Florida Governor Wants To Modify Its Marijuana Market
Florida Governor Ron DeSantis' bombshell announcement to drop his predecessor’s appeal against legalizing cannabis flower for medical marijuana patients contained a largely unreported nugget that he also in favor of getting rid of vertical integration for licensed cannabis operators in the state, allowing for individually licensed cannabis businesses instead.
Governor DeSantis’ remarks about wanting to eliminate vertical integration came as a shock to most, considering Florida’s historical stance on limited cannabis licensing in the state.
"The way they did this vertical integration is not [based on] free market principles," said the Governor.
What is Vertical Integration?
Vertical integration is a common term in the cannabis industry used to describe companies that facilitate multiple points in the supply chain, such as cultivation and retail, rather than operating one specific phase, such as cultivation or retail.
Phasing out vertically integrated licenses is good for the inimitable Floridian market because it will allow for more products and more selection, plus smaller companies will be able to participate. Currently, cannabis companies may only sell the products they make. Therefore, MedMen for example, cannot sell Harvest products and vice versa.
If vertical integration is abolished, it should open the market to the point where retailers can sell practically any product choose. This is especially important for patients, because currently there are few dispensaries in the state. Therefore, if one dispensary is sold out of a patient's preferred product, that patient will likely be forced to go to a local competitor which does not necessarily carry the same products.
Cannabis industry consultant Jade Green said in an interview with Forbes, “Most cannabis states, especially those with recreational laws, are horizontally integrated, which means you must obtain a separate state license for each individual part of your business. In other words, you need one license for growing, one license for manufacturing, one license for distribution, and one license for retail. Sometimes, like in California, a business can become vertically integrated by owning and operating two or more types of individual licenses at the same time. In other cases, like in Florida, the license issued by the state itself is vertically integrated, meaning the license owner automatically has the right to operate every point in the supply chain, from seed to sale.”
Green further explains, “When Florida first legalized medical marijuana, it implemented a merit-based application system by which companies could apply for one of only five vertically integrated licenses to be awarded for the entire state. Each vertical cannabis license in Florida allows for cultivation, manufacturing, and the ability to open up to 30 dispensaries. Knowing that 150 dispensaries would likely not be enough to meet the medical marijuana demands of a state with 21 million people, Florida legislators had included laws allowing for additional vertical licenses to be awarded once the state’s number of registered cannabis patients hit a certain threshold. However, the legislators did not anticipate the enormous number of lawsuits that were filed by applicants who lost out on the first round of licenses.”
Florida License Lawsuits and Red Tape
Green knows a thing or two about Florida licenses and lawsuits – she helped write the application for one of the first five winning licenses, which was subsequently taken away by the state based on a technicality.
“When we found out we had the highest scoring application in our district, we were ecstatic – years of hard work and bootstrapping had finally paid off. Then, the state took away our license and awarded it to the second-highest scoring applicant in our district. Right away, we filed a lawsuit against the state and eventually won, overturning our loss. However, since they had already given our license to another applicant, they basically just handed us a new one. This started a trend across the state – a significant number of the original ‘losers’ started filing lawsuits, and many of them were successful at obtaining a license after all,” Green says.
In Florida’s case, the government divided the state into five districts and the highest scoring cannabis license applicant in each district won. Today, there are 14 vertically integrated licensees in Florida from the first round of applicants. However, only five of the recipients were awarded their licenses based on application score, while the remaining nine licenses were granted via litigation, not merit, after suing the state and Department of Health for a variety of reasons ranging from arbitrary scores, discrimination, or, like in Green’s case, an unsubstantiated technicality.
Lacking resources and facing outcry from Florida constituents seeking increased access to medical marijuana, the Department of Health has settled or lost nine of these lawsuits from license applicants, and a source close to the legislation says more vertical licenses will be awarded from litigation in the coming months.
Millions of Dollars at Stake
Why would a company go through so much trouble to sue the state, an expensive process that has lasted over three years for some applicants, just in the hopes of winning a marijuana license? That’s easy to answer when one looks at how much a single vertical license in Florida is potentially worth.
"The four most recent acquisitions of vertical licenses in Florida equaled a staggering combined value of $284 million. Just this month, Acreage Holdings purchased a vertical license in Florida for $67 million – $63 million of which was paid in cash, while only $4 million was paid in stock. That’s a big price tag considering the license Acreage acquired, Green Owl Pharms DBA Nature’s Way, has virtually no existing operation in the state – there are no products available to purchase from Nature’s Way, and not a single dispensary has been opened by the company," a source close to the Acreage deal explains.
Licenses are expensive in Florida not just because they are vertically integrated, but also because it’s an oligopoly. The entire state’s supply is controlled by only a few operators, giving them more influence over things like product offerings, marketing practices and, most importantly, price.
"It’s basic game theory – ‘I don’t have many competitors, so I can watch them all closely, and my business decisions both influence and are influenced by their business decisions.’ Unlike saturated states like Oregon and Colorado, which tend to have more ‘free market’ characteristics, Florida presents a very unique business opportunity to cannabis enterprises – if they can afford to operate here,” says Green.
If and when the state gets rid of vertical integration, more people will be able to get involved without having to put up the same amount of capital, which will subsequently lower the value of those limited, vertically integrated licenses.
The extreme cost to operate a cannabis business in Florida is one of the very reasons that Governor Ron DeSantis has decided to phase out vertical integration. In his speech, he highlighted that a vertical market only allows for large, wealthy, typically out-of-state corporations, robbing small businesses run by Florida residents of the opportunity to participate in the industry they voted to create.
Timetable for New Licenses
While no specific framework has been outlined for how Governor DeSantis or the regulators will change the licensing structure in Florida, sources close to the legislation say that there are talks of awarding individual cultivation licenses to local farmers and implementing a social equity program that would provide low-income individuals with priority for obtaining cannabis retail licenses.
Another issue that could be mitigated by eliminating Florida’s vertical structure is the lack of product diversity in dispensaries. Current law stipulates that a dispensary can only sell the products grown and manufactured by the owner of the dispensary license. There is no wholesale market for cannabis products in Florida, nor is it permissible for one dispensary to carry or sell products from another grower. In fact, one licensee can’t even wholesale sell its bulk harvest to another licensee – unless the purchasing grower can prove to the state that it suffered significant crop loss, like from a natural disaster.
While this may seem like it’s just an issue for the cannabis operators, it’s actually a big problem for the patients who often have only one or two dispensaries within a reasonable commute from their home.
Depending on the final regulations, which must be approved by the legislative process, it’s likely that phasing out vertical integration will force the Department of Health to allow a less restricted marketplace in regards to where products can be sold, since the manufacturers will no longer be the only retailers, and vice versa. This would allow patients to have access to a broader variety of marijuana products and brands, and would also help to lower prices of products due to increased availability.
While vertical structures tend to only favor big business, there are some benefits to vertically integrated cannabis licenses – primarily when it comes to quality assurance and regulatory oversight. When a cannabis company can only sell the products it makes, it is much easier to trace a product back to its origin in case of a recall or health hazard.
Additionally, regulators have an easier time monitoring companies that control their entire supply chain. Currently, Florida regulators only have to police 14 companies for quality, safety and compliance. The more operators an industry has, the more difficult it can be to ensure that everyone is playing by the rules, which is especially important when you are dealing with a controlled substance that is used as medicine by over 160,000 Florida residents.
Overall, it seems that abolishing vertical integration is better for the community at large.
However, this policy change will adversely affect the large cannabis corporations that have spent tens of millions of dollars to launch a business under Florida’s vertical structure.
According to a spokesperson for MedMen, the company paid $53 million for a vertical license that had no revenue and had to be built out. If there will not be anymore vertical licenses available, the perceived value of the existing verticals decreases slightly because there will be more competitors that don’t have to pay nearly as much to enter the market.
It might take several months before the new regulations are even drafted and any measures to change the market would have to first be passed by the Florida Legislature. In the meantime, it’s likely that the current operators will be busy engaging lobbyists and pulling political strings to ensure that their interests are preserved as much as possible. Regardless of the governor's position, if the Legislature is opposed to it, the regulations could remain status quo.