A Pennsylvania legal settlement that forced an Arizona-based medical marijuana provider's subsidiaries to surrender two dispensary licenses in August was portrayed in some circles as a victory strike against "Big Marijuana" — the fast-growing companies that are dominating the competition across the nation.
But state lawmakers — and the pro-marijuana crowd — shouldn't be surprised to see a wave of mega-companies rising up from the industry, and are naive to think they can keep that from happening in Pennsylvania, according to Jonathan Caulkins, a Carnegie Mellon operations research professor and veteran drug policy analyst who has spent decades writing about the topic.
"What's happening right now was completely predictable," said Caulkins, a former co-director of the nonprofit think tank RAND Corp.'s Drug Policy Research Center.
Marijuana production methods are just like any other technological innovation, with companies that can afford massive investments generating the product for much less than smaller competitors, he said.
"When something new comes along, you're going to see a whole bunch of entrants — people looking to make money," Caulkins said. "Many of them will struggle and a few of them will do very well."
Once that happens, the ones that thrive either merge with other strong companies or buy up those that aren't, he added.
"Governments can try to get creative and write a way around it — but there's always a loophole," Caulkins said. "Successful companies are going to find a way to grow so they can improve their economies of scale — and make their production more efficient."
Big business
That's been a frequent pattern across the nation — and in Canada — over the past year, as some of the marijuana industry's largest players have been spending tens and sometimes hundreds of millions to acquire smaller competitors.
These days, marijuana has gone from back-alley deals to high-profile transactions — often involving two publicly traded companies that trumpet the news in press releases to the masses.
Among them:
-- Jushi Holdings announced a deal in June to acquire Franklin Biosciences, which has licenses to operate as many as 12 Beyond/Hello dispensaries across Pennsylvania, including in Johnstown. Through the $63 million deal, Franklin Biosciences will continue to operate the shops as a wholly-owned subsidiary, company officials said.
-- Multi-state operator MedMen acquired PharmaCann last fall in a $682 million all-stock move. The company it acquired has licenses to open dispensaries in Shamokin and Chester County.
-- GTI Pennsylvania, owned by Green Thumb Industries of Chicago, entered into a "management service agreement" with Pennsylvania's KW Ventures Holdings. KW Ventures operates Firefly dispensaries in the central part of the state. GTI paid KW Ventures an undisclosed amount of cash to run the Firefly retail stores in exchange for nearly all of Firefly's revenues. GTI already held a grow license — the Montour plant was part of the first phase of permits and remains the only grower in the Valley — and dispensaries in Pennsylvania.
-- Harvest Health and Recreation announced the $800 million all-stock purchase of Verano Holdings in March. That was one of several deals the company secured over the past year, including a management services agreement that resulted in a Department of Health review and eventual settlement. The company relinquished its permits for dispensaries in Shamokin and New Castle as part of the deal.
Pennsylvania's move
Pennsylvania adopted statutes regarding its medical marijuana program in early 2018.
The Department of Health awarded permits for dispensaries and growing/processing centers through two phases over the 12 months that followed, awarding several dispensary permits to companies with the same ownership, in numerous cases while requiring them to act as separate entities.
With each dispensary license a company holds, the organization is permitted to have as many as three locations within one of six regions: Northeast, Northcentral, Northwest, Southeast, Southcentral and Southwest. And the state set a cap of five licenses, or 15 total dispensaries.
Department of Health officials have sought to enforce that limit — at least for now.
After Arizona-based Harvest Health and Recreation, entered into an agreement to acquire fellow license-holder CannaPharmacy and secured operating agreements to manage its dispensaries, Harvest announced that it planned to have 21 retail stores, sparking a rebuttal from Department of Health.
The state soon discovered that Harvest also used a company to serve as a general contractor for its dispensary projects that wasn't listed in its applications for licenses. Harvest originally listed a minority-owned entity from Pennsylvania.
A "no-fault" settlement was reached in August, with Harvest agreeing to relinquish two of its dispensary licenses — and the rights to open six dispensaries.
Harvest must also establish a two-year fund in the amount of $400,000 to provide medical marijuana to income-eligible recipients at discounted rates, the settlement agreement shows. In return, the state pledged to reimburse Harvest the $30,000 the company paid to acquire the licenses.
"Our medical marijuana program has been successful in its focus to provide evidence-based, quality options for patients suffering from serious medical conditions," Secretary of Health Rachel Levine said in announcing the Harvest settlement.
"In order to ensure that this program is successful, we have statutes and regulations in place for those companies looking to hold permits. Companies interested in being part of this program must be aware of the law and abide by it."
But the agreement shows Harvest must only refrain from entering into new management agreements for the next two years. Such deals typically allow larger companies to front large sums of money to license holders in exchange for revenue and management decision rights for a set number of years.
"The medical marijuana program has permitted the entities that received the permits. That is who we expect to carry out the permit and operate the location," Department of Health spokesman Nate Wardle said, adding that the department does not regulate ownership transactions.
Harvest Health spokesman Alex Howe said the company "strongly believes" that state regulatory frameworks are essential to the industry's success — but noted that regulations are not consistent across the country.
"We know these frameworks are new in our industry — and because of this we will continue to encounter challenges, but are committed to working closely with all state regulators," Howe said in a statement after the settlement was announced.
Regulations and changes
State Sen. Patrick Stefano, a Fayette County Republican, said Pennsylvania must not waver from its regulations.
The age of "Big Pharma" painfully illustrated what happens when large corporations gain massive control of the drug industry, Stefano said, pointing to the wave of opioids that slammed Pennsylvania and most of the nation.
"The next thing you know, there's pills designed for terminally ill patients being used for toothaches," Stefano said.
He said the rules written into Pennsylvania's medical marijuana program — both license and patient purchase limits — are in place to prevent that from happening again.
"There's big money behind medical marijuana right now," Stefano said. "That's why it's so important that we have a program that regulates it here in Pennsylvania."
Ohio and Maryland have also been striving to control ownership within their marijuana programs in recent months, with lawmakers calling for locally-established dispensaries to be given preference over national chains.
Groups such as the National Organization for the Reform of Marijuana Laws have pushed to allow for even more local control within state marijuana guidelines, including the right for people to grow small batches of cannabis at home.
Awaiting federal law
Caulkins acknowledged that states should regulate their programs. But he cautioned that steps taken simply to keep the largest companies from doing business within their borders will likely be a mistake in the long run.
Such restrictions would likely hold Pennsylvania's industry back compared to neighboring ones — a move that could have a tremendous impact on the day the federal government changes its marijuana laws, he said.
Large, strong companies will be poised to grow their footprints across the country — both in territories ripe for business that didn't have medical or recreational marijuana programs in addition to those that already do.
At some point, limiting the influence of big medical marijuana companies would be like trying to control where automobile-makers could sell vehicles, Caulkins said.
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