New York Moves Closer to Legalizing Adult-Use, Game Changer for Cannabis Industry

Robin Lefferts July 31st, 2018 Exclusive, News, Top Story

New York is about to be surrounded by legal weed. Medical marijuana has been legal in the Northeast and Canada for some time now, but Massachusetts and Vermont have now legalized adult use, and momentum is building in New Jersey as Gov. Phil Murphy makes good on a top campaign promise. Canada kicks off its adult-use program in October.

“For all intents and purposes it is going to be here anyway,” New York Gov. Andrew Cuomo admitted as much to the New York Post in April.

And now, the New York Department of Health, which oversees the state’s medical marijuana program, has essentially endorsed adult-use legalization in a recent 75-page report commissioned by Cuomo himself.

“The positive effects of a regulated marijuana market in NYS outweigh the potential negative impacts,” the report concludes. “It has become less a question of whether to legalize but how to do so responsibly.”

Legalization is also a hot topic of discussion as the state moves to the November elections, and there is broad support for legalized adult-use among the top candidates. Pot could soon be legal in the Big Apple and that would be a game-changer.

The New York Market

The Department of Health’s report estimates there are about 1.3 million marijuana users in the state and that adult-use could reach US$3.5 billion in annual sales, about 16 times greater than today’s medical marijuana market and on par with California’s current retail sales estimates. California is the world’s largest legal cannabis market.

Aside from sheer market size, New York would further legitimize this fast-evolving industry. Adult-use is already legal on the entire West Coast, further legalization on the Northeast of the country, a center of politics, commerce and culture, would give the industry another big push toward the mainstream, bringing more customers and investment capital.

There are only 10 cannabis license holders in the state’s current medical cannabis program. Each licensee is allowed to operate a cultivation and manufacturing facility and four stores to sell its products. When the state legalizes adult-use, these licensees would meaningfully benefit from existing infrastructure and first mover advantage. They are also likely to be some of the first to receive adult-use licenses given they have already been operating under the scrutiny of the state for years.

New York state’s medical marijuana program has been growing steadily and now has about 60,000 active patients. The state has expanded access by gradually increasing the list of qualifying medical conditions and variety of products allowed. Most recently, the state added opioid use as a qualifying condition, offering cannabis as a substitute. Arcview Market Research forecasts medical sales in the state will total US$219 million this year.

MedMen’s Position

MedMen 5th Avenue

Among the 10 medical marijuana license holders in the state is MedMen Enterprises Inc. (CSE: MMEN) (OTCQB: MMNFF) with a flagship store on Manhattan’s 5th Avenue. In sharp contrast to the other license holders in the state whose message and brands are very medical in nature, MedMen has been outwardly courting general cannabis consumers. The brand is already synonymous with cannabis retail with its shops being called the “Apple Store of Weed.” MedMen’s consumer brand appeals to medical marijuana patients as well. Its Manhattan store, one of only three allowed in the borough, is the company’s best performing in New York state.

While the New York Department of Health report recommended that the state limit the number of licenses initially available, even if the number of licenses doubles to 20 and the number of stores each is allowed to open doubles to eight, there would be 160 stores in the state. At US$3.5 billion in annual sales, this would represent an average of US$22 million in revenue per store – consistent with the run rate of MedMen’s more mature stores in California. MedMen should outperform in New York, given the brand equity it has already built with cannabis consumers. Even at average market share and applying a 5x multiple to its New York operations alone, it would result in an enterprise value of US$775 million. That would account for about half of MedMen’s current enterprise value, not including the 41 stores outside New York state the company plans on opening by 2020. The company already has eight stores in California and two in Nevada and has a license to open 25 stores in Florida.

The foresight MedMen had to acquire one of only five medical marijuana licenses in New York in early 2017 seems poised to pay off handsomely. The report from the Department of Health cites other positive benefits of legalization including improved quality control and consumer protection, potentially significant tax revenue and job creation, and the potential to reduce opioid prescriptions and deaths, as well as addressing social justice concerns.

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