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CANNABIS ANALYSTS

The authority when it comes to analyzing the cannabis industry

Revenue – Cost Analysis Part I

We have to thank the State of Massachusetts for making such a wealth of information available to us– we love analyzing it. Let’s take a look at revenues. Basically, the vast majority of MA dispensaries used Colorado’s and California’s historical data to help justify their revenue projections. These projections are required in the applications as part of the business plan.

We examined the top 20 dispensaries with the highest quality business applications that were successful in obtaining licenses. During the first year, they expect to have average revenues of $4.3M per dispensary (with a median of $3.7M). The highest revenue-earning dispensary is New England Treatment Access, of Norfolk county, with an outstanding first year revenue of $11.9M based on 2,000 patients visiting and purchasing an average of 1.6 oz per month. On average, first year expenses are $4.4M, resulting in an average expected net loss of $100k per dispensary. Roughly half of the dispensaries we examined expect net losses in the first year. However, the second operating year is accompanied by very significant revenue growth and lower cost growth, because most of the start-up expenses are incurred within the first year.

For the second year, dispensaries expect their revenues to increase on average ~100% from the first year– that’s right, they expect to double their revenues to $8.5M. The main rationale behind this increase is increasing market penetration: dispensaries expect to go from roughly 50% patient penetration in the first year to almost 100% penetration of the local addressable market (i.e. # patients in county). This also assumes that every patient who needs medical marijuana will eventually purchase it legally from a dispensary. This is true especially as consumption spreads and doctors become more comfortable prescribing cannabis treatment, a story and growth trajectory that has proven true in CO and CA.

On the other hand, costs in year two are only expected to increase by 60% to an average of $7.0M, resulting in an average profit of $1.5M or a profit margin of 18%. During the 3rd and last year of available projections, revenues per dispensary are expected to increase on average 24% to $10.5M, and costs increasing 14% to $8M. Earnings on average rises to $2.5M, a 23% profit margin.

What do you think? Are these growth rates too bullish? Not every state is like CA or CO, only time will tell and growth rates are heavily dependent on number of addressable patients, frequency of visits, and average purchase size. On the profit side, several adjacent industries are more profitable. Look at the e-cigarette business in Oklahoma, a mere $50K initial investment might result in $400K revenue for a single shop. Nevertheless, remember: dispensaries are nonprofit – at the end of the day, your goal is to help those who are ill in the best manner possible, so use those profits to reinvest in your business and beat the competition for the long-term! The most important thing to remember is you’re in it for the marathon, running the first mile may be tough, but there’s 25 more to go!

Ingredients for Approval

As we noted in the MA Dispensary Analysis post, the Massachusetts government has made getting into the industry a serious business process that requires deep pockets from in-state residents. Meticulous protocols and procedures are required (though for some, the steep barrier to get in has caused applicants to blatantly distort their applications). The MA application fee alone is $30K. Then, after approval, you have a $50K fee to register as a dispensary. There are several other requirements:

  • A Board of Directors
  • A believeable budget and three-year business plan
  • Be able to cater to medical needs first and foremost (e.g. offering discounts for patients in financial hardship)
  • Posses medical and business professionalism
  • Posses the clout and ability to work closely with the host communities
  • Posses Show a bank account with $500k cash in the name of the dispensary

The top ranked dispensary, Medical Marijuana of Massachusetts, which has not been accused of misrepresenting its application, is run by the Chief Operating Officer (COO) and the Chief Financial Officer (CFO) of the Ophthalmic Consultants of Boston . Rounding out the team is a former DEA agent, a 30-year veteran police officer, an ex-president of a substance abuse treatment center, and…well, you get the picture. They may not have experience growing, but they have been extensively “delivering the highest quality healthcare.” It looks great on paper, and the fawning authorities loved it.

Of course, a business in the industry requires a proper public relations plan: patient services, education, privacy— all are necessary. Also, working closely with existing medical service providers, like hospices and other patient support groups, demonstrates a dispensary’s ability to increase awareness. The professionalism should translate into proper office setting (e.g. no images of marijuana leaves on the wall), and in case things go wrong, MMM has liability insurance for $1MM of coverage (costing $165k per year).

It is also important to win approval from local authorities. MMM obtained letters of “non-opposition” from the City Council. In addition, it helps if you’ve been operating a medical practice for 30 years, as MMM’s principals have done. In fact, MMM was one of the few dispensary applicants that obtained a letter of support from town authorities (pg 23-24). We think there are three other important points to highlight:

A) Security: the application blacks out this portion but there is no doubt dispensaries should have armed guards, closed loop security cameras, limited visibility from the street, professional safes for cash storage, and collaboration with local police to ensure operational transparency. MMM’s dispensary will have bullet proof glass, too.

B) Well Compensated Staff: President, CFO and Chief Compliance Officer are paid $250k per year, Head of Cultivation coming in at $150k per year, Director of Security and Community Outreach Director paid $100k per year, etc. (page 34). Those are pretty high salaries!

C) Product Testing: MMM is using a top rated third-party marijuana testing service. This is important in ensuring proper quality. Because marijuana isn’t FDA approved (no inspectors will tour the growing facility), there is a significant business opportunity to provide an accepted seal of approval. Testing is a great recurring revenue business because every growing period, every batch needs to be certified.

Barriers are steep in MA, the steepest process out of any state going through marijuana legalization.  The costs (not the requirements) listed above are probably on the high end of what’s needed. Yet, other states that do not have a history of dispensaries may follow similar footsteps toward licensing. It’s not a bad idea to cover all your bases. And just like a pilot going through protocol prior to take-off, having a proper checklist will vastly improve your organization’s capability and probability towards approval.

Massachusetts Dispensary Analysis

On January 31st, Massachusetts released its list of approved medical marijuana dispensaries. The top 20 qualifying companies made it through generally by involving some teams of “heavy hitters” and ample capital. For example, former Congressman Barney Frank and Boston philanthropist Howard Kessler are involved with dispensary New England Treatment Access, or NETA, according to its application.

And NETA is throwing around big money, in its own words a “substantial investment:” $4 million to build cultivation and dispensary sites and another $5 million to fund operating losses until the business breaks even (including $130k for a parking lot!). Heck, they are even working with the electric utility to upgrade the local power substation in order to deliver more electricity to NETA’s cultivation facility. Massachusetts’ selection committee of experts give points based on each applicant’s business experience, public health, security operations, and a host of other variables. Even then, NETA was only ranked #2 among the approved applicants. Top honors goes to a group called Medical Marijuana of Massachusetts (or “MMM,” scored 160/163 of possible points) backed by a group of ophthalmologists and an experienced grower from Cali.

The industry isn’t for the faint of heart. MMM, which got approval for 2 dispensaries, also has big bucks and expects to spend about $1.4 million building each dispensary and another $1.1 million to cover the first year of losses. Each MMM dispensary is expected to reach ~1500 patients, or 1/3 of marijuana buyers in the area, and book $3.5 million in revenue for the first year (mostly sales in the 3.5g and 7g sizes).

NETA, on the other hand, believes its dispensary can reach 2000 patients, or 50% of local marijuana buyers, in the first year and book $11.9 million of revenue profitably by end of 2015 (representing 2400 lbs). They expect revenues will ramp to a healthy $23 million by 2016 (4800 lbs). Price is such that they are assuming they will make on average $4800 per lb, reaching a peak patient population of 4000 in 2016. Monthly consumption assumes 1.6 ounces per patient per month (based on CO experience). What NETA has to its advantage, and it comes down to knowing the right people, is that they are bringing Rocky Mountain Remedies co-founder Kevin Fisher, who runs a 20,000 sq ft site in CO, to run their growing operations along with his team.

Of course, the top notch quality and first class service are not cheap, and NETA won’t be ill-equipped given it deep pocketed backer and experience.

One interesting contrast between these two top potential dispensaries is that MMM projects 2.3 patient visits per year while NETA assumes 2.5 patient visits PER MONTH. There are limitations on purchase amounts, but the 2.3 per year MMM is using sounds low while the 2.5 per month by NETA may be normal to slightly high. In any case, time will tell who is more correct, but nevertheless these assumptions are crucial to both companies’ finances and abilities to scale upwards. If the “patients” don’t come, no marijuana will be bought.

In the next few posts, we look forward to bringing you a more detailed coverage regarding the strengths seen in Massachusetts’ top-ranked applications, as well as aspects to avoid from those who failed to make the cut.