How Will NY's Cannabis Rules Impact MSO Market Share In The State? Analyst Shares Industry Update

On Monday, New York’s Cannabis Control Board (CCB) awarded 28 conditional cultivator licenses. More importantly, the Board announced the winners of the first retail licenses, social equity applicants and non-profit entities involved in social justice efforts.

While social equity applicants welcomed the new permits, analyst Pablo Zuanic from Cantor Fitzgerald believes NY state cannabis regulations “may not represent a significant upside for MSOs once recreational cannabis sales begin.”

Although the potential consequences of the NY cannabis regulation model is still unpredictable, Zuanic assumes an MSO could still potentially scale up its own brands if using third-party processors and cultivators.

However, the resulting economics would be different for MSOs if full, unrestricted, vertical integration had been allowed.

“The rules make it difficult for medical incumbents (mostly owned by the MSOs) to build sizeable market share: the cultivation cap for medical incumbents was set at only 100K sq ft; they will not be allowed to expand production at present; they cannot process more than 55,000 lbs of biomass; [and] medical incumbents can only begin retailing recreational three years after actual recreational sales begin,” Zuanic said in an industry update on Monday. “The 282 pages of rules do not mention the 'right to play' fee of $20Mn that the MSOs could have paid to be allowed a higher cultivation cap and more recreational stores.”

He noted that in this context, supply, quality and accessibility issues may hamper the start-up phase of the state’s recreational program. In short, when and how many retail stores will open during 2023?

Small Print

“The 10 medical licenses in NY (8 in the hands of publicly listed MSOs, and one now owned by publicly listed RIV Capital) are held by Acreage Holdings ACRHF, Columbia Care CCHWF (selling parts to an entity linked to Sean Combs), Cresco CRLBF, Curaleaf CURLF, Etain Health (in the process of being acquired by RIV Capital), Green Thumb GTBIF, iAnthus ITHUF, MedMen MMNNF, private MSO Pharmacann and Vireo Health GDNSF,” Zuanic continued.

Cantor’s analyst highlighted that the initial social equity retail licensees will have a 3-year window before medical incumbents (ROs, in state parlance) can begin sales.

Although ROs will be allowed to add four additional medical stores (to their existing four) and co-locate recreational services in three of those eight stores, they will not be able to offer recreational retail services until three years after the first sale of recreational sales in the state.

In terms of geographic distribution, licenses will be capped once recreational sales begin.

When ROs begin recreational retail services, they will need to allocate 40% of the space to non-RO suppliers (meaning new cultivation and processing licensees). Of the three collocated stores, at least one store will need to be outside the counties of New York, Kings, Bronx, Queens, Richmond, Nassau, Suffolk, and Westchester, and the three collocated stores will not be allowed to be in the same county.

ROs will not be allowed to have more than 100k sq ft of the canopy “unless otherwise authorized by the Board in writing”, which accounts for roughly, 100k sq ft of canopy that can result in 60,000 lbs of biomass per year, and if the RO has purchased any cannabis from another licensee in that calendar year, will not be authorized to process more than 55,000 lbs of biomass.

Moreover, “ROs will not be allowed to begin new construction or major renovation on any indoor cultivation area or facility “unless authorized by the Board in writing” — this would mean Cresco and Green Thumb’s plans to start building indoor facilities will need to be halted,” added Zuanic.

Will Recreational Stores Open Before EOY?

Many cannabis enthusiasts and patients wonder if they will be able to purchase and share legal cannabis with their friends and families these holidays.

In total, 36 Conditional Adult-Use Retail Dispensary (CAURD) licenses will be issued. These 36 stores (of 900 applications received) will be subsidized by the state.

A NY state government fund will arrange and pay for the construction of these stores that will be located in geographic regions designated by the state. However, due to a recent court ruling, the board will not be issuing licenses for the five geographic regions of Brooklyn, Central New York, the Finger Lakes, mid-Hudson, or Western New York.

But, will the stores be open by then?

Those granted a CAURD license will not be allowed to begin operations “until the completion of a secondary supplemental application to the satisfaction of the Office, including completing a notification to the appropriate municipality where the conditional adult-use retail dispensary will be located. In this sense, we doubt any of these 36 stores will open before year-end,” Zuanic concluded.

Photo By Girasol Tarsio Arte Visual On Pixabay.