Philly420: Pennsylvania's plan for corporate cannabis

Philadelphia Soda Tax
City Councilman Derek Green (left), shakes hands with Mayor Kenney. Philadelphia, Pittsburgh and other cities are getting a jump on medical-marijuana zoning -- so the state doesn't do it for them.

Chris Goldstein is a marijuana activist living in New Jersey

Pennsylvania's uniquely structured medical cannabis law could be the point of entry for an onslaught of corporate cash into the marijuana marketplace, something that Philadelphia's City Council will also have to navigate in the competition for licensed facilities.

On Nov. 30, the council's Committee on Rules passed an amended bill from Councilman Derek Green to create appropriate zoning for medical marijuana businesses. But that's just the tip of the iceberg for the industry.

The Pennsylvania Department of Health is finalizing the full regulations for the program now and will open the application process for licenses next year. That's why Philadelphia, Pittsburgh and other municipalities are getting a jump on zoning. Otherwise, the state could do it for them.

There are 25 medical cannabis cultivation/processing permits from PADOH available for all of Pennsylvania. Five of those growers will have the option to serve patients as well. There will be 50 dispensing permits, each allowing up to three physical locations.

One important tidbit that came out during Philadelphia's rules committee hearing this week: The city Planning Commission was told by PADOH to expect as few as four dispensary permits and perhaps zero cultivation operations in the city. That will mean competition to open the first medical cannabis store in the nation's fifth-largest city will be particularly fierce.

The compassionate use law, known as Act 16, is the first in the country that will allow publicly-traded companies to operate facilities for medical cannabis cultivation, processing, lab testing, and dispensing.

Large business interests in the region are now running hot with a fever for a special kind of gold, one that grows under LED lights in warehouses.

Mainstream corporate investment into regulated cannabis has only flowed at a trickle, whereas spunky venture capitalists have been edging into the space for years. Big-name firms have kept the plant itself at arms-length.

Last year this column broke the story about a packet circulated to a select group by Merrill Lynch, the investment arm of Bank of America. The report stayed far away from implying any interaction with plants, instead meticulously cataloging the “life sciences” equipment manufacturers showing an uptick in sales. These already healthy companies stand to grow steadily because they sell the high-end machinery essential to producing cannabis products at an industrial scale. Merrill Lynch was bullish on the whole sector.

The real bottleneck slowing the same kind of corporate capital from flowing directly into marijuana cultivation operations or dispensaries was the perceived risk of federal prosecution.

That risk extends to financial exposure and running afoul of tax law. Such matters are less of a concern for the working class, but having the federal government potentially seize millions in assets has thus far been quite a deterrent to the super-rich or establishment investors with diversified interests.

In a coincidental but crucial alignment, the Ninth Circuit Court of Appeals quelled those fears considerably in United States v. McIntosh. The ruling, issued in August, held that a small provision tucked into Congress's massive annual Appropriations Bill — known as the Farr-Rohrbacher amendment — prevents the Department of Justice from prosecuting medical cannabis operators who are complying with state laws.

Thus, a large portion of the cannabis investment risk was vaporized in the surprise opinion. Pennsylvania, conveniently, offered up the first legal structure for the bigger bet.

The careful corporate framework within Act 16 didn't happen by accident. Cannabis businesses from Oregon to Florida hired lobbyists in Harrisburg in order to work out the language.

Not only did they win access for publicly-traded companies, but also anyone in the country has the opportunity to won the Pa. licenses. Every other state thus far had built careful regulatory barriers preventing out-of-state ownership, or at least insisting on some local involvement, while Pennsylvania is laying out the welcome mat.

With liquid cash requirements and ready-funding minimums in the millions under Act 16, local business owners hoping for a place in a nationally emerging industry will find themselves pitted against a completely different scale of competition. It will be like a kindergarten lemonade stand trying to bid against Coca-Cola for the concessions contract at Citizens Bank Park. 

Having big corporations get into medical cannabis is an inevitable evolution of the policy. Yet, instead of trying to compete in the free-market states, the crystallizing corporate interest in cannabis seems more focused on controlling the markets in states with limited licensing structures. While there is a place for this growth, locals should not be shut out.

A large corporation running a medical cannabis operation — that has never been attempted and it could result in significantly lower prices for patients. Right now, low-income patients are priced out in New Jersey and New York, which serve the most expensive cannabis in the country under tight regulatory schemes.

Garden State patients pay $480 per ounce plus a 7 percent sales tax while New York patients pay hundreds of dollars for a few grams of processed cannabis oils. Those operators are trying to recoup their significant start-up costs out of the pockets of a limited population of patients.

Meanwhile, any adult can fly to Colorado and walk out of a retail store with a $150 ounce of high-grade cannabis that is even laboratory-tested for potency and adulterants.

Marijuana products are not terribly expensive to produce. That leaves a lot of room for markup … which could be the other side of the corporate coin.

Companies are routinely buying pharmaceutical drug patents and then massively increasing the prices. Pill consumers have the financial cushion of health insurance footing some of the bill, but medical marijuana is always paid for in cash, out of pocket, by some of the most severely ill individuals in our community.

Corporate investors might also use the awarded medical cannabis licenses to bolster their share prices without ever putting a shovel in the ground. They can also transfer ownership later, possibly for a hefty profit (another Act 16 innovation). Sending out a press release that a company is holding one of the prized Pa. contracts could bring in millions through a stock spike before a single sprout reaches from the soil.  

Pennsylvania's medical cannabis patients have unknowingly become players in a big-money, high-stakes game.

Because there is no federal oversight, the Pennsylvania Department of Health and municipal governments share a special responsibility to ensure that medical cannabis operators are good actors.

Philadelphia's City Council will need to be intimately involved with this program by striking a careful balance of fostering the new industry while also holding it accountable to our patient community.

Calculating potential profits, which can only be pulled directly from our patients' bank accounts, should not be the main concern. Our relatives, friends and neighbors who can qualify for cannabis deserve fair prices, easy access and good information.

We have an opportunity to bring some forms of medical cannabis above ground in Philly, but it will take a lot of work.