Continued delays threaten Mass. medical marijuana firms
Months of controversy and bureaucratic delays in the Massachusetts medical marijuana program have driven away some investors, stranding several of the companies awarded the first dispensary licenses and leaving them short on cash.
The uncertainty and mounting costs have pushed back the opening of the first dispensaries — originally expected last summer — to this summer, with some owners now saying they are unlikely to be ready until late this year.
The delay leaves thousands of patients in limbo. State figures show roughly 14,000 patients have received doctor certifications to use marijuana medicinally, and 7,100 of them have completed the state’s registration process, paying their $50 annual fee to legally shop in the dispensaries.
“It’s despicable,” said Nichole Snow, deputy director of the Massachusetts Patient Advocacy Alliance. “We need our medicine for relief from serious conditions.”
Twenty provisional dispensary licenses were initially awarded by the administration of Governor Deval Patrick in January 2014, but regulators were forced to freeze the process soon after, amid questions about applicants’ finances and misrepresentations, along with concerns about potential conflicts of interest and political influence.
Massachusetts had intrigued many potential investors with its 2012 voter-approved law that made the state among the first to adopt a medical marijuana dispensary system. But during the five months the licensing process was put on hold amid controversy last year, at least five other states adopted medical marijuana laws or regulations for dispensary systems.
“We started looking around, and other investors started looking, and they said Massachusetts is a pain. People got fed up with it, walked away, and went to friendly states, like Illinois,” said Douglas Leighton, managing director of Dutchess Capital, a Boston venture capital fund.
Leighton has personally bankrolled dispensaries in Washington state, Vermont, and one in Massachusetts, Coastal Compassion Inc. in Fairhaven, which is expected to open in late December.
In addition to the state’s contentious licensing process, its regulations require dispensary companies to operate as nonprofit organizations, further discouraging investors, Leighton said.
“If I didn’t live in the state of Massachusetts my entire life, I wouldn’t invest [in marijuana companies] here,” he said.
The dispensary licensing system crafted by the Patrick administration’s health department is distinctly different from the process the department uses to license other health facilities, such as hospitals. The system for hospitals scrutinizes a facility’s proposed health services and the need for those services in surrounding communities.
But with dispensaries, potential health services took a back seat to zoning, security, and other considerations, and companies were required to bid for a license the way vendors selling the state computers would vie for the business, known as a government procurement process.
Patrick’s successor, Governor Charlie Baker, is expected to revamp the medical marijuana program soon.
“The current administration faults the use of a procurement process, as opposed to a licensing process, faults it for the delay in getting these places open, and getting patients served, and the overall negative public perception that many folks see as an insider’s game,” said Tim Buckley, Baker’s communication director.
William Noyes Webster Foundation Inc. in Dennis is among the marijuana companies dealing with the fallout from the delays. The company received one of the 15 licenses ultimately awarded by the health department last year. Regulators revoked several other provisional licenses after more carefully vetting the applicants.
William Noyes’s business plan, similar to those of other applicants, assumed the state would award the full 35 licenses allowed by law, which called for up to five licenses per county. But William Noyes ended up with the only license in Barnstable County.
Scarcity often makes a commodity more valuable — and more attractive for investors — but for several of the marijuana companies with Massachusetts licenses, it has had unintended consequences.
William Noyes suddenly found itself unprepared to grow the amount of marijuana needed to serve many more patients. The company realized it would need a cultivation facility at least three times as large.
“All of a sudden, the cost of putting the whole thing together escalated, and when it did, our backers didn’t have the money to do the deal,” said Paul Covell, William Noyes’s chief executive.
The company is talking to potential investors, and Covell said the prospect of a 2016 state ballot initiative to legalize marijuana for recreational use has intrigued investors. Many observers expect the initiative to include a provision that will give preference to existing medicinal dispensaries to win licenses for recreational sales.
Despite its setback, William Noyes expects to open later this year.
Executives at two other dispensary companies declined to speak publicly about their financing challenges, saying they feared any publicity after last year’s tumultuous process might jeopardize their company’s license.
But a consultant who advised four successful Massachusetts applicants said that the financing problems William Noyes faced were not unusual.
“Even groups that were fully capitalized have had to raise significantly more money,” to expand cultivation centers, said Kris Krane, managing partner of 4Front Advisors, a consulting company.
Krane said cultivation centers are the most expensive part of the business because they require sophisticated lighting, heating, and air conditioning systems. The state’s licensing process under the Patrick administration awarded extra points to applicants who had secured a cultivation site when they applied. Several companies leased buildings during the application process, without having the chance to scrutinize the buildings’ infrastructure, Krane said.
Many discovered that structures were in worse shape than previously thought and faced upgrades of $1 million more than anticipated, Krane said.
“There is generally more erosion in buildings in the Northeast,” said Krane, who previously advised marijuana companies in more temperate climates.
“Some of this is new, even for industry veterans,” Krane said. “It’s been a pretty universal challenge here.”
Still, industry leaders said they believe the worst of the licensing-related problems are behind them.
“All new industries face challenges, but Commonwealth Dispensary Association members are confident that the process is moving forward in a responsible manner,” Kevin Gilnack, the trade association’s executive director, said in a statement.
“In the coming months, we expect that some dispensaries will be in a position to begin providing patients with medicine, and more will complete the licensing process,” he said.