The sign marking the location of Angelo DeFazio’s Weston Street business in Hartford is roughly 1 square foot in size, displayed about 5 feet off the ground.
The other companies that share the same strip mall have much larger signs near the roof of the multi-unit building, easily visible to cars speeding down the road.
But DeFazio operates a medical marijuana dispensary, so the Department of Consumer Protection (DCP) said Arrow Alternative Care’s sign must be smaller than a standard manila envelope, one of the many strict regulations posing challenges for an industry that just started selling products a month ago.
“It is a pioneer industry in its infancy,” said DeFazio, Arrow’s president and CEO. “It is always wonderful to be on the ground floor of a pioneer industry, despite its many challenges.”
Connecticut’s medical marijuana industry has been laying its groundwork since the legislature approved the drug’s use two years ago, but now with product actually on the shelves, growers and dispensaries have had a volatile month with various issues, including: finding the right pricing structure; projecting how many patients will walk through the door; and gauging the anticipated market impact as more growers and dispensaries come online.
“We are still sort of in the ramp-up stage,” said Michelle Seagull, the Department of Consumer Protection’s (DCP) deputy commissioner. “Once the market is in full operation, Connecticut will get you the best value in terms of price and quality.”
Price stabilization
While Connecticut’s medical marijuana industry is in its early stages, it did have the disadvantage from the very beginning of competing with the long-established, illegal black market, particularly in terms of pricing.
So, when medicinal weed products first hit the shelves last month, dispensaries were immediately decried by medical marijuana advocates for charging too much, particularly compared to black market prices.
Growers, too, have privately raised concerns about dispensaries excessively marking up their prices.
When medical marijuana hit the shelves in September, dispensaries’ prices ranged from $16-$20 per gram, roughly double the black market price.
The lone grower with product available for sale — Theraplant from Watertown — was selling medical marijuana wholesale to dispensaries for $11 per gram. The wholesale price factored in the costs of construction, operations, growing, security, quality control, and packaging. Theraplant hasn’t disclosed its profit margin and company officials declined to comment on this story.
Nearly all other growers and dispensaries contacted for this story also declined to comment on the record because of the sensitive nature of the industry.
For dispensaries and state regulators, the initial struggle was to not have medical marijuana priced below the black market, leaving the potential for patients to turn into drug dealers by selling their legally obtained weed on the streets. At the same time, the price couldn’t be outrageously higher than the street price either.
DCP also has no price controls in place to prevent dispensaries from charging whatever they want.
“That is something we would expect the market to work out,” Seagull said. “Ultimately, competitive forces are going to be driving prices down.”
In the month since medical marijuana first went on sale in Connecticut, prices have dropped to $15-$18.50 per gram as competition has kicked in and more patients have made purchases. DeFazio said dispensaries weren’t meant to compete with the black market; instead they are supposed to serve as a legal alternative that offers the highest-quality product.
“Our competition is to bring the highest quality medical marijuana that is without mold for the best prices that yields the best possible patient outcomes,” DeFazio said.
Once the other three licensed Connecticut growers start making wholesale product available for dispensaries and more patients start seeking out medical marijuana, the price will drop further, DeFazio said.
Market penetration
As of Oct. 15, Connecticut had 2,326 patients approved for medical marijuana, each with the ability to buy the state maximum 2.5 ounces per month. This provides growers and dispensaries some idea of the current market size and what they should expect in terms of revenue, but the industry’s future growth potential remains largely unknown, creating some unpredictability.
Typical market penetration in the 22 other medical marijuana states is roughly 1 percent of the total population, which would put the maximum number of Connecticut medical marijuana customers at right around 35,000 — more than 10 times those currently registered.
Connecticut might not be as lucky, though.
While medical marijuana states like California include broad qualifying conditions such as pain and depression, Connecticut limits the drug to those with 11 very specific disease diagnoses. This could drop market penetration in the state to below 1 percent of the population.
“This is not for everybody,” DeFazio said. “It is only for those people with these 11 disease states.”
Connecticut modeled its medical marijuana market after the pharmaceutical industry, so growers are treated as manufacturers and are responsible for growing, security, quality control, and packaging. All medical marijuana must be delivered to dispensaries in the same form that it is sold to customers, whether it is pre-rolled joints, edibles, topicals, extracts, or flowers for vaporizers.
The dispensaries are meant to be simple pharmacies, registering patients and selling the pre-packaged drugs.
That doesn’t mean dispensaries’ costs are nil. In addition to buying the medical marijuana wholesale, Arrow has to cover the cost of security, pre-approved pharmacists, technicians, other office staff, and typical business expenses like rent, utilities, computers, and software.
DeFazio said he wanted his dispensary to stand out, so he invested in creating a unique atmosphere that would make patients comfortable buying medical marijuana from his store. He describes his storefront as a combination of a physician’s office, spa, and pharmacy — although he can’t legally show it to anyone, other than approved staff and patients, without DCP approval.
Plus, like growers, dispensaries couldn’t get bank loans for their capital expenses, so they had to raise the cash privately.
All these factors added to the overall costs of selling medical marijuana, DeFazio said, which must be reflected in the price. Selling weed at $15 per gram, DeFazio declined to give his profit margin but said he strives to have the cheapest medical marijuana in Connecticut.
In order to cover their expenses and run viable businesses, dispensaries must price medical marijuana according to the market’s supply and demand. When more patients buy drugs, prices will fall, DeFazio said.
“We are seeing a steady increase in interest, registration, and questions,” DeFazio said. “There are a lot of people on the sidelines waiting to see how this is working out.”
Sorting it out
Because the medical marijuana market is in its infancy, regulations governing it are not written in stone, Seagull said. DCP knows it must make adjustments as the market matures.
One early change could be to a rule that requires medical marijuana to be pre-packaged at the grow facilities and sold only in those forms. If a compelling argument was made, the regulations could be changed giving dispensaries more flexibility in how they deliver products to patients, Seagull said.
“If anyone made a compelling case for why the regulations needed to change, we would certainly consider that,” Seagull said.
Another change could be to patient’s monthly 2.5-ounce marijuana purchase limit. That could be adjusted upward if the dispensaries and DCP medical board of advisors find that it was not enough to treat all patient problems, Seagull said.
“There is this tendency to treat medical marijuana as this wholly different thing that has no comparison, but we saw it as a controlled substance, so we treated the regulations like any other controlled substance,” Seagull said.
Meantime, even though the rules now treat growers as drug manufacturers and dispensaries as pharmacies, the regulations don’t prevent vertical integration. A grower could apply for a dispensary license, while dispensaries could vie for a growing permit.
The market now — with four growers and six dispensaries — doesn’t need any new entrants for the foreseeable future, but that is an option as the customer base grows, Seagull said.
“The patients that have come, they are ecstatic. There is finally relief and hope for them,” DeFazio said. “We know there are plenty of patients out there … Now it is a matter of it normalizing and growing.”
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