How Virginia Can Fix Its Regulated Marijuana Market: Challenges and Solutions
Reprinted with the permission of MJ Biz: read the original publication here
Virginia’s adult-use marijuana market, approved by voters in 2021, was once full of potential.
But the program – originally intended to launch Jan. 1, 2024 – has instead been derailed by politics and is now in limbo.
As such, Virginia remains a medical-only state.
Limited-license market
The Virginia Department of Health licenses one pharmaceutical processor to cultivate and package medical marijuana for each of its five Health Service Areas (HSAs).
Each processor is permitted to open up to six dispensaries in its HSA, so vertical integration is required.
That seems a reasonable (if modest) goal; however, it hasn’t been met.
A state-funded survey recently found that, of 476 medical marijuana patients polled, only half lived in a county with a dispensary.
Despite the obvious need for more retail locations, until recently there have been just 21 active dispensaries, although state law permits 30 licensed medical marijuana retailers.
The fifth processor license was awarded just last week to Ayr Wellness, filling a longstanding hole in HSA I, which comprises almost 20% of the state’s population with more than 1.5 million residents.
While the HSA I license originally was awarded to PharmaCann Virginia LLC, it was never put to use: PharmaCann sold that license to MedMen for $10 in 2019 to settle debts from a failed merger.
Virginia regulators revoked the license from MedMen in 2020, when the company failed to open a cannabis cultivation operation, as was required.
The fact that this final license stayed inactive for so long – and that so few dispensaries are open – reflects deeper issues plaguing the market.
Cannabis market barriers
The Virginia House of Delegates’ Health, Welfare and Institutions Committee sponsored a study of the state’s medical marijuana market by Cannabis Public Policy Consulting, which provided input to the U.S. Department of Health and Human Services in its decision to recommend rescheduling cannabis to Schedule 3 of the Controlled Substances Act.
The study was released in November 2023 and revealed the following problems:
- Medical marijuana prices in Virginia are higher than in other states: A gram of flower in Virginia costs patients around $14. Meanwhile, cannabis can be purchased from neighboring Washington, D.C., for $8.73 per gram and from Maryland for $9.27 per gram, on average.
- For 66% of medical marijuana patients, the high cost of regulated cannabis was a barrier to access.
- Twelve percent of MMJ patients reported traveling to Washington, D.C., and Maryland to purchase cannabis, while 57% said they grow at home.
- Ninety percent of patients reported purchasing cannabis from sources other than the regulated market, with the largest proportion from the state’s illicit market. Medical marijuana patients surveyed said only 23.6% of the cannabis they purchased in the past month was from a licensed dispensary.
- Nearly a quarter (22%) of Virginia marijuana consumers said they didn’t need to be registered patients because they have access to cannabis elsewhere.
- Patient enrollment is only 0.5% of the total state population despite low barriers of entry into the state-regulated program.
- With only 21 dispensaries and a population of 8.7 million residents, Virginia currently has only one retailer for every 413,505 residents. This is considerably lower than in Florida, where there is one retailer per 36,890 residents, or South Dakota, which has one retailer per 11,664 residents.
The report stated that, due to “the widespread availability of cannabis from out-of-state markets, home cultivation, and illicit channels,” licensed processors and their dispensaries “have no expectation of increased profits if they expand their supply and lower prices because substitute markets have recently taken root.”
Medical marijuana licensing
The study recommended that Virginia create a series of new, standalone marijuana business licenses – including for cultivation, manufacturing and dispensing – and allow operators to hold multiple licenses across the supply chain at once, known as “permissive vertical integration.”
This pathway would create lower barriers to entry for new businesses while granting them the flexibility to scale through vertical integration, should they chose to do so.
The model also would provide existing pharmaceutical processors with an opportunity to maximize their comparative advantage: creating efficiencies by focusing on one area of the supply chain.
Removing the HSA structure would further facilitate the benefits proposed by these additions.
The study noted that pursuing this avenue would require “significant engagement from existing operators” to be successful, something that might not be easy to obtain, given that it would inject competition into what is now a limited-license market.
Market opportunity
Studies demonstrate that competitively priced, regulated cannabis can best be provided when ample supply and availability meet moderate taxation and regulation.
Recent research from Whitney Economics states: “Consumers generally want to participate in the legal market and will even pay a premium above illicit market prices, just as long as that premium is not too great.
“If the overall legal price is within 10%-15% of the illicit prices, consumer participation in the legal market will convert quickly.”
By opening production and sales to a robust, competitive market, cannabis costs should drop to a range competitive with neighboring states – and possibly competitive with the illicit market.
Currently, Virginia’s only tax on cannabis is a 5.3% sales tax.
If an excise tax were added – but total taxation was kept at 10% or lower – consumers would be more likely to shop the regulated market and potentially convert from illicit sources.
Whether this increase in supply is achieved through a revamped medical market or through regulating adult-use marijuana, Virginia’s cannabis industry should expand significantly, benefitting both consumers and state coffers.
Rachel Wright is a certified public accountant and the founder and CEO of Los Angeles-based Verdant Strategies, an accounting, financial management and strategic consulting firm. She can be reached at rwright@verdantstrategies.com.
Simon Menkes is a certified public accountant at Verdant Strategies. He can be reached at smenkes@verdantstrategies.com.
Reprinted with the permission of MJ Biz: read the original publication here
