PharmaCann CEO Brett Novey tells Grown In that he thinks his company will have to go public to keep growing, that New York’s underground market is one his company’s more challenging issues, and that he expects to go shopping for dispensaries in Michigan to fill out his portfolio in that state.
It’s hard to know for sure, but PharmaCann appears to be the largest private cannabis company operating in the United States. With 60 dispensaries spread over seven states, the company is only an acquisition or two from becoming one of the largest players. And as a private company, it’s perhaps afforded a bit more flexibility than some of its public company competitors.
Novey was one of the company’s earliest members, starting as the Chief Financial Officer, ascending to CEO in 2019. Since then, he’s helmed the company through acquisitions in Maryland and organic growth in Pennsylvania and New York, where it became an early operator in both states.
Recently, Novey sat down with Grown In for an extended interview about those states, where he thinks the overall cannabis market is going, and his plans for PharmaCann overall.
Interview edited for grammar and brevity.
Grown In: You got started in Illinois, which is now home to four major cannabis companies, GTI, Cresco Labs, Verano, and you. How much of that is due to the fact that Illinois has had a very limited number of licenses that created high margins for a small group of companies?
Brett Novey: A lot of it has to do with timing, when the Illinois market first put out the applications. If you rewind the timeline backwards, to 2014, Colorado had just become recreational and Illinois announced it was taking applications for licenses. You had a subset of winners that wrote really high quality applications, and then as other states adopted similar type applications for medical programs, particularly in the Midwest and Northeast, that same subset of applicants, who had not only were successful in the initial rounds, but added operational expertise over time to their applications.
I think it was a very compelling story for a lot of states when they were looking to see the beginning of their medical program. And then obviously in this industry you learn a lot very quickly through operations, and just taking that knowledge and having that temporal advantage, having gotten started in 2015, 2016 is why you see so many successful, highly profitable companies headquartered in Illinois.
GI: You are also active in Massachusetts. That state allows only three dispensary licenses per owner. New York and Connecticut both have sharp license restrictions in mind. How does a company plan for retail expansion in this environment?
Novey: You’re limited, right? The way we’ve done it historically, is in states where there’s caps on the number of dispensary locations, we take that into account when we size our cultivation production facilities. We think that this market is so new and everybody’s learning. Just inherently, over time there’s going to be massive swings in supply and demand equilibriums.
What we’re trying to protect ourselves against is situations where there is massive oversupply, and wholesale prices are really basically punished where they come way down. Having your grow facilities sized appropriately to match demand from your retail stores is one way we try to mitigate the adverse consequences from these volatile market swings. Which is what we think will occur over time for the next three to five years until supply and demand find that equilibrium.
GI: Talk to me about the demand equilibrium. That’s a really interesting concept and not something I’ve really heard about before. How do you think about that and is it something that’s predictable or is it just a volatility you have to live with?
Novey: It’s predictable in the sense that you can model it. The industry is due to have a high degree of confidence that you’re going to get it right, but you can understand the ramp up of patients based on the frictions around getting a medical card, around qualifying conditions. You can look at the population of people in any state and you can make assumptions of how fast a medical program will ramp up from a demand perspective. And then, based on that, apply what it should look like and you can gauge from the market capacity and what’s the capacity in the market today and how’s that going to ramp up over time and how’s that capacity ramp going to look like the demand ramp as a medical market transitions.
The industry is smart in that we try to match the supply and demand dynamics. When these markets transition from a medical to a recreational market structure there’s usually a massive upswing in demand, and because it takes so much capital to invest in these cultivation production facilities, initially when any market transitions from a medical market to a recreational market there’s likely to be an undersupply. But that supply, like we all learned in our macroeconomic classes, potentially that demand gets met with supply and oftentimes becomes oversupplied and that’s how you get massive downward pressure on pricing.
There’s ways to think about it. We have some data points as the industry evolves. Illinois is a good example of what happens in a medical market over time, transitioning from medical to recreational, and you can apply that to New York, which we have, for example.
GI: What sort of factors do you use to figure out market capacity. How do you figure out what a market capacity really is?
Novey: The historical data, there’s lots of groups out there that publish data on consumers.
The older markets, the legacy markets that have had time to mature. Colorado is a great example. We get market data from Colorado looking at in-state purchasers versus out-of-state purchasers. The average spend per customer. The frequency of visits. All those things help you gauge the average number of consumers based on the population. How much they consume, how frequently they consume. And then you can overlay that on any state.
GI: So, then for instance, recently we did a brief analysis of looking at per capita consumption of Colorado and California versus Illinois and Michigan, and you saw Colorado’s per capita consumption was almost twice as much as it was in Illinois and Michigan. Because those are young markets you might make the assumption that Illinois and Michigan still have a lot further to go, they’re going to meet if not go all the way to where Colorado is. But also Colorado’s per capita consumption rate was about the same as in Illinois and Michigan, maybe a bit higher. Does that say to you there’s a lot more room left in California, or are there other factors in play here?
Novey: The older markets, the customers are more educated. A market like Colorado, a customer in Colorado knows exactly what they want. When they go to a store they have a very precise basket by now. We’re talking seven, eight years of recreational. In newer markets, customers don’t know what to buy, there’s a lot of customers that are not comfortable going into a store. The dynamic is, they sort of counterbalance each other.
A market like Colorado, you have a larger percentage of people in the state that have now become comfortable consuming cannabis, that have a smaller, more precise basket, because they’re more familiar with the offerings. In a state like Illinois, you have fewer people that are initially going to the store, that are going to purchase a variety of things, because they don’t know what they like. You have to take all those things into consideration when you think about the supply demand dynamic, pricing dynamic, et cetera.
When we think about the growth of our markets from now to 2025, we think Illinois, despite where it is today, still has a 155% growth from 2021 to 2025, because of the dynamic I just mentioned. Customers will buy smaller baskets, but more people are going to buy and the market is going to grow.
In Colorado, we think the market’s still going to grow, we think it’s going to grow by about 30% between 2021 to 2025. That’s going to be most likely driven by new users that aren’t buying today that decide they are going to start trying cannabis. Colorado also has that aspect of visitors coming into the state. So as that grows in Colorado, the market should grow commensurate with tourism.
Every market is unique. California has over 200 million visitors a year, so as people become more comfortable with recreational cannabis, more and more of those 200 million visitors, that tourism will help drive those purchases.
GI: You’re one of the ten medical cannabis providers in New York, where there’s lots of competition from both the underground market and tribes. How does that factor in for you?
Novey: That’s the toughest question right now when we try to understand the New York market. The two biggest things when I think about this is testing and taxes. This is a CPG product, it’s consumed by human beings, it should be tested rigorously, and there should be high standards. And then taxes, the taxes associated with the industry, and a lot of the reparations those tax dollars will go towards improving people’s lives in the states. The states need to figure out a way to use those levers to ensure more of the traditional markets find its way into the highly regulated recreational markets. I think that will naturally happen over time. People don’t buy gin on the street corner any more. They go to a liquor store to buy gin.
GI: It depends on where you are though. For instance, if you live in Kentucky, where my in-laws do, people do that. It depends.
Novey: I’d be curious to see how many people do that versus that store.
GI: OK. But there are still a significant number of people looking to do that. And those that generally do, are usually your biggest consumers, right? The casual consumer, like me, I’m probably not going to be the person to start with a dealer. But the more regular users, the biggest consumers, like in Michigan, those are caregivers or people buying underground. How do you think about that in a state like New York? Because that’s where a lot of your money could come from.
Novey: To me, it’s testing and breadth of products essentially. You come to a dispensary, there’s a lot more form factors than just straight flower. And educating consumers about the testing standards that come with products from a regulated dispensary versus an unregulated dispensary where there’s no testing requirements.
I think what you saw a few years ago with the vape crisis really highlighted that. As situations like that continue to occur, more and more people will be driven to the regulated market, where they know what they’re really buying.
GI: So, that makes sense for the underground market, but not tribes. Tribes have much lower operating costs. Some of them are getting very savvy and creating their own systems that mirror state systems, but still keeping their costs low because it’s highly integrated. How do you work with that?
Novey: I think that will be quality of product. We’re growing in sophisticated greenhouses where we really tightly control all the environmentals. I think over time, people will realize the quality and consistency of our product far exceeds what’s grown outdoors or et cetera. It’s just going to be consumer education. A lot of it is just going to take time.
Not all it is going to translate over to the regulated market. But more and more will. Just because of quality, the consistency, the standards, the testing.
And customers should feel good about tax dollars going into local programs. You’re buying from the regulated market and taxes are going into the local community. There’s something to be said about that.
GI: Part of your LivWell acquisition includes a large cultivation facility in Michigan. That state has around 500 dispensaries now. Is there room for a new dispensary player in the state?
Novey: There’s room to acquire some of those dispensaries in the state, That’s how we’re thinking about it. And that’s how LivWell was thinking about it as well.
Every state has its own competitive market dynamics that has to be analyzed differently, because the regulations are different. In a state like Michigan where there’s no license caps, We like what LivWell’s done. They built a large grow, they have a low cost manufacturer, a low cost cultivator in the state. Over time we’ll add a meaningful dispensary portfolio to that cultivation footprint, and that will expand margins, from where they are today, and have a nice little business in Michigan, where we could find one or two dispensaries at a time that we could purchase for cash for very attractive prices and roll it into that larger Michigan ecosystem, the foundation of which is that low cost cultivator. Ultimately that will allow us to deliver real value to our customers on the retail side.
GI: Did you apply for dispensaries in Ohio last month?
Novey: We did.
GI: Ohio operators have told us that even if adult use isn’t legalized, they expect a $1.5B market in two years. Does that match your expectations?
Novey: I think that’s aggressive. Unless something really changes with respect to the carding process and the purchase limits, I know there’s lots of talk about that, allowing people to purchase more.
Every state has their own set of unique frictions. As you remove those one at a time, the markets mature, and become more relevant and larger in general. If Ohio starts to remove restrictions around telemed consultations and qualifying conductions, and purchase limits. It could grow to that. Look at Pennsylvania, it is on it’s way. There are medical markets that can grow that large, but you have to remove as many of the frictions as possible for that to happen.
GI: After your purchase of LivWell, it seems like M&A is clearly an important part of your strategy. When you’re considering an M&A deal, what are the key points you look for and what are the red flags?
Novey: The first thing is the people, obviously. We consider people as the most important asset. We want people that are complementary to our beliefs, how we behave and carry ourselves. Our ethical standards. Abilities that complement ours.
A license is a license but an operational business is where there’s lots of differences. In the LivWell case, when we were diligencing them, a big piece of the acquisition thesis was their ability to cultivate and manufacture products. We think that all else equal, given how long they’ve been doing it and they were doing it in one of the most competitive states in the world. They are probably about 40% more efficient today than PharmaCann in growing cannabis. That’s a best practice that we’re going to deploy across all of our grows.
Those are the types of complementary things. You could try to measure that from a dollar perspective, but the acquisition model, you look at the people, the team and their abilities how that all complements the business. Those are the real things we look for when we acquire a company.
GI: When you look at potential threats from adjacent industries, like beverages, tobacco, pharma, hospitality, what do you pay the most attention to?
Novey: Alcohol, tobacco I think make a lot of sense, there’s lots of similarities. We think this is a CPG industry, and all of those companies are going to be players in this industry some day. That’s why we made the partnership with Cronos [Group]. In a sense all CPG companies have an interest in cannabis. You’re selling a product to customers that will improve their lives. That’s exactly the type of companies that will participate in the industry over the long term.
We don’t view it as a threat, really. We think it’s inevitable. We’re a CPG company like they are.
GI: How do you imagine those companies will enter the market?
Novey: It depends. They have to have licenses. Which we have. They’ll go through the same process that we’ve gone through to have the privilege to operate in these states.
GI: We’re learning that size matters a lot when it comes to scaling operations and access to private debt capital. You guys have 60 dispensaries, putting you in a group of four or five companies about that size. Curaleaf has over 100 now. Is that where a company like you needs to go? More dispensaries, more cultivation?
Novey: We plan on adding more dispensaries over time, especially in a state like Colorado. We talked about Michigan already. Where we can add more dispensaries, we’ll add them. A big part of it is matching the cultivation output with retail distribution. For example in Colorado, if we were to expand our capability there, we would look to add stores to match additional capacity.
GI: So, if you think the market could add 30% in consumption, that means we should expect somewhere around 30% growth in dispensaries.
Novey: We’d want to match the market, but I don’t think it all has to come from the net income of dispensaries. We could grow our existing stores by net 30% as well and match the market growth. It’s all about reach as well as dispensary growth. You don’t want two dispensaries so close that you’re stealing from one to add to the other.
The example with LivWell would be along the I-70 corridor – there’s a big opportunity. Their stores happen to be in and around the Denver area, so the opportunity for LivWell would be throughout the rest of the state along I-70. In Michigan we’ll take a similar approach. You want a good geographic dispersion so you touch many different people.
GI: I think you’re the largest – or close to largest – private cannabis company in the country now. Is that a long-term plan? Is there so little value in equity markets right now that you want to avoid it?
Novey: We’re private right now. It’s been helpful for us that we have five to six highly concentrated shareholders with like 80% of the shares. They’re all aligned in respect to the same time horizon with the same long-term thinking. When you have that you’re able to make decisions that aren’t so dependent on quarterly potential growth.
As a public company operationally, there can be friction between doing something today that delivers meaningful long term value but you might forsake something a bit in the short term. That’s a benefit that’s existed for us. On the flip side, we’re getting large enough as a company that we’re looking to acquire some public companies. It’s almost impossible to do, for a private company to use private stock to acquire a public company.
GI: But PE companies do that all the time. They take public companies private. Why can’t you?
Novey: Because they usually do it with cash.
If we had $400 million of cash we could take a public company private, but if we had that kind of capital, the stocks wouldn’t be trading at what they’re trading today.
GI: So ultimately, if at some point you want to acquire a public company, you have to be a public company.
Novey: It’s not impossible, but practically yes.
GI: Is there value in your mind in the equity markets right now in terms of how much capital you think you’d be able to get out of it, or as soon as you go public are you immediately in the danger of getting these super low valuations because equity markets haven’t been treating cannabis that well?
Novey: As a private company our valuation’s pegged off the public companies anyways. I think there’s lots of value in being public. The value is your ability to raise large sums of capital quickly. That’s a real benefit. Historically, as a private company we’ve been able to raise some pretty large slugs of capital, but it’s taken us a lot longer.
Back in early 2021 the market was really strong and a lot of public companies were raising large sums of cash in a matter of days. We raised a large sum of cash but it took us 45 days. And the reason is, a lot of the investment funds that move quickly have liquidity mandates. They can’t even consider us unless we’re in the process of having a short-term path to being public.
That’s why it’s taken us more time to raise capital. That’s one of the real benefits of being public in this space today.
GI: What’s the long-term plan for any multi-billion dollar cannabis company, when it looks highly unlikely that banking laws or federal legalization will be passed through Congress any time soon?
Novey: The same as it’s been for the last six years. It doesn’t change anything. We’ve been dealing with that environment for the last six years. We’re used to that friction. We know how to operate around it. When that goes away, will we be a better, faster, more efficient company? Yes. It’s nothing new. It’s not like a harm that’s being put on us.
GI: Let’s imagine you’re a different kind of CPG company. You’re a beverage company. You would probably be trolling around to get bought by Pepsi or Quaker or something like that. And that’s off the table, because those guys aren’t going to get into cannabis right now.
Novey: It’s off the table for now, but what that allows us to do is to continue to execute our strategy and become bigger, larger and create more long-term shareholder value. The sooner those types of participants enter the market, it’s really going to stymie our ability to create massive shareholder returns, which is what we’ve been doing for the last six years.
GI: Do you ever think about going international?
Novey: We do. When we think about a long-term strategic roadmap, it’s certainly on the map, but there’s so much opportunity in the United States right now, there’s no practical or functional workstreams for PharmaCann. When we think about our growth, we think about the core business we have today, growing that organically, transitioning markets from medical to recreational where we’re already operating. Then we think about going deeper in the states we’re already operating in. Operating up to the license caps in each state, or in states where there’s no caps, like Michigan or Colorado, finding that balance between our cultivation facilities and retail stores.
The last wave of that is expanding into states where we’re not operating, and there’s massive opportunities. A New Jersey, a Florida, a Nevada, an Arizona, a California. That’s our real long-term focus. We’re paying attention to the rest of the world. We have a strategic partner in Cronos, that is paying attention to the rest of the world as well. We think someday will there be a PharmaCann or Veralife banner outside the United States? Sure. But it’s not something we’re acutely focused on in the next 3 to 5 years.
GI: When you spend time thinking about the things you cannot control. Where the dragons be? What are those dragons?
Novey: To me it’s the power of the pen. Regulators, an unforeseen change to rules and regulations in any state we operate. That’s a dragon, you don’t want to get caught sideways for a change you didn’t see coming. The biggest other friction is 280E, something needs to be done with that if this country wants this to be a real long-term, sustainable, viable industry.
And then banking, Access to banking. It would be great to go to one bank, instead of in eight states we have nine banks. It would be great to have lower cost of capital, real treasury services, as a company with 2,500 employees, we’ll be able to work with companies like Microsoft, Workday for HR systems. All these great tools we can’t use, because they can’t work with companies like us.
We’re sort of stuck in the 70’s and 80’s with respect to some of our systems capacities.
GI: Thank you very much. It’s been terrific to talk to you and I appreciate your time.
Novey: Likewise and I look forward to reading the article!