How the marijuana industry is organized in legal states

NIMBY-ism is not a problem only in vertically integrated states like Florida; even highly permissive, horizontally integrated states like California have these challenges.

Regardless of the federal legal status of marijuana, states have proceeded to implement their own medical and recreational cannabis programs.

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State programs can be classified as either horizontally or vertically integrated marijuana industries. The horizontally integrated states are more business-friendly than the vertically integrated ones due to the restrictions typically imposed on marijuana businesses.

In a horizontally integrated program, manufacturing, testing, dispensing, distribution, and transportation are all considered separate business activities. With the exception of testing, a marijuana business can engage in any or all of those. So, a dispensary might carry products from many different growers, as strictly a reseller.

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By contrast, a vertically integrated marijuana program is regulated and licensed by a State Health Department or similar governing agency, which must control all aspects of operation: Cultivation, manufacturing, transportation, distribution, and dispensary, and in many cases, testing. The capital expenditure required to set up shop as a marijuana firm in a vertical integrated state is massive, on the order of tens of millions of dollars.

For example, California is a horizontally integrated marijuana state, whereas Florida is a vertically integrated marijuana state. Illinois and Washington, like California, prohibit vertical integration.

Hawaii, Michigan and Montana are unregulated and currently formulating rules for dispensaries.

Vertical integration in Alaska, Arizona, Colorado, Maryland, Nevada, Oregon and Washington D.C. is allowed, but not required.

Florida and states that require similar vertically integrated systems (such as Connecticut, Delaware, Maine, Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Rhode Island and Vermont) are very different and much more regulated than horizontally integrated states like California.

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Scale-out of a medical marijuana firm in a vertically integrated state is extremely challenging because of the strict oversight and the specific state legislation that governs the growth of a marijuana firm's retail infrastructure, not to mention frequent legislative NIMBY-ism ("Not In My Backyard") in state municipalities, where a firm may face difficulties placing a dispensary or other facilities such as nurseries, plant processing and manufacturing of medication.

For example, Florida law, as it is currently enacted under Amendment 2 and section 381.986 of the public health code, only allows for one dozen medical marijuana firms per 100,000 patients added into the Department of Health system, known as the OMMU (Office of Medical Marijuana Use).

The approval process for becoming one of these firms in Florida is extremely rigorous, even onerous, and -- to a large extent -- politically influenced. Each firm, known as a Medical Marijuana Treatment Center (MMTC), is only allowed up to 25 retail locations in Florida for the first 100,000 patients in the system. Florida currently has approximately 140,000 medical marijuana patients, with approximately 3,000 new patients registered each month.

As of November 2018, in Florida, there are 11 operational MMTC companies, with three in pre-production status. An MMTC may add five additional dispensary locations after each successive 100,000 patients registered by the OMMU. So, there are significant limitations in scalability and capital investment if a Florida medical marijuana firm is looking to expand its overall retail footprint -- but that is assuming they can even find a city to place their dispensary in.

As a result of the NIMBY-ism, many towns in South Florida, such as Boca Raton, Coral Springs, and Fort Lauderdale, have put moratoriums or permanent bans on dispensaries, whereas other towns, such as Deerfield Beach and Lake Worth and Miami, have become dispensary "oases."

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The situation in Florida is further complicated by the fact that, while the marijuana flower itself cannot legally be smoked, there is no provision for home grown (as it is permitted in California, Washington State, and Oregon), and there are currently no guidelines for edible products.

NIMBY-ism is not just a problem in vertically integrated states like Florida; even highly permissive horizontally integrated states like California have these challenges. For example, Napa County, which is just north of San Francisco, does not have any dispensaries, whereas nearby Marin County has several.