As Illinois is set to legalize adult-use sales in just 12 days, which companies are best positioned?
On June 25th, 2019, Governor Pritzker signed a bill that will legalize adult-use cannabis in the state of Illinois. The passage of this bill symbolizes Illinois becoming the 11th state to legalize recreational use of cannabis in the USA. Additionally, Illinois has now claimed the designation of being the first state to design, and ultimately approve, a recreational cannabis program through the legislature rather than by voter initiative.
Speaking on behalf of this monumental event, Gov. Pritzker had this to say:
"As the first state in the nation to fully legalize adult-use cannabis through the legislative process, Illinois exemplifies the best of democracy: a bipartisan and deep commitment to better the lives of all of our people. Legalizing adult-use cannabis brings an important and overdue change to our state, and it's the right thing to do."
Looking at the state's growing medical program
Prior to passing this landmark legislation, Illinois enacted the Opioid Alternative Pilot Program ("OAPP") on January 31, 2019. In step with the stark fact that opioid deaths had increased in the state by 13% from 2016 to 2017, Illinois' Department of Health drafted this program in August 2018 to offer an alternative to those with legitimate pain. This legislation allows medical cannabis access for patients who have, or could be, prescribed opiates based on medical conditions as determined by licensed physicians on the basis of "generally accepted standards of care". Participants of the OAPP are authorized to purchase up to 2.5 ounces of medical cannabis every 14 days.
Additionally, somewhat being over-shadowed by the news of the state's successful recreational legalization initiative, a robust expansion to the state's medical cannabis program occurred in August 2019 that broadened access for prospective patients. Signed by Governor Pritzker, this legislation brought about the ability to prescribe medical cannabis for patients who suffer from a myriad of other health conditions that weren't previously included, including: chronic pain, irritable bowel syndrome, migraines, anorexia nervosa, and autism, alongside 6 other conditions. These 11 new conditions join the existing 41 qualifying medical conditions the state recognizes. This legislation also grants the authorization to both Advanced Registered Nurses and Physicians Assistants to certify a patient’s eligibility for the medical cannabis program.
Illinois' medical cannabis program is still maturing at a rapid clip on its own. Between December 2018 to December 2019, a few key metrics are up nearly 100% year-over-year.
Patients: 49,366 (12/2018) -> 94,773 (12/2019) = 92% YoY increase
Total Retail Sales: $122,607,079 (12/2018) -> $223,845,716.96 (12/2019) = 83% YoY increase
Total Wholesale Sales by Cultivation Centers: $67,754,936 (12/2018) -> $120,839,469 (12/2019) = 78% YoY increase
Illinois pivots to recreational cannabis
The state's forthcoming adult-use cannabis program enables all Illinois residents - from age 21 and up - the ability to possess up to 30 grams of cannabis, 500 milligrams of THC, and 5 grams of cannabis concentrate. Non-residents can possess half those amounts. All existing medical cannabis dispensaries are eligible to apply to be able to sell adult-use products on 01/01/20, and are also enabled to open up an additional store per each license they hold. Illinois law mandates that no entity can have ownership of more than 10 dispensaries. The maximum amount of cultivation facilities that one single entity can possess is 3.
As Illinois currently has 55 operational medical cannabis dispensaries, this creates the potential for 110 stores to be operational and prepared for the advent of recreational sales on 01/01/20. To date, no such additional store has been opened although various companies are presently in different stages of scouting locations, securing leases, and constructing new dispensaries.
Later on in May 2020, the state will be awarding up to an additional 75 retail licenses; and, by July 1st, the state will issue up to 40 licenses for processors and craft growers, while also issuing transporting licenses. The second wave of licenses won't come again until December 21st in 2021, when the state will issue up to 110 more dispensary licenses, 60 licenses for both processors and craft growers, and more transporting licenses.
Many observers of the industry confidently portend that the adult-use program will be critically under-supplied at launch, both from a retail - and chiefly - a cultivation perspective, as incoming demand will simply outweigh the current supply being delivered from the state's 21 grow facilities.
Further credence to these prognostications was given when state legislators commissioned a study in the context of serving the adult-use market, and found that demand could be as high as "550,000 pounds a year". Additionally, the authors of the report - BDS Analytics - projected that Illinois could see an estimated $2-4 billion dollars in sales at maturity. Since the materialization of the state's medical cannabis program in November 2015, total sales have tallied just under $484 million.
Identifying that Illinois is the second largest state (California), and also the third largest jurisdiction in the world (California, Canada), to implement an adult-use cannabis program, the report also identified that existing cannabis cultivators would only be able to supply somewhere between 35 to 54 percent of the market.
"The market size of Illinois - the sentiment that we've seen so far from the investment community and the industry as a whole - they recognize the importance of Illinois moving forward with this adult use (program) and the importance of a top five populated state located in the Midwest and also including a limited license structure. So, it's going to be novel. This type of demand with limited license structure really has never been seen before. So it's (an) incredible opportunity."
Since September 30th, Illinois has awarded 18 of the 21 existing cultivation facilities the ability to begin manufacturing products for adult-use sales. Speaking strictly in terms of publicly-traded operators, Illinois has given the green-light to grow for Cresco Labs (3 facilities), PharmaCann (2 facilities), Green Thumb Industries (2 facilities), Harvest Health & Recreation (via Verano) and Columbia Care.
Specifically, PharmaCann received adult-use cultivation approval for grow facilities in both Dwight and Hillcrest, the latter of which will be owned and operated - subject to regulatory approval - by MedMen, per the terms of their merger cancellation.
Speaking to statesidecannabisinvestors.com, Green Thumb Industries representatives shared that "(the company) is working hard to increase capacity through capital spending, hiring and expansion." Additionally, in the company's third quarter conference call, the company's CEO, Ben Kovler, spoke to the anticipated shortage of supply that the state will initially face as companies take time to scale-up appropriately:
"There is a big amount of demand coming versus the supply that's in the market today that is already pretty tight. So what I mean by the six months is if you are going into raw land or you are going to build a new addition to the facility which many groups are, it’s a six month process from drawing, permitting, construction, and maybe if you hustle you could do it in 90 days or 120 days ...Then you have the six months of growing, which you could obviously shave that down a little bit. But to be conservative, new supply from day one, takes a year to come on the market and we've seen that in many different markets."
Columbia Care's Aurora cultivation facility has been caught in the crosshairs of litigation since 2015. Would-be cultivator Medponics, who were denied their cultivation license when Columbia Care won theirs, filed suit against both Columbia Care and Illinois' Department of Agriculture. Alleging that Columbia Care's application should have been denied due to being too close to a residential area - a violation of state law - a judge sided with Medponics in 2017. Columbia Care appealed this ruling, and, in a decision on October 7th of this year, appellate judges partially reversed the earlier ruling by determining that Columbia Care's cultivation facility was actually not in a zone that was "exclusively residential".
On the retail side of things, Illinois announced that it had awarded all of its first five adult-use cannabis licenses to Green Thumb Industries in early August. The company's dispensaries are located all-throughout Illinois, although one such dispensary, in Naperville, will potentially have to be situated elsewhere as the City's Council voted 6-3 to opt out of adult-use sales. However, Naperville residents will have the ability to voice their opinion on permitting adult-use sales within city limits when they go to the polls this upcoming March. Appearing on the forthcoming ballot will be the following question:
“Shall the city of Naperville, in light of state legislation legalizing the possession, consumption, and sale of recreational adult use cannabis, allow the sale of recreational adult use cannabis within its jurisdiction?”
Additionally, Verano - who is in the process of being acquired by Harvest Health & Recreation - shares a 50% ownership interest, alongside Green Thumb Industries, for a dispensary located in Effingham.
We had the opportunity to speak with Verano's CEO, George Archos, about the company's position in Illinois as the state pivots to permit adult-use sales:
“As an operator in IL, this is as exciting a time as we’ve ever encountered. We’ve worked tirelessly & meticulously over the last 5 years to bring the highest quality cannabis products to the medical patients of IL. Now we have an opportunity to share our work, our passion, our product, with the adult-use market and, candidly, we feel very fortunate to be in the position we’re in. We look ahead and see opportunity draped in optimism. A giant leap forward for the people of IL – our home state.”
Later on in October, Illinois officials granted an additional 6 adult-use sales licenses; 5 of which were granted to dispensaries operated by Cresco Labs. One such dispensary, doing business as MedMar, is located in Chicago. In September, prior to the adult-use approval designation, this dispensary was granted approval by state legislators to move the facility to a larger building in the Wrigleyville neighborhood.
Since the aforementioned October approvals, an additional 26 other dispensaries have received authorization for same-site, adult-use sales. Some of the other operators that have received this designation are 4Front Ventures, Columbia Care, MedMen, PharmaCann, and Verano.
Although they've yet to procure an adult-use sales license for their medical Rolling Meadows storefront, Acreage CEO Kevin Murphy was excited to share his thoughts with us as Illinois turns its head to allow for full recreational use:
"We are particularly excited about the Illinois market. The medical program is inclusive in and of itself, with 30 qualifying conditions in addition to the Alternative to Opioid Act, which gives patients who have or could have been prescribed opioids in Illinois access to medical cannabis. We believe the state is creating a model program as they expand to the adult-use market and look forward to serving the residents of Illinois as we identify ways to further broaden our presence in the state."
For even more information, we've created a presentation that outlines specifically which company is located where, and what assets they possess -- all throughout the state of Illinois. The report also delves into details on the recent Chicago lottery license that was held. The presentation can be found here, and we encourage you to share it.
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