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Arizona

Regulatory Environment Overview

Medical or Recreational Legal Since Requires Cards Accepts Other States Cards Fee Dispensary System
Medical 2010 Yes Yes $150/$75 Yes; Nonprofit

Cannabis Legalization

Proposition 203 passed in 2010 with the approval of 50.1% of voters, legalizing the use and possession of medical marijuana for patients with "written certification" from a physician.  HB 2006, to be considered by the Arizona state legislature in 2015, is a decriminalization bill which would remove criminal penalties for the possession of an ounce or less of marijuana.

Legal Consumption

Patients and their caregivers (21+) may purchase medical marijuana. Qualifying patients include Arizona residents ages 18 or older (those under 18 may have their legal guardian registered as their caregiver) who have at least one of the following conditions: cancer, Glaucoma, HIV/AIDS, Hepatitis C, ALS, Crohn´s Disease, Alzheimer´s, Cachexia, Arthritis, migraines, seizures, post-traumatic stress disorder (PTSD), Multiple Sclerosis, or severe nausea. 

Medical cards are required for Arizona residents to purchase marijuana.  The law also recognizes "visiting qualifying patients," who are those with valid doctor's recommendations from other medical marijuana states. Medical cards require submission of an application, Physician Certification Form, and the state fee of $150 per year, or $75 if on SNAP/Food Stamps, to the Arizona Department of Health Services (ADHS).

Possession Regulations

Qualifying patients may purchase and possess up to 2.5 ounces of usable marijuana every two weeks. Patients authorized to grow marijuana may possess up to 12 plants. A designated caregiver may possess up to 2.5 ounces for each qualifying patient and up to 12 plants for each patient (maximum of 5 patients). Plants must be grown in an enclosed, locked facility located at least 25 miles away from the nearest dispensary.

Patients and caregivers may share marijuana with other patients for free as long as they don’t knowingly cause the patient to exceed 2.5 ounces. In 2015, the Arizona Court of Appeals overturned a 2014 decision made by Arizona Superior Court Judge Richard Fields ruling the state does not have the right to prosecute medical marijuana patients who sell marijuana to other patients. Consequently, state-licensed medical marijuana dispensaries are the only place where marijuana may be sold legally in Arizona.

Regulatory Authority

The Arizona Department of Health Services (ADHS) is responsible for regulating the industry. The location of any dispensary or cultivation site must be in compliance with local zoning restrictions (hours of operation, distance from schools, etc. can be limited).

Dispensary System

Dispensaries are permitted but must be not-for-profit. Under current law, the Arizona Department of Health Services can issue no more than one nonprofit medical marijuana dispensary registration certificate for every ten pharmacy permits issued. As of August 1, 2016, there were 99 licensed medical marijuana dispensaries in Arizona. In May 2016, the Arizona Department of Health Services announced it would begin accepting applications for 30 additional dispensary licenses. If approved it would bring the total up to 129 licensed medical marijuana dispensaries, or roughly one dispensary per 10 pharmacies, as per Arizona medical marijuana regulations.

Licenses are granted by the ADHS to individuals 21 and over who have been Arizona residents for at least three consecutive years. Applicants must provide evidence of access to $150,000 in start-up capital.

Dispensary Restrictions

Each dispensary is allowed one property for marijuana cultivation that may be located at either the dispensary or an off-site location. Grow operations may be on any property that meets state and local regulations dictating minimum distances from schools, libraries, churches or residential areas.

  • Statewide, neither the dispensary nor the cultivation addresses may be within 500 feet of a school.
  • There can be no more than one dispensary for every ten pharmacies, except that there can be at least one dispensary in every county.
  • Dispensaries must have a single secure entrance, a strong security system, and no medicating is allowed on the premises.

Vertical Integration

Permits are granted through the ADHS and allow each dispensary one property to grow marijuana, though they are no longer required to grow a portion of their own product. In order to cultivate, growers must also have a license to operate a dispensary.

Consumer Taxes (at state level or local level)

Marijuana is subject to a 5.6% sales tax statewide, and an additional 2 to 3% levied by cities and other local governments.

Business Taxes (levied on dispensary owners, manufacturers, etc.)

$500 for an initial or a renewal registry identification card for a dispensary agent.

$5,000 for an initial dispensary registration certificate.

$1,000 for a renewal dispensary registration certificate.

$2,500 to change the location of a dispensary or cultivation facility.

Market Dynamics

2015 2016 2017 Forecast 2020 Forecast
Total Medical Marijuana Sales $167,002,798 $242,714,053 $320,382,549 $293,024,603
Sales Growth 51% 45% 32% 40.42% ('16-'20 CAGR)
Avg. Price/Ounce $360 $293 $290 $288

2016 Growth Drivers

The market for medical marijuana grew by an additional 45% in 2016, thanks to market maturation and increasing numbers of medical cardholders. As Arizonans become more comfortable with the idea of medical marijuana, and those living outside of major cities enjoy improved access to dispensaries, demand will continue to grow. Medical marijuana is still relatively new in Arizona: the first dispensaries opened as recently as late 2012. Should recreational marijuana begin operations in 2018, the medical market is expected to peak at roughly $320 $322 million in 2018 before leveling out around $293 million in 2020.

Among the biggest stories impacting the Arizona cannabis industry is the inclusion of PTSD to the list of qualifying conditions for medical marijuana.  Effective January 1, 2015, PTSD sufferers are now allowed to become cardholders and purchase marijuana to treat the symptoms of PTSD.  Over the span of two years, this development has contributed to a nearly 50% increase in the number of Arizona cardholders: at the end of 2014, there were 61,272 cardholders registered with the state.  At the time of publication, this number has jumped to 97,938.  PTSD’s addition to the list of qualifying conditions is expecting to contribute to continued growth in Arizona’s medical marijuana patient number through 2020.

Pricing analysis indicates an average price of $293 per ounce of flower in Arizona, in line with prices in neighboring California but significantly higher than states like Colorado and Oregon. The state's vertical integration requirement has kept both supply and unit prices largely stable year over year since the program's inception.  Prices are expected to remain more or less at this level over the forecast period.

Relatively low rates of taxation (5.6% state sales tax and 2-3% local sales tax) help prevent unit prices from escalating to excessive levels. However, the vertical integration requirements, the restrictions on grow locations and the inability of cannabis businesses to qualify for business loans makes it difficult for large-scale cultivation operations to develop. This acts to deny patients of lower prices generally associated with economies of scale.

The defeat of Proposition 205 in November 2016, which would have legalized the possession, use, and sale of recreational marijuana through the state of Arizona, suggests that the medical marijuana market will likely be the only outlet for legal marijuana for the foreseeable future.

Category Performance

Flower

While the market share of flower continues to grow at impressive rates, rates are slowing as patients increasingly search out alternative methods of consumption. Flower made up 61.87% of the overall sales in 2016, but this share is expected to drop to 35.6% by 2020. Arizona medical marijuana patients are generally older than patients in other states such as California and Colorado, and older patients tend to prefer flower and edibles over concentrates. However, both edibles and concentrates are gaining ground on flower as the selection of reliable brands of these products improves and more patients become comfortable with these alternative delivery methods. Flower is estimated to grow by 28.96% in 2016.

Edibles

As previously mentioned, edibles are gaining in popularity, particularly amongst older medical patients who are seeking healthier methods of medication. Another contributing factor to edible growth is the increasing variety of products carried at dispensaries: selection has improved dramatically in 2016 and is expected to continue to diversify over the forecast period, catering to a wide variety of consumer tastes. Edibles grew by 74.4% in 2016 and are expected to grow by a CAGR of 65% 19.74% between 2016 and 2020. Edibles made up 24% of the Arizona medical market in 2016 and are expected to comprise 40.86% by 2020.

Concentrates

Concentrates may comprise the second smallest market share in Arizona (a 12.6%% market share in 2016), but they are expected to be a fast growing segment of the Arizona medical marijuana market in the near future. Concentrates are becoming much more popular, particularly among younger patients, and are expected to continue to grow at impressive rates (a CAGR of 19.1%) over the forecast period to reach 21% of the overall market by 2020.

Others

Topical products (creams, lotions, etc.), THC pills, tinctures (liquid cannabis extracts) and other infused products continue to grow in popularity among both medical and recreational marijuana users across Arizona. However, all these products combined only made up only 1.5% of the overall market in 2016 and are forecasted to grow to just over 2.5% by 2020. In dollar value terms, these numbers translate to explosive growth, from just under $4 million in 2016 to $7.5 million by 2020, an estimated CAGR of 19.13% over the forecast period.

Industry Challenges

For many dispensary owners, the vertical integration requirements pose a significant challenge. Creating not only their own dispensary, but also their own grow operation takes a significant amount of startup capital. Given the restrictions placed on grow operations, it can be challenging to find an appropriate location for such a facility in smaller towns. For those dispensaries that do not run their own grow operations, securing a steady supply of quality product they can sell at competitive prices and still breakeven is extremely challenging. Similar challenges face Arizona cannabis businesses as in other states, including lack of access to banking and loans.

Supply Chain Analysis

Cultivation

Number of grow operations

As previously stated, Arizona only allows patients, caregivers and dispensaries to cultivate marijuana. While the number of patients and caregivers cultivating their own plants is unknown, there is unquestionably less than 99 professional grow operations in the state (as not all licensed dispensaries cultivate).

Regulations on grow operations

State law ties cultivation to dispensaries by definition and requires a dispensary to provide the address of an additional cultivation location, if any, when applying for a registration. The ADHS does not have the authority to issue a separate certificate to an entity that is only a cultivation facility.

Anyone who cultivates medical marijuana must do so in an enclosed, locked area (indoors or outdoors). To meet this requirement, greenhouses must be equipped with security devices that permit access only by a cardholder or be surrounded by solid 10-foot walls constructed of metal, concrete, or stone that prevent any viewing of the marijuana plants and have a one-inch thick metal gate.

Adequacy of supply

Even though dispensaries are required to cultivate their own product, or purchase it from another dispensary, the amount of product available has adequately met demand. There are occasional, short-lived shortages in supply that are mostly attributed to harvest rotations, but they do not impact the market in any meaningful way. If the laws are ever amended to allow for third-party, for-profit cultivation operations, the investment opportunities could be significant. While it is not required for each dispensary to cultivate their own cannabis, it is difficult for dispensaries to offer competitive prices if they must purchase their flower from another dispensary (which charge higher rates than are typical for wholesale grow operations in other states). Many dispensaries would greatly prefer a system that makes it easier to purchase from growers rather than focus on cultivation, as are present in most other states. 

Processing

Number of processing facilities

As with cultivation operations, processing facilities are tied to dispensaries. It would be logical to assume then that the market for edibles would be characterized by unbranded products, with each dispensary carrying only their own line of edibles. This, however, is not the case as several dispensaries have found their own brand of edibles to be successful and have begun distributing them to other dispensaries throughout the state. For example, leading brand Yilo is produced by Natural Relief Clinic (DBA Green Farmacy) and Emerald Leaf brand products come from Emerald Palace dispensary. Likewise, multistate brands are allowed but are required to partner with a local dispensary to produce and distribute their products in the state of Arizona.

Regulations on processing

Processing facilities must meet local regulations dictating minimum distances from schools, libraries, churches or residential areas.

Opportunities

As more dispensaries, and therefore cultivation and processing facilities receive licensing, competition in the edibles and concentrates market is sure to increase. However, demand for current brands is also likely to increase as not all the new dispensaries will process their own products.

Likewise, given the increasing popularity of edibles and concentrates among medical marijuana patients, there could be investment opportunities if the laws are amended to allow for third party, for-profit processing companies.

Quality Assurance

Number of QA operations

At the time of this publication there were 2 3 testing facilities in the state of Arizona. Due to the fact the ADHS does not require testing of medical marijuana, the Arizona testing market remains small and stagnant. Likewise, because there are no requirements or standards, some dispensaries have their own equipment and do their own testing.

However, even though medical marijuana in Arizona is not required to be tested by law, this is increasingly becoming an industry norm as patients are demanding lab tested medication. In addition, many industry participants believe it is only a matter of time before regulations are put in place and marijuana in Arizona is required to be tested.

If testing regulations are passed, the demand for quality assurance labs will probably grow at impressive rates and will not be limited by the non-for-profit requirements placed upon dispensaries (and out of course cultivators and processors). For this reason, quality assurance laboratories could prove to be the among the best investment opportunities in the Arizona marketplace.

State QA requirements

The ADHS does not require dispensaries to test their medical marijuana for harmful substances such as pesticides, herbicides, molds, bacteria, and other toxins. Fortunately, more and more Arizona dispensaries are choosing to have their medicine tested for quality.

Retail Environment

Dispensary systems

Arizona has a relatively mature dispensary system that has been in place since 2012. However, growth has been slow considering there are currently only 99 dispensaries operating out of the estimated 130 allowed (as outlined in Proposition 203). This accounts for only 76% of the possible number of dispensaries. The remainder of allotted licenses are expected to be distributed in the latter half of 2016. Unless the laws are amended and/or recreational adult use is legalized and provides for more dispensaries, there is limited room for growth under the current dispensary system. 

Lounges

Although the Arizona Medical Marijuana Act prohibits smoking marijuana in a public place, the phrase "public place" is somewhat flexible. Medical marijuana rules developed by the Arizona Department of Public Health define "public place" as "any location, facility, or venue that is not intended for the regular exclusive use of an individual or a specific group of individuals."

Thus, lounges have opened up under the premise of being for the exclusive use of a group of individuals who pay membership fees, meaning the people inside can smoke marijuana legally. Because these lounges have opened through a legal loophole there have been several unsuccessful attempts by authorities and even marijuana dispensary owners to close them down. As things stand currently, these cannabis clubs are unregulated and continue operating.

Number and size of operations

The dispensary system in Arizona is mostly characterized by independent shops. However, several smaller chains (of two locations each) do exist. Given the limitations Proposition 203 imposes on the number of dispensaries allowed, it is unlikely that any large chains will appear without the consolidation of existing dispensaries. It is possible that existing dispensaries will be awarded new locations, but the development of large chain operations is not thought to be likely at this time.

Demand Factors

Category For Calendar Year 2016 (unless noted)
Total Population                                                 6,731,484
Medical cards in circulation                                                      97,938
Estimated Adult Marijuana Consumers                                                    702,802
Heavy                                                    206,475
Moderate                                                      52,801
Occasional                                                    443,527
# of university students  748,455 (2013) 
Population 21-35                                                 1,521,802
Population 36-50                                                 1,386,679
Population 51-64                                                 1,539,176
Population 65+                                                 1,373,288
Prevalence of HIV/AIDS (Rate per 100,000) HIV 232.3 / AIDS 114.8 (2011)
Prevalence of Cancer 184,594 (2014)
Prevalence of Glaucoma 50,879 (2012)
Prevalence of Epilepsy N/A

Demographic Influences on Demand

University Students

According to the U.S. Department of Education, there were approximately 21 million university students in the United States in 2012, or about 5.7% of the population. Arizona boasts nearly twice the national average with close to 750,000 students enrolled in 2013, or 11.2% of the state’s total population. Though Arizona accounts for only 2.1% of the total U.S. population, it is home to 3.5% of its university students.

Though Arizona has a high proportion of students relative to its population, the state is quite unfriendly to marijuana users and researchers who try to take part in marijuana studies on campus. Not only did a 2012 amendment to the Medical Marijuana Act ban possession of marijuana on campuses statewide, the state´s universities have also been strict and severe about enforcement.

An Arizona State University (ASU) student with a valid Arizona Medical Marijuana Card is facing a criminal conviction for using his legal, medical marijuana on campus. In March 2014 he was charged with a felony by ASU police after they found less than an ounce of cannabis in his dorm room. In October 2015, the felony was reduced to a misdemeanor, but the incident illustrates that Arizona continues to be the only state where medical marijuana patients can be charged with a felony for use and possession on campus.

ASU, the largest university in the United States in terms of total student enrollment, might seem marijuana-friendly on its surface due to its reputation as a “party school”. In fact, it was ranked the number three party school in the country by Playboy magazine in their Top 10 Party Schools in America list in 2011. However, for the past few years, ASU has generally hovered near the bottom of the list or has been left off altogether. The university appears to be making an effort to clean up its image and prevent on the use of illicit substances (including marijuana) on campus.  Many of ASU´s current students indicate a noticeable change in the focus at ASU which has been put more on academics as opposed to extracurricular activities.

At the University of Arizona, a well-known medical marijuana researcher and clinical assistant professor in the college of medicine, Dr. Sue Sisley, had been with the university for nearly eight years when she was let go in 2014. She had been planning a study on marijuana's effect on veterans with chronic PTSD. According to Sisley, she lost her job at the university in a political move because she, “was on the forefront of the most controversial research happening at the university and they did not like the optics of veterans smoking and vaporizing marijuana on their campus, even in the context of a rigorous, FDA-approved, randomized controlled trial." The UA denies the allegations that it received political pressure to terminate any employee, but suspicion surrounding the university’s motives remains.

Even with Arizona’s large student presence and the fact the college-aged demographic typically offers the greatest demand for marijuana, many of this state’s schools are fighting the advancement of marijuana research, use and possession. This hostile environment does not currently seem be conducive to the growth of either the medical or recreational marijuana markets.

Senior Citizens

With a 2014 population of over 1.24 million residents 65 or older, or 16.2% of its total population (compared to around 13% in Colorado and California) Arizona has a relatively large proportion of elderly residents. This percentage is expected to slowly climb to over 17.5 percent by 2017.

In terms of this age group’s health, approximately 120,000 people aged 65 or older (or 9.7 percent) currently suffer from Alzheimer’s. Alzheimer’s or “agitation of Alzheimer’s” is one of thirteen qualifying conditions for the legal use of marijuana in Arizona, the prevalence of which has increased by nearly 24 percent since 2010.

Glaucoma is another such condition affecting nearly 51,000 people over age 65 in 2012, or about 4.1% of that age group statewide.

These health figures and the large proportion of elderly residents in the state suggest a high potential demand for medical marijuana to treat ailments commonly suffered by elderly populations.

However, the results of the 2013 National Survey on Drug Use and Health (NSDUH) from the Substance Abuse and Mental Health Services Administration (SAMHSA) show that very few users (less than 1%) of those surveyed nationally in the age 65+ demographic were using marijuana with any frequency. The true figure may be higher due to bias, social stigma or privacy concerns that altered responses among this particular age group, especially when considering that opposition to marijuana legalization tends to be much higher among those 65 and older than younger people. But despite the possibility of bias or inaccurate responses, it can still be inferred from this extremely low figure that the market for marijuana among this age group is probably minimal.

Prevalence of Conditions

The number of people suffering from either HIV or AIDS has nearly tripled in Arizona since 2002, from a rate of 82.9 per 100,000 to just over 241 per 100,000 in 2013. Alzheimer’s disease has shown a similar increase from approximately 97,000 cases in 2010 to 120,000 in 2014. Approximately 3.9 percent of the state’s population suffers from cancer which is low in comparison to a nationwide average of 4.2 percent.

However (as reflected in the Arizona Department of Health Services 2014 statistics below) none of these conditions, commonly treatable by marijuana, have been leading large numbers of patients to seek out medical marijuana.

Nature of Debilitating Conditions during calendar year 2014
Nature of Debilitating Conditions Qualifying Patients
Count Percent
Unique conditions1 71,464 84.69%
Cancer 2,158 2.56%
Hepatitis C 816 0.97%
Cachexia 77 0.09%
Seizures 746 0.88%
Glaucoma 605 0.72%
Sclerosis 31 0.04%
Alzheimer’s 36 0.04%
Severe and Chronic Pain 64,853 76.86%
Muscle Spasms 676 0.80%
HIV/AIDS 409 0.48%
Crohns Disease 381 0.45%
Nausea 676 0.80%
Multiple conditions2 12,164 14.42%
Severe and chronic pain with mention of one other debilitating condition 10,595 12.56%
Severe and chronic pain with mention of two other debilitating conditions 985 1.17%
Severe and chronic pain with mention of three or more other debilitating conditions 135 0.16%
Multiple conditions without mention of severe and chronic pain 594 0.70%
State Totals 84,383 100.00%
1Conditions are unique as in, of the 84,383 qualifying patients 2,158 indicated cancer as the only debilitating medical condition.
2Multiple conditions are two or more conditions specified by a qualified patient as in, of the 84,383 qualifying patients 12,309 indicated having at least two or more of the listed debilitating conditions.

 

According to the data in the above table, 76% of patients are using marijuana to suppress severe or chronic pain and over 14% are treating pain as well as another unnamed condition or conditions. Thus, over 90% of the qualifying conditions include severe/chronic pain.

None of the other conditions commonly treated by marijuana, such as cancer, Glaucoma or HIV/AIDS were listed as the unique qualifying conditions for greater than 2.6% of registered cardholders.

There are many possible reasons for this anomaly. Patients may be experiencing pain related to an enormous array of health conditions, some even associated with the serious conditions listed above. Some patients may be falsifying information and using the vague category of "pain" in order to gain legal access to cannabis without having to claim any verifiable condition. Others may be concerned with privacy and simply omitting further details about their underlying medical conditions by claiming pain rather than, for example, stigmatized HIV or AIDS.

Whatever the case, this information is revealing. The market for medical marijuana in Arizona is not necessarily rooted in the needs of patients suffering from many of the conditions commonly treated by marijuana. Severe or chronic pain is such a broad category it covers a virtually infinite number of medical conditions, and questionable medical marijuana clinic practices have made it impossible to know which of these illnesses are being legitimately suffered by patients and which are being falsified in “certification mills” (see below). Due to these factors, data on the prevalence of conditions typically treatable by marijuana are not an effective tool for gauging or understanding the medical marijuana market in the state of Arizona.

Patient Recomendations

Adults over the age of 18 with a valid state ID and an Arizona address may receive a medical marijuana card if they suffer from one of the following conditions and submit a doctor’s recommendation: cancer, Glaucoma, HIV/AIDS, Hepatitis C, Amyotrophic Lateral Sclerosis (ALS), Crohn’s disease, Alzheimer’s disease, Cachexia (or wasting syndrome), severe/chronic pain (arthritis, migraines, etc.), nausea, seizures, muscle spasms, or PTSD.

Patients typically look to medical marijuana clinics rather than their primary care physicians to obtain their recommendations in Arizona. According to State Health Director Will Humble, many family doctors have been hesitant to recommend marijuana, possibly because they lack information about the drug. Others do not want to deal with what they see as an administrative hassle of certifying patients, a process different than simply writing a prescription. For these reasons Humble, “pushes the patients to the certification mill physicians.”

In 2013, according to the Arizona Daily Sun, 25 doctors (out of more than 27,000 licensed in Arizona) were responsible for 70 percent of the medical marijuana recommendations issued in a one-year period. Patients must present their medical records from the previous 12 months (documenting a diagnosis of one of the above listed conditions) to a medical marijuana clinic to receive a physician’s recommendation. They must also pay an annual state fee of $150, which may be less for patients using Food Stamps or in the Supplemental Nutrition Assistance Program (SNAP) program.

Due to bureaucratic, social and political hurdles, only 1.2% of Arizona residents carried a medical marijuana card in 2016. This percentage is expected to rise as the industry develops and cannabis is increasingly recognized for its medicinal applications. The number of cardholders increased by 18% in August 2016 compared with the same period in 2015.

Political Influences

Arizona is a traditionally conservative state. Voters supported a Republican congress by a wide margin (nearly 56 percent of the vote) in 2010, and again in 2012 but with only 51 percent of the vote. Voters also supported the Republican presidential candidates in both the 2012 and 2016 elections.

According to the New York Times’ Presidential Geography series, Arizona is a Republican-leaning state largely because Maricopa County is a Republican-leaning county. With about 60 percent of the electorate, Maricopa County’s political preference tends to determine election outcomes. The county is so big that even though it leans Republican, Democrats get the bulk of their votes there too. The main Democratic-leaning county in Arizona is Pima County which includes Tucson (where the University of Arizona is located).

While Phoenix itself leans Democratic, most of the vast suburbs do not, according to David Berman, senior research fellow at ASU’s Morrison Institute for Public Policy. The Republican Party dominates in western and southeastern Arizona. Mohave and Yavapai Counties in the northwest are older, more rural, less diverse and more socially conservative than the Phoenix suburbs. These local ideological divisions may cause the implementation and enforcement of a statewide recreational marijuana policy to vary greatly from county to county – with some regions inviting marijuana into their districts and others vehemently opposing it.

However, a statewide shift toward Democratic ideals may drive state policy to become more accepting or lenient toward marijuana in Arizona. Per Mr. Berman, the days when Republicans can count on carrying the Grand Canyon State may be numbered. More and more voters are registering as independents and the number of unaffiliated voters has surpassed the number of registered Democrats, and is soon expected to overtake the number of Republicans. If this is indeed the case, we can expect an expansion of the markets for both recreational and medical marijuana in the state.

Competitive Environment

Companies – Small vs. Large

The market for medical marijuana dispensaries in Arizona is mostly characterized by small, independent operations. The largest chains of dispensaries in the state currently have only two outlets. Most of these two store chains have at least one location in the Phoenix metro area, where dispensaries are generally larger and have more competition.

Larger dispensaries are certainly at an advantage in Arizona due to the regulations on cultivation. Because dispensaries are required to either grow their own product or acquire it from another dispensary (while it is technically possible to acquire from patients or caregivers, the higher rate of taxation makes this impractical) larger dispensaries that have their own grow operations are able to sell their products at much lower prices. Given the costs necessary for developing a grow operation compliant with Arizona law, the greater the number of dispensaries to each grow operation will allow for better margins for dispensary owners.

In rural Arizona, there are fewer dispensaries and therefore not as much competition between them.  Currently the majority of dispensaries are located in and around Phoenix, Tucson, and Flagstaff, and along the Nevada border.  Dispensaries in other areas are few and far between, though new establishments are expected to appear as the ADHS resumes the dispensary application process.

Investment Flow into the Supply Chain

Due to the limited number of dispensary contracts granted, as well as the residency, nonprofit and vertical integration requirements for Arizona medical marijuana companies, the state has not yet attracted much attention from major multi-state investors. The three largest out of state companies with interests in Arizona at present are Bhang Chocolates, Kiva, and O.pen Vape, each produced and distributed by local dispensaries.

Other multi-state edible and concentrates brands are expected to gain traction in the market within the next few years. California edibles maker Auntie Dolores recently announced it had raised $1.25 million in capital for expansion to neighboring states; Arizona is expected to be among its prime targets, although as of August 2016 its products were not yet available in Arizona dispensaries. Colorado-based Dixie, which recently secured a deal to begin distribution in California, have recently become available in Arizona dispensaries. Finally, Medically Correct, the company behind popular Colorado brand Incredibles, began distributing concentrates products in Arizona in 2016.

With the explosive growth in the medical market, the growing popularity of edibles and concentrates amongst Arizona medical patients and recreational legalization possible in 2016, good investment opportunities continue to abound in the Arizona market. Manufacturers of popular edibles and concentrates in other states should consider entering the market now and establish partnerships with local dispensaries to ensure their brand has a strong presence as the market grows.

Vertical Integration

Most medical marijuana dispensaries in Arizona are vertically integrated, with cultivating, processing and sales all managed by the same company. As the state of Arizona does not allow for third parties to take part in cultivation, processing or the distribution of cannabis, this has encouraged the presence of small to mid-sized cannabis operations in the state.

Given that some smaller dispensaries do not have their own grow operations, it is difficult for them to price their products competitively and still cover their costs. As a result, nearly all dispensaries in the state that do not have their own grow operations are moving in that direction.

In order to maintain a wider selection of strains, edibles, and concentrates, many dispensaries trade products with each other. Therefore, while all the products carried at a given dispensary are likely grown by a dispensary (some might work with caregivers) they may not all be grown by that dispensary. Similarly, all edibles in Arizona must be produced by a dispensary but can be branded and distributed for sale to other dispensaries around the state.

Branding

Despite the regulatory restrictions put in place, branded edibles play an important part in the Arizona market with the ten largest brands accounting for 50% of the market (the top three accounting for 30%). As all products must be produced by dispensaries within the state, Arizona dispensaries carry few brands that are popular in other states. Two exceptions to this are Bhang Chocolates and Kiva, which at the time of writing were being carried widely in dispensaries throughout the state. However, some dispensaries produce their own edibles and only carry these brands exclusively.

Popular Brands

Yilo is the largest brand in Arizona with a presence in nearly every dispensary in the state. Their flagship products include marijuana infused juices, coffee, and teas. However, they also have a large variety of other products including, but not limited to, chocolate bars, hard candy, twinkies, brownies, popsicles, gummy bears, and tootsie rolls. Yilo also specializes in sugar-free edibles. Yilo is produced by Natural Relief Clinic (DBA Green Farmacy) and all marijuana used in their products comes from their own grow operations. They also offer their own lines of concentrate and flower. A notable selling point is the “traffic light” labeling system: all products are color coded according to how many grams of THC or CBD they contain. Yilo is the largest brand in Arizona and accounts for just over 18% of total edibles sales.

Bhang is a California based edibles company that specializes in chocolate bars, mouth sprays, and chewing gum. Bhang also has a successful line of vape products, such as vape pens and several varieties of cartridges. After being introduced in early 2015, Bhang has grown to become the second-ranked edibles brand in Arizona, with an estimated 7.58% of the market.

Vital V is the third largest brand in Arizona, with products commonly found in dispensaries across the state. The company’s main focus is on infused fruit juices, tinctures, and hard candies, although it is also well known for a line of infused honey sticks. As of August 2016, Vital V was the third-ranked edibles manufacturer, with 4.88% of the market, and the top ranking others manufacturer, with 3.22% of the market.

Consumer Marketing

Dispensaries in Arizona generally market to consumers online, through dispensary social media accounts or customer testimonials on brand maker websites. Many are members of online sites such as WeedMaps and Leafly, though some dispensaries in rural areas have so little competition they can advertise only through their own website and still remain successful.  Dispensaries generally advertise their products through online menus on their own websites or industry related sites.

Growth Potential

Outlook

Growth potential is quite strong for the legal cannabis market in Arizona, with the total market set to grow by a CAGR of 40% between 2016 and 2020. Arizona's vertical integration requirements and relatively strict regulatory environment have allowed the industry to ramp up gradually, with strong growth expected to continue until both the number of medical cardholders and number of dispensaries reaches a saturation point.

By August 2016, just over 1.2% of all Arizona residents held a medical marijuana card. With the inclusion of PTSD to the list of qualifying conditions, the number of medical patients in Arizona is expected to grow continually the forecast period. Similarly, the law allows for approximately 130 dispensaries in the state, and only 99 held licenses by August 2016. Due to the relatively high startup costs inherent in the vertical integration model, the number of dispensaries is likely to continue growing at a moderate but steady rate over the coming years, gradually giving Arizona patients more readily accessible medicine.

While all product categories are expected to benefit from the industry's impressive growth, edibles, concentrates, and the “category” including Topical products, THC pills, tinctures, etc. are set to benefit the most. Concentrates are still a very small niche in Arizona, both because they are less popular amongst older patients (which make up the majority of Arizona's medical market) and because they are more difficult for vertically integrated dispensaries to produce.

However, this is expected to change quickly due to the growing acceptance of concentrates as a delivery method, particularly for younger patients. With the entrance of major multistate concentrates brands these products will be more readily available. Concentrates are expected to grow by a CAGR of 19.1% between 2016 and 2020 to reach just over $61 million in sales for 2020.

Edibles are expected to witness impressive growth over the forecast period as well. Several dispensaries have already established relatively large-scale models for manufacturing and distribution of high quality edibles throughout the state, and older and younger consumers alike are looking for healthier methods of consuming their medicine. The introduction of popular out-of-state brands such as Incredibles will also play a big role in forecasted growth.  Edibles are expected to generate $119.7 million in sales by 2020, indicating a CAGR of 19.74% over the forecast period.

Topical products, THC pills, tinctures, and other infused products are becoming more popular among marijuana users across the nation. Sales for this category of products are expected to increase to just under $7.4 million in sales by 2020, with a CAGR of 19.13% over the forecast period.

Opportunities

Arizona’s vertical integration requirements and relatively strict regulatory environment may create significant barriers to entry, but they also make the state an attractive location for investment. These steep barriers for entry have kept competition to a minimum and unlike most states which have limited the number of licenses that can be issued, there are still licenses left to be granted. In smaller population areas dispensaries run into almost no competition, with many only feeling the need to advertise through their own website. With only 99 dispensaries in the state, even the largest metro areas have only a few dozen dispensaries compared with the hundreds present in cities like Los Angeles or Denver.

Enterprising dispensary owners looking to increase the scale of their business can invest in the development of their own brands of edibles or concentrates, which can then be distributed to other dispensaries throughout the state. Those not looking to focus on product development can partner with major edibles or concentrates companies in other cannabis markets who are interested in entering the Arizona market. Brands that already have a presence in the Arizona market prior to the possible legalization of recreational marijuana will certainly be at an advantage to capture a significant share of this massive market. This is particularly appealing as a recreational market would almost surely eliminate the nonprofit requirement and could lead to massive profits for well positioned and savvy entrepreneurs.

Further opportunities abound in Arizona in the area of quality assurance labs. At the time of publication there was no product testing requirement and only a very limited number (2) of laboratories present in the Arizona market. Much of the state's medicine is sold untested, although some dispensary owners test their products with their own small scale equipment.

Lab tested medication is increasingly becoming an industry norm as patients in legal cannabis markets nationwide are starting to demand lab tested products. Dispensary owners are looking for a cost effective way to satisfy this need without making products excessively expensive. Arizona would be a prime market for mobile testing labs which, due to the smaller scale of facilities and lower overhead, would be able to offer lower prices to Arizona dispensaries and more easily reach dispensaries in many of the state's more remote locations.

Full scale testing laboratories located in the larger metro areas of Phoenix and Tucson are also a promising business opportunity. As the demand for laboratory tested products continues to grow in the medical market, and if recreational marijuana becomes legal, the opportunities in quality assurance could be significant. Furthermore, as laboratories are not regulated by the state, they are not subject to the same nonprofit requirement as Arizona dispensaries. This makes the segment an even more attractive investment opportunity.

Threats

The same threats face Arizona cannabis businesses as others in the industry nationwide, most notably the threat that a shift in federal government policy could result in shutting the industry down. As Arizona is a well-regulated state, dispensaries that comply with the state's rules are not in danger of federal prosecution under the current policy set by the Department of Justice. However, this policy could of course change with a new administration or new Attorney General.

Likewise, because of federal laws most dispensaries must operate in all cash without easy access to financial products such as business loans or even checking accounts. This creates significant difficulties for expansion or even normal business transactions.

Finally, if recreational cannabis is legalized in the future the exact regulations will determine whether this is a threat or an advantage for existing business owners, though it is unlikely that current dispensary owners would be excluded from entrance into the recreational market.

Evolution of the Industry

Regulatory Environment

Given the strong set of rules in place for Arizona and the relatively low level of taxation, it is unlike that regulations surrounding the medical marijuana market will change significantly over the forecast period. While it is possible that the vertical integration requirements could be eased, this is not expected in the short term. The possible major adjustment to the regulatory environment would be if Arizona legalized recreational marijuana following the 2016 election. If so, the government would have to determine how to best align a new recreational market with the current medical market.

Supply

The vertical integration requirements have generally not created any supply issues for the state. As the market matures, more dispensaries have been able to build their own grow operations and ensure that supply will keep pace with demand. Likewise, as long as the number of dispensaries (and thus grow operations) continues to increase alongside the growth in the market, supply will continue to meet demand.

After a temporary moratorium on new regulation and the resignation of the ADHS director in 2015, the agency has resumed accepting application for marijuana businesses. The agency is expected to issue 30 new licenses, bringing the total number of dispensaries to 129. Despite an increase in the number of operating medical marijuana businesses, the state’s supply continues to be stable, with few fluctuations in price.

Demand

Demand is expected to continue growing given that only 1.2% of the population currently holds a medical marijuana card and that there are many more Arizonans who may qualify as medical patients. As previously mentioned, states with more mature medical marijuana markets have close to 2% of their populations as medical marijuana patients. The recent addition of PTSD to the list of qualifying conditions, as well as a large and growing population of older patients who are more likely to suffer from qualifying conditions, is expected to continue to fuel growth in patient numbers throughout the forecast period.

Competition

Competition continues to be somewhat weak in Arizona at the moment. Despite an increase in the number of operating marijuana business to 129 by 2017, the market is not expected to become deeply competitive over the forecast period. Competition would also heat up if recreational marijuana were to be legalized in the state. If legalization occurs, and assuming the nonprofit requirement is dropped and the number of licenses awarded is not restricted, competition is likely to become much more intense.

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