Etain Health owners discovering the trials, tribulations of operating a marijuana business in tough New York market

, Etain Health owners discovering the trials, tribulations of operating a marijuana business in tough New York market

Like many cannabis entrepreneurs, Amy Peckham and her daughters decided to get into the medical marijuana business in part for personal reasons.

The trio started the vertically integrated cannabis company Etain Health in New York after watching the family’s matriarch – Amy’s mother – suffer through amyotrophic lateral sclerosis and a regimen of opiate pain relievers that seemed to do more harm than good.

None of them had ever been involved with cannabis in the past. But they came from a century-old, family-run road construction company well known in the state, bringing with them an established name, business experience and acumen plus healthy doses of drive and toughness.

Those assets have helped the Peckham women survive one of the most difficult medical marijuana markets in the country, where heavy regulations, low patient numbers and other challenges are creating deadly pitfalls for the handful of companies that won licenses to grow, process and sell cannabis. Along the way, the Peckhams have been forced to change plans and come up with creative solutions to unexpected problems such as revised deadlines, space limitations and undelivered equipment, often with little notice. They’ve also had to deal with sexism.

Rather than let the challenges get the best of them, the Peckhams have found new sources of motivation. And they credit their closeness as a family and cautious policies for getting them this far.

“We believe we have proved to all who questioned ‘the girls’ and ‘what do they know about business’ that we can effectively execute expansion in any six-month window,” Amy said, referring to their challenging launch phase.

Still, they’re not out of the woods yet. Without some changes in the state’s regulations, even the most hard-working and inventive marijuana entrepreneurs may not survive a market where state-licensed businesses are still bleeding red nearly a year after the industry launched. Case in point: One of the state’s five licensed medical cannabis companies reportedly has not been able to pay vendors and is seeking new owners.

“I think everyone financially is hurting,” said Etain’s Chief Operations Officer Hillary Peckham, who doesn’t expect to break even until next spring. “We’re headed in the right trajectory. But I definitely would expect a couple of the other organizations to go out of business or to just not reapply” for license renewals next July.

Networking, Leveraging Experience & Thinking Ahead

The idea to explore opportunities in the cannabis industry started with Amy, but it was her younger daughter Hillary, now in her mid-20s, who did most of the research and started the process of forming Etain, which is the name of a heroine from Irish mythology.

“It might have been my dream. I might have started the research, however, making the push to actually take it to the next level, hire the lawyers, make a corporate structure, go out and meet the experts, that was Hillary,” said Amy, a seasoned veteran of the family construction business and Etain’s chief executive officer.

The two were eventually able to pry Amy’s other daughter Keeley, a horticultural expert, away from New Orleans, where she was settled, happy and getting ready to start her own business.

Amy and Hillary started performing due diligence about the marijuana business by learning and networking.

“We started to make connections because we didn’t really know anybody when we started out,” Hillary said.

One of the first and most important contacts they made was with Women Grow, a group for female professionals in the industry. The organization proved particularly valuable in helping the Peckhams meet others in the medical cannabis business and vet potential partners.

“Because it’s a new industry, there are no references you can check. Connecting with women to support each other is essential for us,” Amy said.

What the trio lacked in cannabis industry experience, they tried to make up for by leveraging their knowledge of the construction business and the state regulatory bureaucracy. They then created strategies that they thought might make their license applications more attractive.

For example, when the Peckhams were looking for locations for their manufacturing center and dispensaries, they sought out communities that needed economic boosts and therefore might be more open to marijuana businesses than conservative towns.

Capitalizing on Family Bonds

The Peckhams have experienced a laundry list of challenges so far, from navigating the application process – when they encountered their first sexist remarks – to dodging bullets in the startup phases to trying to keep Etain afloat today.

They credit tight family bonds for helping them get them through the toughest times in their cannabis business journey. The family sees it as an advantage that their competitors don’t have.

When New York pushed up the medical marijuana program launch deadline to Jan. 7, Etain was one of only two licensed MMJ companies to open with a full product line. It also was one of three companies to open two separate dispensaries on the first day of sales, while the other two licensed companies only opened one.

“The reason we were able to do that is because we’re family. So every time we would go home to dinner, we were still working. We would always be talking about ideas and the things we needed to do,” Hillary said, explaining that during the application and launch phases, they lived in Keeley’s house in Chestertown. Chestertown is also where Etain’s cultivation site, extraction laboratory and processing facility are located. Now, Keeley still lives in Chestertown, Amy in Katonah and Hillary out of her car, because she’s always traveling between the four dispensaries and the manufacturing plant.

“We definitely have our challenges working together, but I don’t think this could have been accomplished without being a family.”

The three Peckhams operate as a team, but each has her own distinct area of responsibilities and oversight. While Keeley runs cultivation, she has to coordinate closely with Hillary, who as COO oversees operations and is responsible for anticipating demand and determining which products are selling the best. As CEO, Amy analyzes the market and the strategic decisions, meaning she has to be in close contact with Keeley and Hillary.

Despite their distinct areas of expertise, the three women still huddle together to talk about and decide important company decisions together. They don’t gather on less important or day-to-day questions, deciding those individually, depending on whose area of expertise a question might fit. They do, however, keep each other informed about those less important decisions, so everybody is in the management loop.

Dealing With Surprises

The first major issue unexpectedly cropped up in early December 2015 when the Peckhams learned that New York officials had moved up the deadline to launch MMJ sales by a few weeks. As a result, Etain had to start growing its medical cannabis sooner than expected. But there was a big problem: Construction of the company’s four greenhouses wasn’t slated to wrap up until February.

So the Peckhams shifted gears and transformed six of the eight rooms of their extraction laboratory into a temporary cultivation space totaling about 500 square feet until the greenhouses were finished.

“It was a challenge that both came up suddenly and that I could see coming,” Keeley said, explaining that she felt there was a possibility that state officials might move up the deadline, and so she had given the issue some thought.

To get the most out of the 500-square-foot room they were growing in, the Peckhams decided tiers would be best. So they installed risers that allowed the company to cultivate more plants than it would have using a single-level platform.

“They were like bleachers, creating more workable space,” Keeley said.

Because the room wasn’t initially designed for growing cannabis, it didn’t have any temperature or humidity controls. So Keeley brought in temporary air conditioning units and dehumidifiers. While permanent units can be automated, the temporary ones cannot, meaning that Keeley or someone else had to turn the units on or off at night and in the morning.

While the conditions were far from ideal, the extra work and solutions that Keeley developed resulted in better, stronger plants.

“The plants that ended up in the greenhouse were really quite large, very healthy and ready to go,” Keeley said.

While she would have preferred to grow in an expansive greenhouse initially rather than a small room that wasn’t outfitted for cultivation, the experience wasn’t without its advantages.

“We learned a lot. It was nice to have that time when (the grow) was still small, when you could see everything all together because now you go in this room and this room and this room and you lose a little bit of that perspective,” Keeley said.

The Peckhams soon dealt with another surprise: extremely low patient numbers. When the first sales started in January, only a few dozen patients had registered with the MMJ program in the entire state.

The three executives responded by scaling back their cultivation plans.

Etain currently runs eight harvest cycles and goes through one cycle every three weeks. Before launch, when the Peckhams were anticipating moving the plants from the modified lab space into greenhouses, the company followed all eight cycles while focusing on keeping the plants at a size where they’d be healthy and ready to go into larger pots and move along the growth process.

But because of the limited space and the low number of patients, Etain started with cycles of smaller batches of 30 or 50 plants. The company then expanded that number to between 100 and 200 plants per cycle, and it now has 600 to 700 plants per harvest cycle.

“We scaled it as slowly as we could,” Keeley said.

To keep the plants from growing too fast, the Peckhams kept the smaller ones in solo cups, where they were able to develop a strong root structure before being transferred into one-gallon pots, where they were pruned early and often.

Navigating Incorrect Orders, Missed Deliveries

Another problem that Etain encountered was that some of the clones of marijuana plants they obtained turned out to have dramatically different cannabinoid compositions than the Peckhams were initially told.

“Many strains are simply given common marketable names without any verifiable accountability,” Amy said.

For example, clones that were promoted as having high levels of CBD wound up producing plants that ended up having none at all. That forced the Peckhams to change how they treated and marketed the plants.

“That was a nerve-racking part of it, being committed to a schedule, (planning to make) a specific product, and seeing things you don’t really recognize till you’re in it, then having it all change on a dime when you get your test results back and they’re completely different,” Hillary said. “The industry didn’t have a lot of integrity.”

She added that every one of the five licensed companies “as far as I know got a plant or two that wasn’t what it was presented to be.”

Having CBD-heavy plants is important to Etain, which offers products that have 1-to-1 ratios of THC to CBD, 20-to-1 ratios of CBD to THC, and THC-dominant products.

Fortunately, the Peckhams anticipated that there would be issues with plant compositions, and therefore they started with about 20 different strains to ensure wide diversity. Because of this, Etain was able to harvest another crop that had a high-CBD profile, tested it and was able to get it on the company’s shelves. The Peckhams processed the other crop anyways, mainly to work on consistency, although it didn’t go on the market.

Hillary said Etain didn’t lose any money on the mishap, but she acknowledges that having to make the adjustment added time to the process of getting product out on dispensary shelves.

“I know most people in New York have the same issue that we did, it’s just sort of the way it is,” Hillary said. “But when you’re under such huge time pressure, it affected us.”

The surprises didn’t end there.

Keeley’s cleverness helped the Etain team get their plants ready for extraction and processing, and the company’s lab team successfully extracted the oils. However, the automated dispensing machine that puts the oil into capsules didn’t arrive when it was supposed to. The team had planned to have the machine onsite about two weeks before its dispensaries opened on Jan. 7, which the Peckhams thought provided enough leeway in case there were some hiccups with delivery. But it didn’t show up until late January. That forced the Peckhams and their workers to fill the capsules by hand using pipettes.

It takes one person six months to do what the capsule machine can do in a day. By hustling and working long hours, though, Etain managed to fill about 500 bottles with some 30 capsules each. That was enough to meet initial demand given the slow start to the market. If demand had been higher, however, the company could’ve found itself dealing with frustrated patients.

“We made what we expected we would need for a couple of months,” Hillary said, noting that the company also had other products available at the time, including vape pens, tinctures and a cannabis-infused peppermint spray.

Cutting Costs, Keeping Prices in Check

While the lack of patients in the program eased concerns over inventory shortages, it created worries over whether there would be enough customers to support the business.

When Etain opened its first two dispensaries, not one patient came to the company’s storefronts. It didn’t necessarily cause panic, as the Peckhams were expecting a slow start, at least to some degree.

“We only saw 20 patients in the month of January and yes, that was disappointing, but we had only projected that we might see 50 patients,” Amy said. “By January we already knew the rollout of the program was going to be slow.”

Still, they didn’t expect it to be that sluggish.

With a dearth of patients, the Peckhams had to curb, at least temporarily, their ambitions to expand and instead had to focus on keeping their costs down. That started with managing inventory closely.

“We’ve been careful about not overgrowing. We don’t want to have a whole bunch of product just sitting on shelves,” Keeley said.

Hillary agreed: “From the beginning, our concept has been to grow with the market, rather than grow too much and hope the market catches up to us.”

The Peckhams also reduced costs at the employee and operational levels. When the company’s dispensaries went online in January, Etain had about 10 employees, including the three Peckhams plus security, cultivation, laboratory, manufacturing and support personnel. Etain supplemented its workforce with part-time workers and even brought on an intern from the famous Bronx Botanical Garden. That helped lower costs vs. hiring full-time staff.

Another strategy Etain has used for dealing with a slow market is to have its four dispensaries open just three days per week (although the company recently moved one to four days a week). This strategy allowed Etain to hire only two pharmacists rather than four. Those two then split their time between the dispensaries.

Growing out of greenhouses also saves money. Hillary estimated that the construction costs of an indoor facility would have been substantially more than the company spent on the 14,000 square feet of greenhouse space it built. At the same time, she figured the $35,000 Etain spends monthly on running the greenhouses and manufacturing facility would be twice as much in an indoor facility.

While such moves have helped Etain keep internal costs down, they haven’t helped the company lower prices enough for patients – a problem that all New York medical marijuana businesses are suffering from.

Etain produces capsules, tinctures, oils and spray mists that range in price from $60 to $200. That’s well above what most patients can afford.

About 40% of Etain’s customers don’t come back a second time, Hillary said. The company follows up with those who don’t come back, and “95%” cite price as the reason.

“Overall, that’s the biggest barrier in the market right now,” she said.

New York must approve the prices at which dispensaries want to sell their products, as well as subsequent price changes. Dispensaries can also offer discounts, but only to patients needing financial assistance. Dispensaries also are not allowed to offer “incentive” discounts such as two-for-one deals.

“The only economic driver of cost is volume, which would lower the price of New York medical marijuana as a whole,” Hillary said. “The current problem in New York is not one of supply, but demand.”

To try and bring down the prices, Etain offers discounts to patients in financial need, and it is also trying to increase automation in the firm’s manufacturing and laboratory departments.

Pushing for Regulatory Changes

Aside from more patients, fewer regulations would help bring prices down, Etain’s leaders said.

“There was a lot more oversight than we anticipated,” Amy said. “When you look at what we had to do to establish pricing, they require justification of all of your billing, your cost of goods. It wasn’t simply, ‘Here’s your price.’ Our prices were broken down to milligrams, dosages, units.”

New York regulations have made business difficult for dispensaries in other ways as well. Dispensaries are not allowed to sell flower or edibles, nor can they advertise or advise doctors or patients seeking information about the state’s MMJ program, for example.

“We believe until traditional advertising is allowed, growth will continue slowly here,” Amy said.

Another regulation prohibited licensed companies from moving products from one of their dispensaries to another. They could only obtain products from their manufacturing facility, which in some cases meant higher costs and longer transit times. The state’s health department, however, removed that restriction after the five licensed companies lobbied to have it changed.

While most of the regulations lead to a better product, Amy said that’s not always easy to explain to customers.

“That’s a disadvantage because the consumers ask and complain about our prices,” Amy said. “But we say our prices are higher because of the higher regulations, and the higher regulations result in a better, safer product.”

The Peckhams also believe there are several ways to increase the patient population: expand the list of qualifying conditions, make it easier for potential and registered medical marijuana patients to find doctors who are certified to recommend medical cannabis, and make it easier for doctors to recommend MMJ.

As of Oct. 3 there were 8,421 registered patients and 705 physicians certified to recommend medical marijuana. Many of those patients are not active customers, however.

Amy has estimated that Etain needs to serve about 1,200 patients per month to be sustainable. She believes they can hit that figure in 2017. The company is currently serving around 400 patients per month, but it has seen many more since launching.

“You need to understand that this program is heavily oriented for the critically ill, and each week we have to face end-of-life patient losses,” said Amy. She added that Etain didn’t see consistently returning clientele until this summer, while growth is now around 150 patients per month.

The Peckhams, however, believe the willingness of state health officials to listen to the licensed companies and lift restrictions – like the one on not transporting product between dispensaries – is a sign that regulators may take steps to improve the market.

Indeed, New York recently decided to permit deliveries to homebound patients and allow nurse practitioners to recommend medical marijuana for patients with certain ailments. And as of early October, Gov. Andrew Cuomo’s administration was considering several important proposals the health department made, including adding chronic pain to the qualifying conditions list and allowing dispensaries to advertise.

“The price will come down especially as we see a larger patient population,” Hillary said. “I think that’s really needed and necessary for this program to survive in New York.”

Pushing Ahead

The Etain women won’t divulge their revenue figures but say their private, family-owned business has more than enough capital to continue operating for a while.

“We are still investing to meet operating costs, and since this is a family business, no one is looking for any return on investment any time soon,” Amy said.

Hillary noted that every licensed MMJ company in New York “spent many millions of dollars to get their doors open and are continuing to invest because nobody is meeting operating costs.”

Still, scaling up is certainly on their minds, even though the business hasn’t reached stability yet. The manufacturing facility can accommodate the demand of about 5,000 patients per month, but the Peckhams would go into expansion mode if they hit 3,000 or 4,000 patients per month.

“The scale of the expansion will be directly proportional to our projected patient demands at that point,” Amy said.

Hillary added that the signs are encouraging.

“Business is picking up, the program is expanding and getting more attention, so the challenge is staying ahead of that potential growth and being ready to adapt to new regulations,” she said.

Indeed, in some ways they’ve already started. As of September, Etain had about 35 full-time employees, roughly triple the number it had in January. The company also had enough cannabis oil to last until April, which it produced using only half of its total grow capacity.

Does this mean that Etain’s founders plan to renew their medical marijuana business license?

“We want to be committed to it,” Amy said.