Pennsylvania marijuana market in tumult amid falling prices, consolidation

Image of the Pennsylvania state capitol building lighted in green

The Pennsylvania capitol building is lighted in green in 2016 after the House of Representatives passed legislation to legalize medical marijuana in the state.

The Pennsylvania medical marijuana market is in upheaval, with smaller companies getting squeezed by falling wholesale prices while their ranks are thinned by growing consolidation among multistate operators.

The situation has spurred independent operators to call on the state government for help, with one company accusing marijuana regulators of failing to enforce the rules and allowing monopolistic control.

This trend of consolidation is playing out across the U.S. cannabis industry, and Pennsylvania is a case in point.

Cannabis companies there report sliding wholesale prices for medical marijuana as the state’s patient count plateaus and more production comes online.

The price drop comes as multistate operators are gearing up for the prospect of adult-use legalization and buying smaller, independent marijuana businesses that are struggling and laying off employees in an increasingly crowded market.

“The biggest losers are the mom-and-pops,” said Steve Schain, a cannabis industry veteran and attorney based in Philadelphia.

The dispensaries are having a difficult time if they’re not affiliated with a multistate operator, he added.

“A large, publicly traded multistate operator can survive a long period of time without being profitable, and a stand-alone cannot,” Schain said.

“It’s virtually impossible to compete with somebody who doesn’t have to be profitable in the short run.”

Business owners in the state say wholesale flower prices have fallen from around $4,000 a pound to closer to $3,000, on average.

One independent medical marijuana grower and processor, Calypso Enterprises, announced earlier this month it was laying off 55 workers at its Erie facility – or nearly 75% of its staff.

Company asked the state for help

“The (Pennsylvania) Department of Health has allowed monopolistic control to happen through lack of enforcement of the regulations,” Laura Guncheon, a vice president with Calypso parent company Erie Management Group, said in a statement to MJBizDaily.

Another grower, Hanging Gardens, also laid off dozens of workers and said it planned to sue the state on the grounds the regulators ignored a provision in the 2016 state law that established the market.

The law bars more than five companies from being vertically integrated and mandates that any retailer can own only up to 15 locations.

But, according to Hanging Gardens, six multistate operators own about half of Pennsylvania’s 165 dispensaries, and five of those MSOs run more than 15 locations.

For instance, Massachusetts-based Curaleaf Holdings owns at least 17 retail locations in the state, according to a company news release in June.

According to state data issued in July, 26 growers/processor licenses have been awarded in Pennsylvania, with 23 actively growing and processing. The remaining three are in various stages of operation.

The state limits dispensary licenses to 50, and each licensee can open three storefronts per permit.

The state recently upped the number of clinical registrant licenses from eight to 10 and clinical registrant dispensaries from 48 to 60.

There are currently 161 medical cannabis stores open and operating in the state.

The 2022 MJBiz Factbook projects medical marijuana sales this year in Pennsylvania will range from $1.6 billion to $2.0 billion, up from $1.2 billion to 1.5 billion in 2021.

As of May, 712,421 patients were registered in the program, which is about 5% of the total population of the state.

However, industry insiders report that number has been slow to increase as of late.

Bullish on Pennsylvania

“There’s been a little bit of a slowdown in the state of Pennsylvania,” said Aaron Miles, chief investment officer at Verano Holdings, an Illinois-based MSO with a vertically integrated cannabis operation in Pennsylvania.

“Pricing has played an impact on how some of the companies are performing.”

Wholesale marijuana flower was selling for as much as $4,000 a pound, but “we’ve definitely seen that pricing coming down.”

The upper range for a pound of flower is closer to $3,000 a pound now, according to Miles.

Depending on the operator, he’s seeing around $50-$55 for an eighth of an ounce at the retail level.

Despite that, Miles said the company has been expanding via acquisitions in the state.

The company has 14 active dispensaries in the state and a 60,000-square-foot cultivation facility in Chester.

Verano also acquired another clinical registrant license that allows it to open six additional dispensaries as well as a second cultivation facility.

The plateauing of medical marijuana patients entering the market is also playing into that price deterioration.

Miles said that’s despite an implication among the industry in the state that adult-use marijuana legalization will happen “at some point.”

“You’ve seen that in other states, where you start to get some momentum around adult-use, then there’s a little bit of a plateau.”

As far as patient access, Miles said there are enough retail outlets for consumers to buy the medicine they want, with 50 licenses that can open three dispensaries per license.

He’s also happy with the conditions list that doctors can use to recommend medical marijuana.

State regulations allow for 23 medical conditions to be treated with a doctor’s recommendation for medical marijuana, including cancer.

Although the United States has experienced a prolong bout of inflation, prices for cannabis at both the wholesale and retail are not going up, according to Miles.

“You layer that on with a slowing medical program, it’s caused a little bit of a pullback in Pennsylvania,” he said.

However, with the potential for recreational marijuana legalization, which he hopes will happen by 2024, there’s still a “massive” opportunity in the state, Miles added.

Adult-use legalization would mean the company would put more resources into its cultivation facility, for example.

“We will want to bring more supply to the market as that demand starts to increase,” he said.

Low prices to compete with illicit market

The decline in pricing might not be as beneficial to the businesses in the state, but it does mean a more affordable product at the retail store, which helps competition against the illicit market.

Trent Woloveck, chief commercial director at Jushi Holdings, a Florida-based multistate marijuana operator with cannabis operations in Pennsylvania, said that lower price point also means more access for consumers.

“I am not a fan of $4,000 a pound for wholesale products,” he said.

Wholesale pounds of flower are now selling for around $2,500-$3,200, according to Woloveck.

As companies scale up and become more efficient, that should still lead to a “really good profit margin,” he said.

Woloveck said the wholesale flower market needs to operate in the $1,800-$2,200 range “to compete against the illicit market and still make a healthy profit.”

Although the market is able to adequately meet the needs of the patient population, not allowing infused products or pre-rolls means there remain some potential consumers who would come into the market if those form factors were available, he added.

As for the perception that the state is becoming dominated by multistate operators, Woloveck said that “whether you’re a small mom-and-pop, independent grower-processor or you’re a big MSO grower-processor, patients know they want to consume good, standardized, repeatable products.”

Like Verano, Jushi is preparing for the advent of the adult-use market, Woloveck said. He pointed to several Pennsylvania lawmakers who are laying the groundwork on the recreational program.

“There’s super strong infrastructure in place to support a transition to an adult-use market,” he added.

Bart Schaneman can be reached at bart.schaneman@mjbizdaily.com.