By Alexa Peters
While many cannabis consumers are in it for the buzz, others are using the plant to combat medical issues—and for good reason.
According to current research, medical cannabis has shown real potential for treating issues like chronic pain from arthritis, cancer, epilepsy, anorexia, irritable bowel syndrome, and as a result, medical cannabis sales in the U.S. valued $5.9 billion in 2019 alone.
And overall, U.S. retail cannabis sales are projected to rise as high as $30 billion by 2023, according to exclusive projections from the 2019 edition of the Marijuana Business Factbook.
Hence, starting a medical cannabis business not only offers a way to help people, but it is also a foot into a market set to explode once federal adult-use policy passes.
Still, starting a medical cannabis company is about much more than opportune timing.
Whether you want to grow cannabis for specific conditions, process and formulate a therapeutic cannabis product, or connect patients with illnesses to the right cannabis treatment for them, or do all three as a vertically-integrated cannabis monolith—starting a successful medical cannabis company requires an understanding of the medical cannabis market, state and federal cannabis compliance, and the money involved to get off the ground.
To start, let’s dive into cannabis retail, and then I’ll explain the differences for processing facilities and a grow-ops.
Starting a Medical Marijuana Dispensary
There are a few things you need to grok before starting a medical marijuana dispensary. Here’s what we’ll cover:
- Understanding medical cannabis and the market
- Understanding compliance
- Understanding your finances
1. Understand medical cannabis and the market
Every medical cannabis dispensary should understand the product they will be selling and who their target market is.
Medical cannabis plants or products are designed to help treat a medical issue, not necessarily to just induce a strong “high.” Hence, while adult-use cannabis is often grown, processed and marketed with psychoactive THC content in mind, medical cannabis is about attention to levels of therapeutic cannabinoids (like CBD, known for its calming effect), beneficial terpenes (like myrcene, an anti-inflammatory), and getting the right product into the patient’s hands.
Know Your Medical Marijuana Business’s Target Customers
Additionally, the consumer for medical cannabis is different than for recreational, and their needs are specific. Medical cannabis patients are usually older than recreational consumers, and more often suffering from debilitating conditions.
According to statistics from the Colorado Department of Health and Environment, 35.18% of medical cannabis users in the state registry are 51 years of age or older, only 26.02% of medical cannabis users were aged 30 or younger. Severe pain was the reason many were seeking medical cards in the state, with 93.23% of patients on the registry reporting the condition.
This is opposite of recreational cannabis consumption. A 2016 survey that focused on all types recreational use found that young adults “aged 18 to 25 are three times more likely to be current users compared to older adults.”
Think about the Customer Experience
In the interest of better-serving medical patients, Greenhouse Wellness, a Maryland-based medical dispensary founded by Gina Dubbé and Leslie Apgar, M.D., chose to model the dispensary like a medical residency program in a hospital, all the way to dispensary décor—sleek, clean, and white—as opposed to the casual look and structure of most recreational dispensaries.
“We approached [our medical dispensary] with a medical director on site—which is me—and turned it into a residency program so that all the wellness consultants behind the bar are chief residents,” said Apgar, a licensed OBGYN.
“They were trained from a very medical standpoint—forced to read textbooks, articles. They’re quizzed all the time. They are learning from their colleagues from a very medical approach about how to talk to patients and how to gently ask questions about their medical background—it’s just a completely different experience then a recreational facility.”
It’s having a legitimizing effect.
As Apgar, noted, the medical community has begun accepting Greenhouse Wellness and referring patients and family members to them because of their very educational and medical approach, which specifically serves a subset of cannabis consumers who are often overlooked or underserved at adult-use facilities.
“You don’t go to the pharmacy and just kind of wing it with the pharmacist when you get there. That’s what [the Maryland cannabis program] is asking patients to do,” said Apgar.
“They’re asking patients to go to a dispensary and wing it with a budtender. It’s absurd. Our patient demographic is much, much older, [and] a lot of our patients have either never tried cannabis or certainly haven’t tried it since the ‘60s and ‘70s. This is not the cannabis of their youth.”
2. Understand compliance in the medical marijuana industry
Another key part of running a successful medical cannabis dispensary is understanding both federal and state compliance because it will affect practically everything about your business—from how you obtain the business license you need to open your doors to how you protect your profits.
But, prepare yourself: Dubbé and Apgar say compliance continues to be the hardest thing they’ve ever done.
“Compliance changes all the time and they don’t tell us it changed. It’s cumbersome and some of it doesn’t make a lot of sense,” said Apgar.
Firstly, anyone who wants to open a dispensary—recreational or medical—is required to apply for the appropriate business license in their state.
To start a medical dispensary in Maryland, the business-owner must submit an application fee with an application that enumerates legal names, address of the dispensary, operation procedures—which includes storage and security—as well as a “plan” for how the business will continue to abide by Maryland’s medical marijuana regulations.
As well, according to Marijuana Business Magazine:
“Business owners make the decision to vertically integrate early on, and in some markets, the state chooses for you. In Washington state’s recreational market, vertical integration is prohibited, and in New Mexico’s medical marijuana market, it’s required. Other states, such as Colorado and Oregon, allow vertical integration but don’t mandate it.”
In other words, your state laws may dictate how your business is structured—as do the tax laws and license types available—and that creates “a different risk-reward for being vertically integrated versus not,” as Troy Dayton, CEO of The Arcview Group in San Francisco, told Marijuana Business Magazine.
Hence, the process of figuring out what they wanted their company to look like, writing the application, and getting it approved took Dubbé and Apgar over a year.
“I thought it would be 20 hours of work, it was more like 120 hours of work. And 600 pages later we submitted our proposal and a year later got the word that we had, out of 1000 applicants, won,” said Dubbé.
And, once a dispensary opens, there are more imperatives to follow.
Most states have policies for both recreational and medical dispensaries, that include restrictions like how much cannabis can be sold in one transaction, age limits for who can buy cannabis, and banning consumption of cannabis on the dispensary premises and within a certain distance of schools. For a full list of state regulatory agencies and their policies, visit here.
There are some additional state regulations specific to the treatment of medical marijuana patients in a retail facility.
Currently, 21 states are medical-only, and in 20 of these states only those patients with conditions deemed “qualifying” can purchase cannabis with a state-issues medical marijuana card. And, you guessed it, these qualifying conditions vary from state to state.
For instance, according to Maryland state law, the only qualifying conditions are: “cachexia, anorexia, wasting syndrome, severe or chronic pain, severe nausea, seizures, severe or persistent muscle spasms, glaucoma, post-traumatic stress disorder (PTSD), or another chronic medical condition which is severe and for which other treatments have been ineffective.”
Meanwhile, Florida has more than 50 qualifying conditions. (To fully understand the laws in your state for medical cannabis patients and businesses, refer to this resource from the National Conference of State Legislators.)
And, then: there are a couple of federal compliance hiccups that may get in a business-owners way:
- Real Estate
- Banking
Real Estate is an Issue
Firstly, it will likely be hard to find a space to rent for your business because cannabis is still a schedule 1 illegal drug according to the federal government, and most big retail buildings are somehow tied to public money.
“Truthfully, [finding] real estate, is a nightmare. No real estate investment trust or large buildings will take you because they are publicly traded. Any building that has a mortgage on it the bank won’t allow a dispensary to be in there,” said Dubbé
For six months, the pair from Greenhouse Wellness looked for a space to rent but could find nothing. Luckily, an open-minded colleague with a privately-owned wellness building offered them a space, but not all cannabis businesses are so lucky.
Banking is Tough, Too
Additionally, because cannabis is still a schedule I drug under federal law, cannabis companies cannot bank with the majority of FDIC-approved banking institutions.
“It’s harder to hell to process our payments, nothing can cross the wires, we have to have Garda pick up bags,” said Dubbé.
That said, some banks that do not cross state lines may be more progressive about working with cannabis companies, and Apgar and Dubbé were able to secure one of these rarities.
“There are a couple in Maryland that have told the federal reserve what they’re doing and are working with us,” said Dubbé. “But again, we don’t get interest on our [cannabis] money in the bank. The bank has to be very careful not to violate the FDIC rules but it’s at great cost to us.”
3. Know your financials
On that note, a new business needs capital, and none of it can come from a loan from a federally-insured bank. That means the capital—a lot of capital—either has to come from your own savings, or from private investors.
“No cash equals death in running a business,” said Dubbé, a serial entrepreneur who typically estimates how much she will need and then adds 50% more. “[And] you can’t finance anything [in cannabis]. Everything is cash.”
Andrew Reich, the Vice President and General Manager of Operations at iAnthus Capital Management, a major cannabis private equity firm, said:
“The retail side is easily a million dollars that you need upfront to just get it started, and then you’re going to have burn rate 3/4 in your first couple years to stay afloat, and you need to buy all the inventory to start out. So, I’d say it’s about 2 million-dollar investment to expect.”
Whether or not a medical dispensary makes that back depends on who you ask.
While some business-owners have been discouraged from getting into medical cannabis because of lower profit margins, Greenhouse Wellness is doing quite well, and some Wall Street analysts think that medical cannabis will be the “smarter play” for investors.
Even then, it is exceptionally rare for a new business to make a profit within the first 2 years (hence the need for burn rate, or the amount of money your company is spending or losing per month) and sales data shows that the recreational cannabis is outpacing medical.
According to The Motley Fool:
“Arcview and BDS Analytics also offer year-by-year breakdowns of global medical and recreational sales. After adult-use revenue hit $6.1 billion in 2018, to go along with $4.8 billion in medical marijuana sales, the duo will be looking for recreational revenue to expand to $26.7 billion by 2024, with an accompanying $13.9 billion in medical weed sales. Over this six-year period, recreational pot sales growth will handily outpace medical weed growth, since medical patients in recreationally legal countries or states will simply bypass a costly doctor’s visit to purchase legal cannabis.”
What’s more, it’s customary for medical cannabis dispensaries offer medical cannabis at lower costs to patients, and some states even offer tax breaks for medical cannabis, largely because cannabis is their medicine and cannot be covered by federally-regulated medical insurance.
“Imagine your medicine was also highly taxed and thus very expensive since it also doubled as a recreational joy for many people—that would be the reality of patients if they only had access to recreational dispensaries.”
Though this affords medical patients have more access to care, this can also impact your profit margins, especially if you’re in a state with recreational retail competition.
What about Medical Cannabis Producers and Processors?
There are multiple ways to enter the cannabis industry.
Aside from starting a dispensary or retail brand, there are producers who cultivate the plant and processors who turn the raw plant into a cannabis product.
For these business types, much of what has already been discussed for medical cannabis retail still applies, save a few key differences.
Starting a medical grow-op
To start, there are many state compliance rules you need to familiarize yourself with and stick to, and they can vary from the rules for dispensaries. (For instance, have a look at Oklahoma’s Commercial License Application Checklist.)
As well, producers and processors are not customer-facing like a dispensary, unless the facility is part of a vertically-integrated company that controls every step of the supply chain (these sorts of companies are common in Colorado, for instance.)
Hence, though your product is still medical cannabis, your customer will be a brand or dispensary, and your success will be reliant on the success of this separate entity. Hence, for growers, the retail relationships you cultivate are as important as the quality of the plant you grow.
Then, you can get to the nitty gritty—resources and agricultural know-how.
Dean Taylor, owner of Laughing Gas Farms, LLC, began his medical grow-op in Oklahoma with his wife right after the state legalized medical cannabis in June of 2018. It had been a dream of theirs for a while, and after receiving money from a family death and a lawsuit, they moved forward. As Taylor puts it:
“With what we all put together, my wife and I, we’ve invested $30,000 in the company and that’s nowhere near what we need. It is [expensive]. When people ask me what you need to do I say, ‘How much money do you got? You’re gonna need more.’”
Reich, too, says a cannabis farm is the most expensive start-up on the supply chain by far:
“Probably need 3 years burn rate, and the facility is going to cost you minimum 6 or 7 billion to build out. It doesn’t even matter if you find an existing greenhouse—the infrastructure that’s required and the state regulations for product quality control, it’s inevitably expensive.”
Even if you have the funds, growing cannabis takes time to learn. No matter if you’re running an indoor or outdoor facility—growing effective medical cannabis requires a solid understanding of plant biology. The quality of your yields will be affected by countless variables like light, temperature, pests, that need to be controlled by the grower.
Plus, while much adult-use cannabis is often grown with psychoactive THC content in mind, medical cannabis is cultivated with attention to levels of therapeutic cannabinoids and terpenes. This process is highly nuanced and requires a solid understanding of plant genetics and “managing your variables,” as Taylor said.
Hence, though many new growers find eventual success, it’s usually veterans in agriculture that do well right from the beginning. Taylor, for instance, grew up on a tobacco farm and has a degree in hazardous waste management and environmental reconstruction.
But he is optimistic that anyone can get into it if they do their research, in fact, he has successfully consulted with patients on their own grows.
“Research your nutrients and what they’ll be able to do for you. Overall, look at the plant science and all the equipment associated. Managing the variables is the hardest part. Learn to manage those variables, and you’ll learn to be a good grower,” said Taylor.
Starting a processing facility
Another way to get into cannabis is through starting a processing facility where raw cannabis is transformed into oils, topicals, edibles, and other products, and then packaged for sale.
According to Reich, who’s helped start a few processing facilities from the ground up, processing is, money-wise, a “sweet spot.”
“The equipment that you need to do the basic set-up run you about a quarter of a million dollars, and you’ll want a burn rate, so you’re probably at about three-quarters of a million in.”
That said, processing is also specialized. You will need scientists at the top of their game and like with cultivating, time to get the product just right. According to Reich:
“Quality is such a big fact[or]—it’s a combination of art and science. You need someone who’s talented and has years of experience processing. It’s not something you could just learn in 6 months.”
For instance, KININ eco is a personal aromatherapy pen that uses various blends of essential oil pods with CBD. They spend months painstakingly toying with the chemistry of their products for quality of effect, safety, taste, and design, and then they have them third-party tested to doubly verify each blend meets their standards.
Here’s how Matt Harrigan, founder of KININ, explains the process:
“We start, for one blend, there are 200 to 300 possible options. And then, there are ten that we think actually will be consumable in a way that’s meaningful to a human, and then, out of those, there are maybe 5 we consider semi-final candidates, and by the time we get to the bottom there’s like 2 options. That process—for one blend—takes months.”
Once you’ve got your product where you want it, processing also requires fluency in manufacturing-specific compliance laws, like state packaging requirements.
For instance, on all marijuana products sold in Alaska, the state requires opaque, resealable, and child-proof packaging as well as a labeling that contains several statements, including ‘Marijuana has intoxicating effects and may be habit forming and addictive.’ (For a state-by-state guide to packaging compliance, see here.)
Meeting these requirements can be expensive and should be included in your budget.
As Karli Warner, owner of cannabis brand Garden Society, told Sonoma West Times, “What’s on the market [for child-resistant packaging] is either inexpensive and terrible for the environment or expensive and working on not being so terrible.”
Conclusion
In the end, retail, cultivating, and processing are all good ways to get into the medical cannabis industry, and all of them offer a lot of reward for the entrepreneur—as long as they understand the nature of the medical cannabis market, compliance, and the financials.
For Dubbé and Apgar, their business has become about patients like Adam Kern, a 23-year-old patient with Muscular Dystrophy who they helped get off opioids and “get his life back,” said Dubbé.
Taylor, of Laughing Gas Farms, expressed something similar. “It’s no longer about us as a company but the people we’re helping in the community,” he said.
And, despite how difficult this industry can be—especially with the convoluted laws and persisting stigma around cannabis—all of these business-owners agreed on one thing. The most important step to starting a medical cannabis business is just to start.
As Apgar said, “Just do it. Don’t ask for permission.”