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Michigan

Regulatory Environment Overview

Medical or Recreational Legal Since Requires Cards Accepts other States Cards Fees Dispensary System
Medical 2008 Yes Yes Patient: $60 (2 years) Caregiver: $25 Yes, but it is now considered illegal

Cannabis Legalization

Medical marijuana was legalized in Michigan by a 63% voter approval of Proposal 1 in 2008. To date, 14 cities have passed laws decriminalizing recreational marijuana possession and use. These laws leave much to the interpretation of local law enforcement officials as recreational marijuana use is still illegal.  However, regulation may be in Michigan’s near future: House Bill 2049, which would create a comprehensive regulatory framework for the medical marijuana industry, passed the Michigan House in October 2015 and is expected to be voted on in the state senate sometime in early 2016.  Under the proposals of the bill, all medical marijuana businesses in Michigan would be licensed and regulated.  

Legal Consumption

Michigan requires medical marijuana patients to have a registry identification card and accepts out-of-state cards. In order to obtain a card in Michigan patients must fill out an application, submit the $60 registration fee, and submit a Physician Certification form validating the patient´s condition to the Michigan Department of Community Health.

Patients with the following conditions qualify to apply: Alzheimer's disease, Amyotrophic Lateral Sclerosis (ALS), Cachexia, cancer, chronic pain, Crohn´s disease, Glaucoma, HIV/AIDS, Hepatitis C, Nail-patella, nausea, post-traumatic stress disorder (PTSD), seizures, or muscle spasms. Patients under 18 may qualify with permission from a parent or legal guardian and written certification from two physicians.

Possession Regulations

Patients may possess up to 2.5 ounces of usable marijuana and 12 marijuana plants kept in an enclosed, locked facility; or outdoors if not visible from outside the property and within an enclosed, stationary structure. No one in the state (including dispensaries) can legally sell or give marijuana to others.

Regulatory Authority

Although medical marijuana patients must register with the Michigan Medical Marihuana Program (MMMP) in the Department of Licensing and Regulatory Affairs, Michigan has no formal statewide set of regulations for the industry. Thus, the responsibility has fallen on local governments which have been authorized by the state to legally shut down dispensaries. Conversely, many of Michigan´s cities have passed laws decriminalizing both medical and recreational marijuana possession and use.

HB 4209, which was still sitting before the state senate as of August 2016, would create a new five member state Medical Marihuana Licensing board that would license dispensaries, commercial growers, distributors, and testing facilities. Other proposed legislation due to go before the senate would also create a “seed-to-sale” tracking system to closely monitor the quality of all marijuana products sold statewide.  It remains unclear if current business would face closure or be grandfathered in under the proposed regulations.

Dispensary System

Michigan's 2008 medical marijuana law does not directly address dispensaries and a series of court cases have since clouded their legal status. Up until 2013, dispensaries operated freely in the state. In the case State of Michigan vs. McQueen (Feb. 8, 2013) the Michigan Supreme Court ruled that dispensaries were illegal. As a result, patients in Michigan must now grow their own marijuana or get it from a designated caregiver. The ruling also allowed county prosecutors to shut down dispensaries as a "public nuisance” – though many of them have continued to operate. Since then, attempts have been made to clarify the role and legal status of dispensaries in the state, but no legislation has been approved yet.

In February 2015, State Rep. Mike Callton introduced HB 4209 which if passed would create a newly created state agency to regulate Michigan’s state industry.  The bill would also provide a framework for "provisioning centers" which could sell extra medical marijuana grown by caregivers after being tested for quality and contaminants. Under Callton’s proposal, local governments would also be given the right to ban provisioning centers or limit the number of storefronts that in operation. Until this or other legislation is passed, dispensaries will continue to operate in a legal gray area.

In October 2015, the city council of Detroit, where the bulk of Michigan’s medical marijuana dispensaries are located, voted 6-1 to approve a proposed licensing and regulation system for the city’s approximately 150 dispensaries.  The new framework requires all city Detroit dispensaries to obtain a city license or shut down.  Dispensaries are also subject to inspections and regulations governing operating hours, and location.  The regulations are expected to remain even if HB 4209 is passed, as the state bill allows local municipalities to enact their own specific regulations regarding local marijuana businesses. 

Dispensary Restrictions

With the exception of Detroit and other municipalities that license dispensaries such as Ann Arbor and Flint, medical dispensaries are currently unregulated and thus do not face specific restrictions.  Within Detroit, dispensaries must obtain licenses from the city and must not be located within 1,000 feet from schools, parks, liquor stores, and places of worship.  Dispensaries owners will be subject to criminal background checks, and dispensaries must also undergo inspections by city authorities. 

Testing Requirements

Currently, testing is not required as all marijuana must be cultivated by patients or their primary caregivers on their own properties.  Under HB 4827, a companion bill to HB 4209 that would create a “seed-to-sale” marijuana tracking system, quality testing for marijuana products would be required. 

Vertical Integration

Dispensaries, processing and commercial cultivation of marijuana is currently illegal in Michigan so there is no vertical integration possible.  It is as yet unclear whether HB 4209, if passed, will create any specific guidelines regarding vertical integration.

Consumer Taxes (at state level or local level)

Marijuana cannot be legally sold in Michigan, so there is no specific tax levied on marijuana patients or businesses. HB 4209, which if passed would create a new state board to license dispensaries and regulate the medical marijuana industry, proposes a 3% tax on the gross retail income of dispensaries, and would also require patients to pay state’s 6% sales tax on all purchases.

Market Dynamics

2015 2016 2017 2020 Forecast
Total Medical Marijuana Sales $451,175,385 $500,804,678 $550,440,808 $663,829,094
Sales Growth N/A 11.0% 10.0% 7.3% ('16-'20 CAGR)
Avg. Price/Ounce $335 $300 $295 $293

 

2016 Growth Drivers

Michigan's medical market saw continued growth in 2016, estimated at 11% over the previous year. Edibles increased slightly in terms of market share, from 23% to 24.6%, while the market share for concentrates maintained growth, increasing from 22% to 23.6%. The share of flower decreased slightly, from 53.9% to 50.4%.

Topical products (creams, lotions, etc.), THC pills, tinctures (liquid cannabis extracts) and so forth are growing in popularity among both medical and recreational marijuana users across the nation. However, all these products combined only made up only 1.13% of the market with approximately $5 million in sales.

In Michigan, the use, possession, manufacture, or distribution of marijuana resin or marijuana oil – important ingredients for most edibles – is illegal. However, even given these restrictions, edible sales continued to increase, growing to $123 million in 2016.

Concentrates increased by roughly 20% to $118 million, while flower increased to $252 million. Flower remained the single dominant product category both in terms of market share and dollar value of sales.

Edibles and concentrates will continue to make slow and steady gains in market share and both will continue their trend of outgrowing the market overall. However, flower will remain the leading product category both in terms of market share and in terms of dollar value of sales.

2016 Headlines

The biggest story currently impacting the Michigan cannabis industry in 2016 continues to be the advancement of House Bill 4209, now under deliberation in the state senate.  If passed HB 4209 would create a comprehensive regulatory framework for the state’s medical marijuana industry, bringing in significant tax revenue, and reducing the number of raids by state law enforcement carried out against state dispensaries.  HB 4827, a partner bill to HB 4209, would create a tracking system for all commercial marijuana grown in the state and require laboratory testing for all marijuana products.  A third bill, HB 4210, would decriminalize the use of marijuana resins and oils for making infused marijuana products.  With Detroit’s recent creation of a municipal level regulatory system for medical dispensaries, the era of unregulated dispensaries operating under imminent threat of raids by law enforcement seems to be coming to an end. 

Nevertheless, while seemingly on the horizon, a formal statewide regulatory system has yet to be passed, meaning that law enforcement action against unregulated dispensaries continues to be an issue for 2016, with notable raids occurring in Lansing and Allegan County.

Regarding possible legalization of recreational marijuana, as of August 2016, two separate initiatives that had been competing to be on the ballot, one by the Michigan Cannabis Coalition and another by the Michigan Comprehensive Cannabis Law Reform Committee, failed to gain enough signatures to be placed on the November 2016 ballot. At the time of writing, a citizen’s group, MI Legalize, was challenging the state’s 180-day limit on collecting petitions signatures in an effort to get a legalization measure on the ballot.

Category Performance

Flower

Flower sales continued to slow in 2016, growing by a modest 2.85% over the previous year. This trend is expected to continue over the forecast period (2016 to 2020) as patients are increasingly searching for alternative methods of consumption. Flower made up 50% of the overall sales in 2016, but this share is expected to drop to 35% by 2020.

Although patient demographics vary by location within the state, flower will remain the dominant product category in Michigan's medical market as many cardholders are older and prefer flower and edibles to concentrates. Total flower sales are estimated to decrease by 7% over the forecast period with a Compound Annual Growth Rate (CAGR) of -1.83%. The dollar value of medical flower sales is expected to decrease from just over $252 million to just under $234 million between 2016 and 2020.

Edibles

The variety of edibles carried at dispensaries ranges widely but is expanding at many locations. It will continue doing so over the forecast period while catering to the varying tastes of each medical patient. Edibles are gaining in popularity, particularly among older medical patients who are looking for a healthier method of consumption.

Edibles grew by 18.7% in 2016 and are expected to grow by a CAGR of 14.23% between 2016 and 2020. Edibles made up 24.6% of the Michigan medical market in 2016, though this should increase to 31.6% by the end of the review period. Edibles will be the fastest growing segment of the Michigan medical market but will remain behind flower as the largest market segment in both market share and dollar value of total sales. The dollar value of sales is expected to increase from $123 million in 2016 to just under $210 million in 2020, with a total growth of over 170%.

Concentrates

Concentrates are expected to perform nearly as well as edibles, with their market share growing to 30.8% by 2020. In dollar value terms, concentrates will see strong growth moving from $118 million in 2016 to $204 million by 2020, an estimated CAGR of 14.62% over the forecast period. The preference among younger consumers for the convenience, potency, and odorless vapor of many concentrates will be a major factor driving growth.

Other

Topical products (creams, lotions, etc.), THC pills, tinctures (liquid cannabis extracts) and so forth are growing in popularity among both medical and recreational marijuana users across the nation. However, all these products combined only made up only 1.35% of the overall market in 2016 and are forecasted to grow to 2.29% by 2020. In dollar value terms, these products are expected to see impressive growth and increase from just over $6.7 million in 2015 to over $15 million by 2019, an estimated CAGR of 22.49% over the forecast period.

Unit Price Performance

Production influence on unit prices

Production is conducted mainly by individuals or small grow operations. This not only limits grow capacity but also keeps unit prices relatively high as it prevents grow operations from achieving economies of scale. The average Michigan unit price for an ounce of flower is stable at $293 - significantly higher than states like Colorado or Oregon - but similar to what is seen in Southern and Central California where real estate and other related costs are much higher than in Michigan.

Tax policy influence on unit prices

Because marijuana cannot legally be sold in Michigan there is currently no tax structure for it. State taxation therefore does not currently influence unit prices.  Under the proposals of HB 4209, gross dispensary sales would be taxed at 3%, and consumers would pay the state sales tax of 6% on all marijuana purchases.  An earlier draft of the bill suggested an 8% tax on dispensary sales, but critics argued this rate would lead to unreasonably high prices for patients.

Industry Challenges

The biggest challenge facing the industry in Michigan is the uncertainty regarding pending legislation that would alter the legal status of dispensaries and other businesses at the state level. A number of municipalities, such as Ann Arbor, Flint, and now Detroit, have effectively regulated possession and use, but these policies are in conflict with state and federal laws. This leaves businesses operating in legal gray areas and subject to changes in enforcement policy.  It remains unclear whether existing businesses will be grandfathered into the proposed regulatory system, or be forced to shut down.  Urban zoning regulations may also force the closure of existing dispensaries.

Michigan cannabis businesses face similar challenges that are typical for the industry as a whole including a lack of access to banking and loans. Most dispensaries are forced to operate cash-only without access to financial services or even checking accounts. This creates significant difficulties for expansion or even normal business transactions. Additionally, operating an all cash business creates safety concerns for business owners, employees, and patients that could be targets for theft.

Supply Chain

Cultivation

Number and size of grow operations

Due to the legal gray area in which most of Michigan’s medical marijuana industry operates, there is no mechanism in place to track the number of grow operations in the state and thus the exact number is uncertain. However, there is an abundance of small independent operations, many of which grow outdoors.

Regulations on grow operations

Though commercial grow operations are prohibited in the state, personal marijuana cultivation is regulated. Indoor marijuana plants must be kept in an enclosed, locked facility. Outdoor plants must not be "visible to the unaided eye from an adjacent property when viewed by an individual at ground level or from a permanent structure" and must be "grown within a stationary structure that is enclosed on all sides, except the base, by chain-link fencing, wooden slats, or a similar material that prevents access by the general public and that is anchored, attached or affixed to the ground, located on land that is owned, leased, or rented" by a registered grower with restricted access.

Adequacy of supply

Despite the current legal restriction on marijuana cultivation as of August 2016, the supply in Michigan has been abundant enough to support the establishment of the estimated 197 unregulated medical dispensaries operating throughout the state. The steadily increasing number of medical marijuana cardholders also points to an adequate supply, indicating there are a significant number of commercial grow operations despite the legal prohibition. Currently, the state government is considering lifting legal restrictions on medical dispensaries, which would also involve easing restrictions on commercial cultivation.

Annual Changes

As evidenced by a steady increase in medical marijuana cards granted by the state and the growing number of medical dispensaries, demand for marijuana in Michigan has been increasing. If legal approval of medical dispensary operations takes place this year, grow operations are anticipated to see explosive development in the near future.

Number and size of operations

The state currently prohibits the commercial growth of marijuana. Large scale grow operations are therefore uncommon, with most state dispensaries being supplied by small to medium-sized operators. Given the state’s regulatory system and the ever-present threat of prosecution, this is unlikely to change in the short term.  Tiered commercial operations would be allowed under HB 4209, which would establish the smallest tier at a minimum of 500 plants and the largest tier at a maximum of 1,500 plants.

Processing

The state of Michigan does not legally authorize processing companies. Therefore, the state’s cannabis processing capabilities are restricted to small and medium scale operations.  Large scale processors are expected to be established with either the passage of HB 4209 in early 2016, or the legalization of recreational marijuana later in 2016.  However, until the state’s regulatory environment is clarified, no major changes are expected in the processing environment.

At least three major multi-state processors have entered the Michigan market despite its regulatory difficulties. California edibles maker Trikom Treats currently accounts for 23.25% of the edibles market, while Bhang Chocolates are now sold at dispensaries through a local distributor and account for 0.5% of the edibles market. California concentrates maker Moxie Seeds and Extracts is the second-ranked concentrates brand in Michigan, with 2.27% of the market. These examples illustrate the gradually increasingly popularity of out-of-state brands at dispensaries throughout the state.

Distribution

Distribution is currently illegal and therefore not controlled by a regulatory system. As no large scale distribution system is in place dispensaries either work directly with grow operations, representatives of edibles and concentrates companies, or have employees grow for their dispensary.  Under HB 4209, the state would create a licensing system for distributors and track marijuana through the industry’s supply chain.

Quality Assurance

Number of QA operations

There were five marijuana testing facilities operating in the state of Michigan as of August 2016.  There is currently no regulatory structure by which testing facilities are granted licenses.

Annual Changes

While testing is not required by law, more and more patients are demanding lab-tested medications. Some dispensaries are now carrying tested cannabis products as a way to distinguish them from the competition and build consumer loyalty. The industry is expected to continue moving in this direction over the forecast period creating a strong demand for quality assurance.

State QA requirements

Quality assurance is voluntary in the state of Michigan.  However, should HB 4827 pass the state legislature, quality testing would be required for all marijuana sold at dispensaries as part of a state-wide tracking system.

Major players

Of the five operating laboratories, the most well-known is Iron Laboratories LLC which has been operating since 2011 and includes Michigan edibles manufacturers such as Mr. McGooz Edibles among its clients. Another major player is Great Lakes Lab Services, which boasts ISO 9001 certification.

Retail Environment

Dispensary systems

State law currently prohibits medical dispensaries. However, small, independent ones are quite prevalent, especially in urban areas such as Detroit and Lansing.  Large clusters of dispensaries also flourish in municipalities with dispensary licensing systems, such as Ann Arbor and Flint.  Dispensaries in other locations either operate in quiet defiance of the law or under the protection of decriminalization laws present in certain municipalities. Nevertheless, the complex legal environment makes it difficult for many dispensaries to establish themselves, meaning the market is still a nascent one.

Lounges

Lounges are not present in the market and not permitted by law.

Number and size of operations

The majority of medical marijuana dispensaries in Michigan are extremely small, independent shops, many of which operate in lower-income urban or rural areas. It is exceedingly rare to see dispensaries with even two locations and the state has yet to see the development of large, vertically integrated chain stores of the kind present in more developed markets.

Demand Factors

Category For Calendar Year 2016 (unless noted)
Total Population                                                          10,665,103
Medical cards in circulation                                                                203,889
Estimated Adult Marijuana Consumers                                                             1,152,279
Heavy                                                                311,546
Moderate                                                                167,902
Occasional                                                                672,831
# of university students 680,035 (2013)
Population 21-35                                                             1,957,087
Population 36-50                                                             1,964,473
Population 51-64                                                             1,933,775
Population 65+                                                             1,510,958
Prevalence of HIV/AIDS (Rate per 100,000) HIV 172.4 / AIDS 91.2 (2011)
Prevalence of Cancer 502,047 (2014)
Prevalence of Glaucoma 91,629 (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 percent of the population. Michigan has well above this national average with 680,000 university students enrolled in 2013, which constitute 6.9% of the state’s total population. Additionally, a 2013 University of Michigan study of a nationally representative sample of enrolled students concluded that “daily marijuana use is now at the highest rate among college students in more than three decades.”

These statistics point to significant opportunities for marijuana demand around Michigan´s major university campuses, but when anticipating demand among the state´s college students it is also important to consider the current consequences of the use and possession of marijuana on Michigan´s campuses. In many cities around the state such as Ann Arbor (which houses the University of Michigan and its nearly 44,000 students) marijuana possession is only a civil infraction — offenders may incur a mere $25 fine. However, smoking marijuana on a state university campus is a misdemeanor punishable by a fine up to $2,000 and up to one year in prison.

Moreover, per the Deputy Director of Students for a Sensible Drug Policy Stacia Cosner, there is a U.S. Department of Education policy that rescinds college students’ financial aid if they are convicted for marijuana possession. Consequently, because residence halls are marijuana free, even students who legally medicate with medical marijuana could end up facing disciplinary measures.

Despite these restrictions, there is optimism for student advocates and users of marijuana in Michigan: The “Hash Bash”, an event held by marijuana advocates looking to reform local and state marijuana laws, continues to take place annually in the University of Michigan’s Crisler Arena and in 2015 it was attended by approximately 9,000 people.

This year, it was patrolled by the Ann Arbor Police Department and University Police who were watching for any emergencies. Despite the fact the usage of marijuana is illegal and was very prominent at Hash Bash, only three arrests were made. The University of Michigan Ann Arbor campus (and possibly others around the state) appears to have a certain amount of leniency toward marijuana users. This, along with the number of students in the state and rise in college students´ daily use of marijuana, supports the stability and growth of the medical marijuana markets in Michigan.

Senior Citizens

With a 2014 population of about 1.5 million residents 65 or older, or 15.6% of its total population (compared to around 13% in Colorado and California) Michigan has a relatively large proportion of senior citizens. This percentage is not expected to change significantly in the next few years. In terms of numbers, the population of senior citizens in the state is particularly large due to Michigan´s greater-than-average population of nearly 10 million people.

Among those 65 or older, approximately 170,000 people (or 11.4%) currently suffer from Alzheimer’s in the state. This number is predicted to increase by over 22% in the next decade. Since Alzheimer’s is listed as a qualifying condition for the legal use of medical marijuana in Michigan, the potential market is considerable and growing among seniors. Glaucoma is prevalent among many in the state as well, with 91,629 people over the age of 40 suffering from the condition in 2012.

However, demand for medical marijuana among this demographic may not be as high as these figures suggest. The results of the 2013 National Survey on Drug Use and Health (NSDUH) from the Substance Abuse and Mental Health Services Administration (SAMHSA) data analysis 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 or privacy concerns that altered responses among this particular age group, especially considering opposition to marijuana legalization is much higher among those 65 and older than younger people. However, it can be inferred from this extremely low figure the market for marijuana among this age group is probably minimal.

Prevalence of Conditions

The prevalence of HIV/AIDS in Michigan increased by over 50 percent between 2003 and 2013 from 10,421 cases to 15,665 statewide. Cancer is prevalent among over 500,000 people in the state as of 2014, or approximately 4.4% of the population, which is greater than the national average of 4.2%. By 2025, the 180,000 current cases of Alzheimer’s are expected to climb to 220,000. By 2050, the number of people in the U.S. suffering from Glaucoma is expected to more than double from 2.7 to 6.3 million.

These figures on conditions commonly treatable by medical marijuana are particularly significant in a state such as Michigan with a relatively large elderly population. However, as reflected in the 2014 Michigan Bureau of Health Care Services statistics below, none of these conditions commonly treatable by marijuana have been leading large numbers of patients to seek out medical marijuana for their treatment.

Debilitating Condition % of Patients with Condition*
HIV/AIDS 0.75%
Alzheimer’s 0.05%
Amyotrophic Lateral Sclerosis 0.04%
Cachexia 0.94%
Cancer 4.04%
Crohn’s Disease 1.06%
Glaucoma 1.39%
Hepatitis C 1.74%
Nail Patella 0.03%
Posttraumatic Stress Disorder (PTSD) 0.38%
Seizures – Epilepsy 2.05%
Severe and Chronic Pain 93.70%
Severe and Persistent Muscle Spasms 25.66%
Severe Nausea 9.62%
Wasting Syndrome 0.97%

*The totals add up to more than 100% because patients may have more than one qualifying condition.

According to the data in this table, as of 2014 nearly 94% of patients are looking to marijuana to suppress severe and chronic pain. Another quarter of patients listed “Severe and Persistent Muscle Spasms” as their qualifying conditions and approximately 10% indicated “Severe Nausea” (patients may list more than one condition). Combined, HIV/AIDS, Alzheimer´s, cancer, and Glaucoma (all of the major conditions discussed above) make up just over 6% of the demand for legal medical marijuana.

There are many possible root causes for this phenomenon. Some patients may be experiencing pain, nausea or spasms related to an enormous array of health conditions, some even associated with the serious conditions listed above such as Alzheimer’s or cancer. Some patients may be falsifying information and using the vague categories of "pain" and "nausea" 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 may be, this information is revealing. The market for medical marijuana in Michigan is not necessarily rooted in the needs of patients suffering from many of the conditions commonly treated by marijuana. Severe pain and nausea are such broad categories they cover a virtually infinite number of medical conditions, and it is difficult to figure out which of these conditions are real medical issues and which are falsifications by patients looking for a legal way to use an otherwise illegal substance. 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 Michigan.

Patient Recomendations

Patients may qualify to receive a medical card if they suffer from one of the following and pay a two-year patient fee of $60: Alzheimer's disease, Amyotrophic Lateral Sclerosis (ALS), Cachexia, cancer, chronic pain, Crohn´s disease, Glaucoma, HIV/AIDS, Hepatitis C, Nail-patella, nausea, PTSD, seizures, muscle spasms, or other condition that has been approved by a review panel. The application includes a patient certification form that must be filled out and signed by a Medical Doctor or Doctor of Osteopathic Medicine and Surgery who is fully licensed by the State of Michigan.

Though medical marijuana was originally legalized via Michigan´s Proposal 1 in 2008, it has been subject to several amendments since that time. The centerpiece of Michigan´s 2012 legislative package concerning medical marijuana, House Bill 4851 (HB 4851), tightened restrictions put on physicians recommending medical marijuana to patients. The law requires them to establish a “bona fide physician-patient relationship” in order to submit a patient certification form. As part of this process, physicians must:

  • Review the patient´s medical records and complete a full assessment of the patient’s medical history and current medical condition, including an in-person medical evaluation.
  • Create and maintain records of the patient’s condition.
  • Have an expectation that they will provide follow-up care to monitor the efficacy of medical marijuana as a treatment of the condition.
  • If the patient gives permission, notify the patient’s primary care physician of the patient’s condition and use of medical marijuana.

This legislation has made it more challenging for patients to obtain legal authorization to use medical marijuana.

Likewise, in many cases primary care physicians refuse to issue recommendations due to fears over marijuana´s legality in the eyes of the federal government.

Political Influences

Michigan could be viewed as a traditionally liberal state as it has voted for a Democratic candidate in every Presidential election since 1988. However, this followed a string of five straight Republican presidential victories. The state currently has a Republican Governor, has only had two Democratic Senators since 2001, and currently has five Democratic and nine Republican Representatives in the House of Representatives. There were no Michigan seat changes in the 2014 Congressional elections.

These varied political attitudes are also reflected in the state´s view on recreational marijuana legalization. A statewide study of 600 likely voters carried out by the Marketing Research Group (MRG) in April 2015 revealed 51 percent support for legalizing recreational marijuana "if it was regulated and taxed like alcohol." Another 45 percent of respondents were opposed. Support for legalization was highest amongst Democrats and young people. According to Tom Shields, president of MRG, “while attitudes toward marijuana may be mellowing, most Republican voters and those 65 and older are still not ready to legalize it.”

Based on voting history and polling, there is no conclusive evidence that Michigan´s voters will pursue the legalization of recreational marijuana in the near term.

Competitive Environment

Companies – Small vs. Large

Although the dispensary market in Michigan is still developing, it has recently shown extensive growth as evidenced by the rapidly increasing number of medical marijuana cardholders over the past year. Consequently, the market features many new, small-scale operations that have opened to meet the state’s strong demand. Such growth comes in spite of the unclear legislation regarding the legal status of dispensaries and edible marijuana products in the state.

Given the upward trend in medical cardholders, the state government is soon expected to officially sanction dispensaries by approving HB 4209, which is currently under deliberation in the state senate.   The bill would facilitate the sale and consumption of medical marijuana and create a comprehensive licensing and regulation system for the entire industry.  Should the state legalize recreational marijuana in 2016, the market can look forward to explosive growth in all areas of the supply chain.

Currently, the majority of brick-and-mortar dispensaries in Michigan are concentrated in and around Detroit and Lansing with the remainder scattered throughout the Lower Peninsula.  Virtually all dispensaries are independent single-location operations, although a very limited number operate two stores.

Investment Flow into the Supply Chain

Due to legal uncertainty the market has yet to attract a significant amount of out-of-state investment. Currently, the largest out of state company with presence in Michigan is Bhang Chocolates, a California-based edibles manufacturer that distributes through a limited number of dispensaries across the state.

However, given the upward trend in medical users and the growth in demand for brand name, lab-tested edible products of consistent quality, the market has considerable opportunities for potential investors. These will expand even further as the state officially sanctions medical dispensaries and establishes a clearer set of industry regulations. Since locally produced, unbranded edible products currently dominate the market, it is expected that multi-state edible licensing will generate significant investment over the short term. Likewise, as only 5 testing laboratories are currently operating throughout the state it is expected that increased demand will create a need for investment in new facilities.

Vertical Integration

Most dispensaries purchase marijuana from local growers. However, current regulations regarding marijuana cultivation in Michigan are quite prohibitive, limiting growers to no more than 72 plants. Both this restriction and the abundance of fertile, remote land has led to a larger number of illegal grow operations throughout the state that supply many of the newly opened dispensaries. Local business interests and marijuana advocates are pushing to have the growing restriction removed which would allow the proliferation of vertically-integrated businesses as seen in other states.  Should HB 4209 be approved, commercial growing would be established under a tiered licensing system, although it is unclear whether any specific restrictions against vertical integration will be instituted.

Branding

Due to a lack of clarity regarding regulations, the market is dominated by unbranded, locally manufactured products. Many dispensaries simply produce and distribute their own edibles. One exception is Bhang Chocolates, which is sold at dispensaries throughout the state. While most dispensaries carry local Michigan brands such as Special FX or out-of-state brands such as Trikom Treats, many others simply produce and sell edibles on site.

Popular Brands

The Detroit Fudge Company is a Michigan based infused-edibles maker boasting over 15 years of experience in the medical marijuana industry.  In addition to their flagship fudge and chocolates, the company produces a wide range of marijuana products, including cookies, baked goods, throat lozenges, peanut butter, tinctures, cough syrup, and even suppositories.  All products are tested and certified by Michigan testing lab Iron Laboratories.  The Detroit Fudge Company is one of the leading edibles in the state, with over 2.9% of the edibles market as of September 2016.

Special FX is a well-established Michigan manufacturer of edibles, tinctures, and capsules. Established in 2008, Special FX prides itself on being one of the first companies to use CO2 extraction methods in the manufacture of its products. Its line of chocolates is produced by a trained chocolatier with over 50 years of experience while its tinctures are independently tested by third-party laboratories. Special FX also boasts a comprehensive, professionally built website with detailed product descriptions, something many of its in-state competitor’s lack. Special FX was the leading edibles brand in Michigan in September 2016, accounting for5 .2% of the total edibles sales as of September 2016.

Nicely Toasted is a Michigan-based manufacturer who specializes in cannabis-infused baked goods and cereals.  The company also produces chocolate bars and several other chocolate-based products.  Although it accounted for only a small part of the market at the beginning of 2015, Nicely Toasted accounted for 1.9% of the market as of September 2016.

Consumer Marketing

Dispensaries in Michigan primarily rely on review websites such as WeedMaps and WheresWeed to market edibles to consumers. While manufacturer Special FX has its own website with product descriptions and customer testimonials, most other in-state brands rely on social media sites such as Instagram to advertise. Currently, strong demand for medical marijuana products in Michigan means most dispensaries do not have to engage in significant marketing to be successful.

Growth Potential

Outlook

Growth potential is quite strong for the medical marijuana market in Michigan despite the current illegality of dispensaries and the uncertainty surrounding legislation to regulate them. The total market is set to grow 47% between 2015 and 2020 with a CAGR of 8.03% over the forecast period of 2015-2020.

Steady growth is expected to continue as the number of medical cardholders increases. As the number of cities passing laws decriminalizing marijuana possession increases, action regarding the legal status of marijuana dispensaries will be required.  As of August 2016 approximately 1.9% of all Michigan residents held a medical marijuana card, compared to over 2% in Colorado and Oregon. This indicates that there is potential for the number of medical patients in Michigan to continue to grow somewhat throughout the forecast period, particularly with the inclusion of PTSD to the list of qualifying conditions.

While all product categories are expected to benefit from industry growth, edibles and concentrates are set to benefit the most. Concentrates are expected to show considerable growth, especially with younger patients who make up a significant portion of the consumer base in certain locations. The emergence of major multi-state concentrates brands will make these products more readily available and they are expected to grow by CAGR of 14.62% to over $204 million in sales in 2020.

Edibles are expected to see the fastest growth over the forecast period as they are gaining traction among older patients who would rather take their medicine orally than smoke it. Edibles are expected to generate over $209 million in sales by 2020 with a CAGR of 14.23% over the forecast period.

Topical products, THC pills, tinctures, etc. are becoming more popular among marijuana users across the nation. This “category” of products is expected to increase to over $15 million in sales by 2020 with a CAGR of 22.49%.

Opportunities

 

The current legal ecosystem creates strong incentives for many entrepreneurs to adopt a "wait and see" approach to investment, limiting competition. However, fourteen Michigan cities have passed laws decriminalizing marijuana possession and use. While the stability of retail operations in these jurisdictions is largely dependent on local law enforcement policy, more dispensaries are opening across the state as municipalities adopt a more permissive approach to medical marijuana. There is certainly risk for dispensary owners, but growing political support and an increasing number of medical marijuana patients points to a strong demand for more dispensaries.

There are many opportunities for dispensary owners to expand by offering larger selections of edibles or concentrates. Less risk-averse entrepreneurs will find additional opportunities in manufacturing their own brands of edibles or concentrates to sell themselves or at other dispensaries throughout the state.

Further opportunities abound in the quality assurance sector. At the time of this writing there were no product testing requirements and only a very limited number of laboratories present in the Michigan market. Much of the state's medicine is sold untested, which presents a significant business opportunity. Patients in legal cannabis markets nationwide are starting to demand lab-tested medication and dispensary owners are looking for cost-effective ways to satisfy this need without making products excessively expensive.  Should HB 4209 and HB 4827 be signed into law in 2016, quality testing will become mandatory for all marijuana sold in Michigan, which will create new opportunities for those looking to invest in creating licensed testing centers.

Threats

The greatest threat to Michigan cannabis businesses is their current legal status at the state level and the uncertainty of pending legislation that would alter it. While there are many municipalities who have effectively regulated possession and use, these policies are in conflict with state and federal law. This leaves businesses subject to changes in enforcement policy.  According, raids and sting operations by state law enforcement against dispensaries remain somewhat common, occurring throughout the state.

In addition, most dispensaries must operate cash-only without access to financial services, loans or even checking accounts. This creates significant operational difficulties and severely limits expansion potential. Furthermore, if medical dispensaries are permitted the precise regulatory mechanism will determine whether new threats will arise such as tax policy, zoning requirements, local bans, etc.

Evolution of the Industry

Regulatory Environment

While there is no statewide regulatory system in place yet, should HB 4209 pass the state senate in 2016, it would create a new state agency that would oversee the comprehensive regulation of the Michigan medical marijuana industry. This would transform the Michigan market into a structured, regulated medical marijuana market similar to those seen in Oregon or Nevada.  Given many of the specifics of new regulation have yet to be determined, it is unclear to what extent existing businesses will be able to integrate into the new regulatory regime.  However, the establishment of clear regulations and the official licensing of marijuana businesses is expected to bring much needed stability to the market that will encourage investment and growth.

Supply

Supply has not been a significant issue for the Michigan market despite production being mainly limited to individuals and small grow operations. However, as the demand for medical marijuana continues to increase, these smaller operations may need to scale up their operations.  The establishment of a tiered commercial cultivation licensing system such as prposed under HB 4209 will facilitate the establishment of a sufficient number of cultivators to meet demand.

Demand

Based on the NSDUH, it is estimated that total demand for marijuana (from either legal or black markets) will increase 22% by 2019. As a mere 1.9% of the population has a medical marijuana card there are far more people in Michigan who would qualify as medical patients. States with more mature medical marijuana markets have 2% or more of the population as medical marijuana patients, which Michigan could easily exceed given the addition of PTSD to the list of qualifying conditions.

Michigan also allows out-of-state medical marijuana cardholders to possess and use marijuana while visiting. However, this is not a significant component of the market as most states neighboring Michigan do not issue medical marijuana cards. This is likely to change over the forecast period as the medical marijuana market in Illinois opens up as a huge percentage of Michigan’s visitors come from the Chicago area.

Competition

Should HB 4209 or a similar regulatory bill be enacted in 2016, the medical marijuana market is expected to become far more competitive.  A stable, licensed market will encourage investment and growth at all stages of the supply chain, and as an increasing number of businesses compete for customers, competition in the form of product innovation, lower prices, and economies of scale will likely become a common occurrence.   At the same time, stability brought about regulatory stability will also present a wider range of investment opportunities for those seeking to enter the market.

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