel Analyst Andrew Carter.
In addition to the vertical integration ban exemption, medical marijuana operators are permitted to double the number of medical dispensaries they operate from four to eight, provided the first two additional dispensaries are located in underserved areas, and they can operate three adult-use dispensaries with existing medical marijuana locations. New operators in the market are capped at three total stores.
“It's a great first mover advantage that they potentially have. The question will be how fast the competing licenses kind of get issued,” Carter added.  “Right now, just the way the law is, they are extremely well positioned with the current environment -- I mean, the head start, and they already have of course the capital advantage relative to the other operators.”
Viridian Capital Advisors wrote in a note that the law creates “an unequal playing field for new entrants.” 
“For the existing operators, we expect competitive advantages combined with the scale of market sales to translate to disproportionate top line growth and profitability. For the operators willing to sell assets, we expect existing licenses to be sought after and valued at premium multiples,” the firm wrote in a note.

Existing Operators Sound Off

But Nick Vita, CEO of Columbia Care, told Cheddar he doesn’t think the bill inherently gives existing medical operators a leg up. According to its website, Columbia Care has operations in 11 states and Washington D.C.
“I think it rewards existing operators by sort of allowing them to participate in the market, but it doesn't really give us an advantage. And by that I mean…the market is so significant and so large that by opening the door for new operators, I think you're effectively creating a very level playing field,” Vita said.
Canopy Growth CEO David Klein agreed, saying it was a relief to existing operators that they would be able to open adult-use shops under the new system. Canopy Growth has a deal to acquire 70 percent of Acreage Holdings, which already owns four Botanist-branded dispensaries in New York, once cannabis is federally permissible in the U.S.
“These companies that have already started to invest in the state, I think it's reasonable to assume that they can continue to play, and so I don't know that it's a leg up…but, certainly, it's better than the outcome that people had feared, which is that maybe they would be closed out,” Klein said.
One of the biggest cannabis producers in Canada, Canopy Growth cannot legally operate in the U.S. cannabis market until the drug is legal or permissible in the U.S. at the federal level. But the company and its largest shareholder, Constellation Brands, have been hungrily eyeing the massive market opportunity U.S. cannabis presents. Canopy has taken a number of legal steps toward entry, like buying up consumer packaged goods brands like BioSteel sports drinks and Storz & Bickel vape accessories, and launching CBD brands like Martha Stewart CBD and Quatreau infused beverages. They’ve also struck deals to acquire stakes in U.S. operators Acreage Holdings and TerrAscend when it becomes legal to do so. Klein said the company is also exploring other ways to enter the New York market, aside from its interest in Acreage.
“Canopy is looking at the best way to play in New York post-permissibility,” Klein said. “We already own stock production assets in New York that were built out originally for hemp, and so we're going to continue to look at how to best position ourselves to win in New York post-permissibility.”
Curaleaf CEO Joe Bayern wrote in an email that the company was “pleased” with provisions for existing operators. Curaleaf, which runs four dispensaries in New York, is one of the largest operators in the U.S. with a footprint across 23 states.
“We’re pleased the legislature has recognized the contributions of those companies who blazed the trail for medical cannabis. Allowing medical operators to ‘grandfather’ the industry will help ensure the safety and quality of products, which we hope will encourage consumers to not partake in the illicit market,” he said.
Analysts believe Curaleaf is one of the big beneficiaries, not only of New York legalization, but of other, recent legislative changes in the U.S. The company has a presence in Arizona and New Jersey, two of the five states where voters approved cannabis-related initiatives during the November election. Experts had predicted that New Jersey could set off a “domino effect” of legalization in New York and surrounding states where Curaleaf also has a robust presence. 
Analysts at BTIG wrote in a note that New York could become a top five state for Curaleaf, if it can manage to leverage the lead it has in cultivation.
"...NY is poised to be a massive wholesale opportunity for those companies that can ramp up cultivation quickly. To this point, we believe CURA is best positioned to extend its lead in this market (CURA sells into nearly all registered operators/dispensaries in NY) that will desperately need significant cultivation to meet what should be overwhelming legal wholesale demand,” the note reads.
Curaleaf, for its part, already has plans for “strategic and aggressive expansion” of existing cultivation to meet the market’s needs, Bayern wrote in an email.
Cowen also pointed out the advantages of vertical integration for Curaleaf, and added that the company’s brand strategy might pay off long-term.
“For a company that ultimately wants to operate as a CPG company, and operates in the most states among the peer group, this targeted approach to building brand equity could serve the company well over time,” Cowen analyst Vivien Azer wrote in a note.
Even with provisions that seem to favor existing operators, Bayern said the company is “confident” the bill has enough protections baked in to encourage a wide and diverse variety of businesses to get in on the industry.
“The bill has included proposals that will bring economic relief and opportunity to the communities most impacted by the war on drugs. It will also ensure community and economic investment are directed where they are needed most, especially in the wake of the pandemic,” he wrote in an email.

Newcomers Eye the Market

Existing medical operators aren’t the only companies gearing up for the launch of adult-use cannabis in New York. Cannabis companies operating outside of the state are also looking for a piece of the industry. The Parent Company, which formed via a SPAC transaction that combined California-based Caliva and Left Coast Ventures, has its sights set on New York.
“All of us have been waiting for New York for a while. I think most people probably say it's long overdue, but clearly better late than never. So I think we're all thrilled to see New York join the ranks in regards to getting the legislation passed,” The Parent Company CEO Steve Allan said.
Allan couldn’t share much about the company’s plans, as the interview took place during a quiet period for the company, but he did say The Parent Company was “very actively looking at the tri-state area.” He also said the legislation, as written, would permit healthy competition down the line for new operators in the space.
“Vertical integration gives you an advantage in a nascent marketplace. But long-term, vertical integration is not and should not be a competitive advantage, right? Because if you look at any other industries, you know, you don't have General Mills growing the wheat or the corn that goes into their product,” he said. “It really makes no sense for a particular [consumer packaged goods company] -- a consumable CPG more than anything -- to be vertically integrated.”
Although the medical providers will undoubtedly have more dispensary locations, Allan also pointed out that adult-use legalization tends to take a toll on existing medical markets. A 2019 analysis from Associated Press noted a decline in the rates of medical marijuana patients across numerous states after adult-use legalization.

East Coast Green Rush

It’s no surprise that cannabis companies are itching to get into the New York market. Adult-use cannabis sales are not expected to kick off in the Empire State for quite some time, but already experts anticipate the market could be worth billions. Stifel’s Carter projects that New York, with its population of roughly 19 million adults, could represent a $5 billion market opportunity. A more modest estimate from Marijuana Business Daily projects the market could generate around $2.3 billion in sales by its fourth year of operation. Once it gets up and running, Gov. Cuomo anticipates legal cannabis in New York could generate some $350 million in tax revenue annually and create 30,000 to 60,000 jobs.
Even amid the economic devastation of the coronavirus pandemic, however, that revenue won’t be going to pad the state’s coffers. The bill’s authors and longtime advocates of a social justice approach to cannabis legalization were committed during their negotiations with the governor to reinvesting in communities that have been disproportionately harmed by cannabis criminalization. As it stands, 40 percent of revenue -- after costs associated with running the program and collecting data and research -- will be reinvested in those communities. Operators including Columbia Care, Curaleaf, Canopy Growth and The Parent Company praised lawmakers’ efforts to create an equitable cannabis industry.
“This is one of those generational opportunities that exist. And it's not often that an industry can get created, and get created to have a more diverse supply chain from the beginning,” Allan said. “When you have that in place, I think it provides continuous opportunities.”