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This is what legalized pot looks like in New York

Entrepreneurs want to get a piece of the state's budding cannibusiness. But bringing the drug to market, it turns out, is a high-risk investment.


The green leafy bud must be turned into an amber colored extract.
Photo: Buck Ennis

By Matthew Flamm
April 19, 2015 12:01 a.m.

When Jason Pinsky talks about cannabis extracts—the concentrates made from marijuana that can pack a joint's worth of weed into a dab of oil or wax—the Brooklyn businessman sounds like a fragrance specialist, not a stoner. He mentions terpenes and flavonoids, color and texture.

That shouldn't come as a surprise. Mr. Pinsky, a dot-com-era chief technology officer and former tech consultant to the band Phish, is laying the groundwork for a cannabis extracts-related business called Cannastract.

He also had the honor last year of judging concentrates at all six of the Cannabis Cup competitions run by High Times magazine, a feat requiring stamina in addition to a keen nose. Amsterdam's winner, he noted, had a "unique flavor profile." It smelled like "cotton candy," tasted like "pink lemonade" and packed a high "strong enough to make an impression" after a day of sampling entries.

But Mr. Pinsky, 41, really becomes passionate when he talks about the medical benefits of concentrates he has had access to since Colorado legalized recreational cannabis in January 2014. With their help, he weaned himself off the massive doses of prescription opiates he had been taking since a back operation in 2000 left him with two vertebrae pressing against each other.

Now Mr. Pinsky is joining a growing group of New York entrepreneurs who are racing to start cannabis businesses as legalization continues to gain steam. And though he is starting in Denver, his plans provide a glimpse into how enterprises could bring their products to market in New York, which in 2014 became the 23rd state to legalize medical marijuana and where dispensaries should be open by January.

"Even though we're looking at cultivation and processing opportunities in Colorado, that's just because it's where the laws make it an appropriate place to start," Mr. Pinsky said. "The plan is to take our methodology and research, and deliver it across the country."

Restrictive state law

Significantly, Mr. Pinsky never considered applying for a medical marijuana license in his own state, though he was an active enough supporter of New York's legislation to be on hand for its signing. He believes the regulations are so restrictive that any operation is sure to lose money for the first few years at least.

Overall, however, the opportunities in the legal cannabis industry are big enough to incite talk of a "green rush." In addition to states that have legalized medical marijuana, four, plus the District of Columbia, have also legalized its recreational use. Fourteen more states are expected to join them by 2020, according to the ArcView Group, an Oakland, Calif.-based investment firm.

Combined recreational and medical sales spiked 74% in 2014, to $2.7 billion, and are forecast to hit $3.5 billion this year and $10.8 billion by 2019, according to ArcView. And that's not counting ancillary businesses, which range from packaging to hospitality.

"The world has never seen a business this big that was black-market become white-market," said Leslie Bocskor, managing partner of Las Vegas-based cannabis consulting firm Electrum Partners. He expects to open a Manhattan office for the Electrum Fund, a hedge fund focused on the legal-cannabis industry, by June.

Mr. Pinsky, who is in talks with investors, wants to develop a grow house in Denver, where genetically selected harvests will be processed into high-quality extracts. Cannastract's chief science officer, Mark Scialdone, an organic chemist and veteran of DuPont, is working on new ways to refine concentrates, identify compounds and create patented variations that target medical conditions.

It's an approach that's well-suited to New York, where licensees, in addition to growing the plants, will have to master the chemical processes for turning buds into oils. Under the current law, which is considered possibly the most restrictive in the country, cannabis sales will be limited to extracts and pills.

Cannastract could end up with an exclusive partnership or possibly a consulting arrangement with a New York operation, according to Mr. Pinsky, who sees intellectual property as the future of the business, especially if mainstream pharmaceutical companies eventually join the rush. "We are in talks with potential licensees," he said.

The process for choosing those licensees begins once applications go out from the Department of Health, which is expected to happen any day. Five licenses for indoor grow houses will be granted by July, and each licensee will open four dispensaries.

Critics of the law say 20 dispensaries can't possibly serve enough patients in a state with 20 million people. The insistence on extracts to the exclusion of what is commonly called flower is also unpopular in some quarters, since patients who prefer smoking weed to inhaling vapors might stay loyal to the black market.

The biggest complaint is the limited number of qualifying conditions. New York doesn't include post-traumatic stress disorder, for instance, and, most critically, sets a high bar when it comes to pain. That could shrink the pool of patients to where the financials don't add up for some industry players.

Capital costs

"Do we sit on the sidelines and wait, or go for first-mover advantage and bite the bullet until the program expands?" asked Derek Peterson, chief executive of Terra Tech, an indoor agriculture firm involved in Nevada's medical marijuana rollout that has been scouting potential grow sites in New York. "That's the question for a lot of us, because [New York's law] is not an entrepreneurial-friendly piece of legislation."

An extraction facility is another headache, adding upward of $1 million to capital costs, as well as the challenge of staffing. "It's like building out a Breaking Bad lab," Mr. Peterson said. "There are people with experience nationwide with cultivation, but not with supercritical CO2 extraction at a commercial level."

The law's supporters acknowledge that the regulations are restrictive, but say there are provisions for adding qualifying conditions over time. And if the program is successful, demand could be so great that "the commissioner of health will expand the number of licenses sooner rather than later," said Diane Savino, the Democratic state senator who sponsored the legislation.

She acknowledged that "there's a lot of risk" for entrepreneurs. But, she said, "there's a unique opportunity, because the state is establishing a program that is going to be the leader in the country."

That sounds grandiose, but some in the cannabis industry agree with her. Josh Stanley, a medical marijuana pioneer credited with opening the first dispensary in Denver, recently moved his company, Citiva Medical, to New York in hopes of obtaining a license.

He pointed out that proper dosing can only be done with extracts, and argues that the green rush spurred by recreational weed in Colorado has made it difficult to focus on its medical potential.

"New York's law is without a doubt the most narrow and restrictive, but it's zeroing in on the science," Mr. Stanley said.

He added that he is building a team that will help make New York an epicenter of a "new biotech revolution," with the development of "standardized doses of varying ratios" of cannabis' active compounds.

"If you want to get a glass of wine, go to Napa Valley," Mr. Stanley summed up his view of how regional differences are shaking out. "If you want to smoke a joint, go to Colorado. If you want to get healthy, come to New York."

http://www.crainsnewyork.com/article/20150419/HEALTH_CARE/150419852?template