East Coast Empire

Illinois-based PharmaCann makes its mark in the emerging medical markets of the East Coast

Illinois-based PharmaCann makes its mark in the emerging medical markets of the East Coast

Separated by 3,000 miles and vastly different histories and cultures, the east and west coasts of the United States pride themselves in doing things differently, from New York’s pizza and subway culture to Los Angeles’ fish tacos and traffic jams.

It only makes sense that when it came to legalizing marijuana, the two opposite sides of the country would go about it differently.

Jeremy Unruh, general counsel and chief compliance officer for Illinois-based PharmaCann, has been on the front lines for more than two years now, watching as states east of the Mississippi River begin to build their industries. PharmaCann currently has operations in Illinois and New York. It also has a dispensary license in Maryland, but still needs a property on which to locate it, and has submitted a license application in Pennsylvania.

From Unruh’s perspective, the West Coast’s recreational industry grew out of decades of gray market medical marijuana, which was generally decriminalized or legalized, but not well regulated.

“The way that the industry has developed in the West has been an evolution of these entities,” he says. Unruh describes the East Coast as a “different critter” that was developed as legislatures created regulations from whole cloth, resulting in a more compliance-focused industry with more rigidity in operational standards, higher barriers to entry and limited access for patients.

“They did the regulations first,” Unruh says of the Eastern states.

PharmaCann is positioning itself to be a major player in the medical-focused markets. It has more licenses than any other company in Illinois and was one of the five original licensees registered in New York. It has a total of eight dispensaries in the two states and three cultivation centers totaling 250,000 square feet of greenhouse space.

Currently, the company’s dispensaries operate under the PharmaCannis brand name, but Unruh says a company-wide rebranding effort is under way, with plans to roll out a new dispensary brand this summer.

PharmaCann operates three cultivation centers in two states, including this greenhouse in Hamptonburgh, New York. The company prides itself on hiring professionals from non-cannabis industries, below, to run its operations.

BUILDING A MAINSTREAM TEAM

A former prosecuting attorney in Chicago, Unruh says he and his partners saw in 2014 a need for “a more sophisticated operator in the cannabis space” to help “push the ball forward” with physicians and regulators, as well as to build a bridge between the cannabis and health care communities.

When fellow attorney Teddy Scott — who also has a degree in molecular biophysics — applied for a license and showed Unruh the plans for a cultivation center, he told his friend “you’re not leaving without me” and the two began making plans.

In February 2015, PharmaCann was awarded licenses for two cultivation facilities and four medical dispensaries in Illinois, more than any other medical marijuana company in the state. The following month, Unruh left the law firm to join Scott, who today is PharmaCann’s CEO.

The pair put together a group of professionals from various sectors of the economy to create a company aimed at breaking the stereotypes traditionally associated with marijuana culture.

“He identified a real need for sophisticated, mainstream business and technical experience in the emerging markets of the eastern United States, knowing that regulators in these nascent markets would be attracted to operators committed to bringing these mainstream backgrounds into the industry,” Unruh says of Scott.

Since then, the company has been “drinking from the fire hose,” as Unruh puts it, trying to keep up with demand and the speed with which the industry moves. PharmaCann now has 150 employees, including a director of research and development with 20 years experience in the pharmaceutical industry and a director of cultivation Unruh describes as a “refugee from DuPont.”

“We’ve tried to assemble a team of mainstream folks to bring their skills into the cannabis space,” he says.

Unruh says the team members’ backgrounds allow PharmaCann to connect with more traditional, institutional players in a way that black or gray market businesses may not be able to.

“Each of us has the experience of being at the boardroom table,” Unruh says. “We’re able to interact with people with mainstream businesses on their terms.”

The goal is to create a multi-state footprint focused on the eastern part of the country and despite being only two years old, it is well on its way. The company began operating its first Illinois cultivation center in July 2015 and its first dispensary in November 2015. Operations in New York began in January 2016. The company’s New York application — which totaled 44,000 pages in 22 bankers boxes and had to be delivered in a U-Haul truck — was the highest-ranked application in the Empire State.

“We’re learning as we go,” Unruh says.

Real estate deal provides operating capital

By Brian Beckley

Because of federal regulations, many banks are unwilling to give loans to companies working in the cannabis space. But large investments in real estate, production facilities, applications and licenses can put a dent in operating capital, making it difficult for even the best-structured cannabis company to keep its head above water.

For example, according to PharmaCann chief compliance officer Jeremy Unruh, his company spent $30 million on real estate and the build-out of its 130,000-square-foot cultivation facility in Hamptonburgh, New York, about 60 miles northwest of New York City.

In order to free up working capital, PharmaCann in December 2016 sold its facility to Innovative Industrial Properties (IIP), a new real estate trust aimed at the cannabis space.

IIP is the first cannabis-related company to be publicly traded on the New York Stock Exchange. Its business plan and strategy targets medical-use facilities and properties for acquisition and then sells or leases the property back to the licensee under a long-term, triple net lease (in which the lessee agrees to pay all real estate taxes, building insurance and maintenance), thereby providing the licensees with operating capital.

“We believe this industry is poised for significant growth in coming years, and we are focused on being a creative capital provider to this industry through the long-term ownership of cultivators’ mission-critical facilities,” reads a statement on IIP’s website.

PharmaCann was IIP’s flagship tenant, though the real estate trust recently announced additional acquisitions in Maryland.

According to a press release, the term of PharmaCann’s lease is 15 years, with two options to extend the term for two five-year periods. The initial base rent is $319,580 per month, subject to annual increases at a rate based on the higher of 4% or 75% of the consumer price index. IIP receives a property management fee equal to 1.5% of the then-current base rent throughout the term, and supplemental base rent for the first five years of the term at a rate of $105,477 per month.

Together, the annualized initial base rent, property management fee and supplemental base rent equate to approximately 17.2% of the purchase price of the PharmaCann property.

Innovative Industrial Properties company is traded under the symbol IIPR and as of mid-June, the stock was trading at between $17 and $18.

For example, Unruh says the company’s first director of processing spent the previous 30 years working at a manufacturing facility and was “excellent” at his previous job, but the processing side of the business quickly began to require a “higher degree of sophistication” than his manufacturing experience provided.

“We outgrew him rapidly,” Unruh says.

The learning experience with cannabis has gone both ways. Unruh says the company is learning “the art of the cannabis culture” to be able to more effectively layer mainstream science and business with the culture’s art and language. In fact, he says the company’s director of cultivation, who came from the horticulture field but had no experience growing cannabis, had to reach out to someone with marijuana knowledge as the company ramped up production.

Unruh says the PharmaCann team has also learned the importance of not just proper growing techniques, but extracting and formulating as well, especially to the company’s plans. One of the major differences between the coasts is that several East Coast medical programs — including New York, Ohio and Pennsylvania — are oil-only states that do not allow patients to purchase flower or edibles.

Because of that, making sure the company’s extract is top-quality is a major concern.

Inside a PharmaCannis dispensary, the focus is on creating a bright, comfortable environment designed to appeal more to older medical users and break the stigmas associated with cannabis.

DOING IT DIFFERENT

PharmaCann grows cannabis in steel-sided greenhouses with polycarbonate coverings and automated environmental controls. The company uses light deprivation and supplemental lighting to enhance its growing cycles and an integrated pest management system that keeps pesticide use at “virtually nil.”

Because the company is based in Illinois, which has very rigid pesticide rules, Unruh says PharmaCann extended its home-state rules to all its facilities, regardless of state.

In total, PharmaCann has about 20 to 25 different strains available in each state, though only half are in production at any given time. New York laws require vertical integration, so all cannabis products at the dispensaries must be supplied by the company’s cultivation facility. However, Illinois has a more robust market where Unruh says dispensary managers are instructed to stock what patients want, whether it’s grown by PharmaCann or not.

The company does things a little differently at the storefronts as well, mainly because of the focus on medical operations and the patients to whom they cater. For example, New York law requires dispensaries to be supervised by licensed pharmacists. Though not required in Illinois, Unruh says PharmaCann has created a “sister cities framework” that connects general managers from that state with New York pharmacists to better relate to and provide the information that clients seeking medicine need to get the right product.

In Illinois, for example, Unruh says the standard client is a 55-year-old white woman with cancer. She may not be interested in the different types of strains and the description of their effects that a budtender would provide, but more concerned with the medical properties and uses of the product.

“Pharmacists talk much differently to patients than budtenders,” Unruh says. “We want our general managers in Illinois, who are not pharmacists, to have a little bit of that health care language because that’s what patients come into our dispensaries for.”

LESSONS LEARNED

The quick growth and evolution of the industry has led to plenty of lessons and surprises for the young company. Unruh was most surprised by the pace of the industry, from the legislative bodies dragging their feet while writing regulations to the breakneck pace to get facilities operational once the regs are in place.

Unruh says that at times, identifying and vetting the right partners and employees can be challenging and mistakes can be made, like the director of processing who had to be let go.

“We are learning this industry,” Unruh says, “and this industry is evolving rapidly.”

Unruh says he hopes the more traditional backgrounds of the people at PharmaCann add some weight to their business, even though it is still new, but says that the company tries hard to manage expectations, since so many people have the impression that a cultivation or dispensary license is essentially a go-ahead to begin printing money.

Unruh says PharmaCann is yet to turn a profit, due in part to the limited number of registered patients in Illinois and New York. There are currently about 21,000 patients in reach state eligible to receive medical marijuana, though Unruh says the patient number increases by about 1,000 people each month, especially in Illinois, and the company has seen an increase in New York since chronic pain was added to the list of conditions for which cannabis can be authorized.

“The rate at which these numbers are climbing is very encouraging,” he says.

Unruh says the company believes the number of qualifying conditions in each state will continue to increase as the industry moves more toward health care and away from law enforcement and they have faith that elected officials will work to expand the list.

For now though, PharmaCann is focused on building its business and brand at its facilities in Illinois and New York, while keeping an eye on up-and-coming markets like Ohio, Pennsylvania and Maryland.

Unruh says PharmaCann is currently dedicated to the medical side of the industry and the health care market, but in the future, it will not ignore the adult-use markets, should more eastern states move in that direction.

“We’re turning our attention toward emerging markets,” Unruh says.

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