IBISWorld Med Pot Growth Study

WWW.IBISWORLD.COM Medical Marijuana Growing in the US May 2014 1

IBISWorld Industry Report OD4141Medical Marijuana Growing in the USMay 2014 David Yang

New highs: An aging population and loosening regulation will boost grower revenue

2 About this Industry2 Industry Definition

2 Main Activities

2 Similar Industries

2 Additional Resources

3 Industry at a Glance

4 Industry Performance4 Executive Summary

4 Key External Drivers

6 Current Performance

8 Industry Outlook

10 Industry Life Cycle

12 Products & Markets12 Supply Chain

12 Products & Services

13 Demand Determinants

13 Major Markets

14 International Trade

15 Business Locations

17 Competitive Landscape17 Market Share Concentration

17 Key Success Factors

17 Cost Structure Benchmarks

19 Basis of Competition

19 Barriers to Entry

20 Industry Globalization

21 Major Companies

22 Operating Conditions22 Capital Intensity

23 Technology & Systems

23 Revenue Volatility

24 Regulation & Policy

25 Industry Assistance

26 Key Statistics26 Industry Data

26 Annual Change

26 Key Ratios

27 Jargon & Glossary

www.ibisworld.com | 1-800-330-3772 | [email protected]


This industrys establishments grow marijuana for medical use. Most operators are nonprofit collectives that provide medical marijuana to other collective members. Transactions

are typically conducted on a donation basis because the sale and distribution of marijuana is illegal in most states that permit medical marijuana.

The primary activities of this industry are

Growing marijuana for medical use

11191 Tobacco Growing in the USFarms in this industry grow tobacco leaf.

31214 Distilleries in the USDistilleries produce spirits and other alcoholic beverages.

31222 Cigarette & Tobacco Manufacturing in the USFirms within the industry manufacture cigarettes, cigars, smoking and chewing tobacco and reconstituted tobacco.

32541a Brand Name Pharmaceutical Manufacturing in the USPharmaceutical manufacturers produce medication that treat various diseases and illnesses.

Industry Definition

Main Activities

Similar Industries

Additional Resources

About this Industry

For additional information on this industry

www.cmcr.ucsd.edu Center for Medicinal Cannabis Research

www.mpp.org Marijuana Policy Project

www.thecannabisindustry.org National Cannabis Industry Association

The major products and services in this industry are

Indica marijuana products

Sativa marijuana products

IBISWorld writes over 700 US industry reports, which are updated up to four times a year. To see all reports, go to www.ibisworld.com


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Revenue vs. employment growth

Products and services segmentation (2014)

56.1%Indica marijuana products

43.9%Sativa marijuana products


Key Statistics Snapshot

Industry at a GlanceMedical Marijuana Growing in 2014

Industry Structure Life Cycle Stage GrowthRevenue Volatility Medium

Capital Intensity Low

Industry Assistance High

Concentration Level Low

Regulation Level Heavy

Technology Change Low

Barriers to Entry Medium

Industry Globalization Low

Competition Level High

Revenue

$2.1bnProfit

$25.7mWages

$1.5bnBusinesses

1,423,077

Annual Growth 14-19

23.3%Annual Growth 09-14

16.2%

Key External DriversRegulationPer capita disposable incomeNumber of adults aged 50 and olderExternal competition

Market ShareThere are no Major Players in this industry

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FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 26



Key External Drivers RegulationMedical Marijuana Growing has been significantly restricted by an increasing amount of attempts to impose additional regulations on the industry. In particular, medical marijuana remains a Schedule I controlled substance under federal law, despite legalization at the state level for many states. While the level of regulation is expected to remain flat in 2014, it still poses a potential threat to the industry.

Per capita disposable incomeThe level of household income determines consumers ability to purchase medical marijuana products. While prescription products can be essential for health and therefore less susceptible to changes in consumer expenditure, the unconventional nature of the industrys products make it subject to changes in disposable income. As such, an increase in disposable income will boost demand for

Executive Summary

For decades, all marijuana transactions in the United States were conducted under implicit or explicit prohibition. States have increasingly moved to legalize nonprofit marijuana growing for medical purposes, however, as well as implement regulations for organizations that produce and distribute cannabis. The growing acceptance of medical marijuana is providing operators and investors with unprecedented opportunities. Revenue growth did slow in 2011, though, due to aggressive prosecution of medical marijuana growers and dispensaries by

the Drug Enforcement Administration. This sort of intervention has increased uncertainty for industry operators, resulting in higher operating costs from legal fees and risk mitigation.

Luckily for industry operators, there has been no shortage of demand in recent years. The industry has benefited from increased acceptance and legitimacy of medical marijuana products. Revenue is expected to grow 23.1% in 2014 alone, largely due to a favorable regulatory environment, a steadily aging population and an increase in per capita disposable income. Overall, the Medical Marijuana

Growing industry is expected to experience annualized revenue growth of 16.2% to $2.1 billion in the five years to 2014. Adults aged 50 and older are a major industry market because they tend to require more healthcare services and treatment than the rest of the population. The number of adults in this age group has been steadily expanding and is expected to total 107.0 million in 2014. Consequently, medical marijuana demand from this demographic has risen during the past five years.

Industry revenue is estimated to increase at an annualized rate of 23.3% to $6.1 billion over the five years to 2019. The industry will remain at risk, however, until the federal government definitively changes its position on the legality of medical marijuana. Until then, a growing number of doctors and patients will likely turn to medical marijuana for treating health conditions such as Alzheimers. Rising demand is also forecast to widen profit margins. Appealing margins and any legal advancement would entice new operators. Additionally, Colorados relatively successful legal for-profit marijuana initiative can spur more states to legalize for-profit marijuana sales. Consequently, IBISWorld estimates that the number of firms operating in this industry will increase at an average 19.6% annually to 3.5 million in the five years to 2019.

Industry PerformanceExecutive Summary | Key External Drivers | Current Performance Industry Outlook | Life Cycle Stage

Operators have benefited from increased acceptance of medical marijuana products


Industry Performance

Key External Driverscontinued

medical marijuana growers. Per capita disposable income is expected to increase over 2014, presenting an opportunity for the industry.

Number of adults aged 50 and olderIndividuals aged 50 and older are more likely to require medical marijuana products that this industry provides since a number of health conditions that medical marijuana is prescribed for (e.g. Alzheimers Disease) are prevalent among members of this age group. As the

population ages, demand for industry services will grow, resulting in revenue growth. The number of adults aged 50 and older is expected to increase during 2014.

External competitionMedical marijuana products struggle to compete against conventional healthcare services and products due to the alternative and unconventional nature of their treatment. External competition from traditional drugs and healthcare providers is expected to grow in 2014.

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Demographic boost Demographic factors have played a significant role in driving industry growth. Demand for medical marijuana correlates with the average age of the US population, which has steadily increased over the past five years. More specifically, adults aged 50 and older represent a significant proportion of total industry sales because of their greater incidence of ailments that can be treated with medical marijuana. Over the five years to 2014, this demographic group is expected to increase at an average annual rate of 2.2% to 107.0 million people.

The aging population is also associated with an increased number of

physician visits. In the five years to 2014, the number of physician visits is anticipated to increase at an annualized rate of 2.1% to 1.15 billion. And although doctors cannot prescribe marijuana to patients, they can assign a right to visit a company or cooperative that provides medical marijuana.

The Medical Marijuana Growing industry has flourished over the five years to 2014, bolstered by increasing consumer acceptance of alternative treatment via marijuana products. Marijuana, which is a dry, shredded mix of flowers, seeds, stems and leaves of either the Cannabis sativa or Cannabis indica plant, can be used as a medical treatment. Since 1996, proponents of cannabis have pushed for individual states to recognize marijuana as a treatment or pain-reliever for a range of illnesses. New medical research and changing public opinion have advanced these efforts and will contribute to anticipated revenue growth of 23.1% in 2014.

According to the US Government Accountability Office, under State Medical Marijuana Laws, symptoms and conditions that can be treated by cannabis include Alzheimers disease, anorexia, AIDS, HIV, glaucoma, cancer, arthritis, epilepsy, nausea, pain, cachexia, Crohns disease, migraines, multiple sclerosis, spasticity and wasting syndrome. Although for many decades all domestic marijuana transactions were conducted under implicit or explicit prohibition, states have recently moved to legalize marijuana for medical

purposes. Consequently, IBISWorld expects industry revenue to grow at an annualized rate of 16.2% to $2.1 billion over the five years to 2014.

Demand for industry products is largely dictated by fluctuations in the regulatory environment, per capita disposable income, the number of adults aged 50 and older and external competition from conventional healthcare providers. In general, the use of medical marijuana is increasing, particularly among people with chronic illnesses and pain. At the same time, significant concerns continue to persist, questioning the legitimacy and efficiency of medical marijuana-based treatment. Organizations such as the National Cannabis Industry Association have worked toward increasing the legitimacy of medical marijuana use by working on creating industry standards. These efforts, in turn, have helped spur demand. Rapid demand growth has driven a wave of new entrants into the industry. In the five years to 2014, the number of enterprises is anticipated to increase an average of 16.0% per year to 1.4 million, while the number of employees is also anticipated to increase an average of 16.0% per year to 1.7 million.

Current Performance

The elderlys greater incidence of illness has driven demand for products



Regulation weighs on the industry

Regulation from governments at all levels presents the greatest challenge to medical marijuana growers, especially because state and federal governments have conflicting regulations at times. The Controlled Substances Act (CSA), passed as a part of the Comprehensive Drug Abuse Prevention and Control Act of 1970, classifies marijuana as a Schedule I controlled substance. Schedule I substances are deemed by the federal government to have a high potential for abuse; furthermore, prescriptions of them are illegal. Although 21 states plus the District of Columbia have adopted laws permitting some form of marijuana consumption or distribution for medical use over the past two decades, the possession and distribution of marijuana remains illegal under federal law. Consequently, many businesses operate with the risk of being shut down or experiencing a property seizure without notice. In addition, industry operators cannot make standard deductions for business

expenses and have difficulty securing standard banking and financial services.

The Department of Justice (DoJ), through the Drug Enforcement Agency (DEA), raids and prosecutes marijuana dispensaries and growers in the United States. Five years ago, regulation trends were promising for industry operators, as President Obama announced plans to end federal government raids of dispensaries. In 2009, Attorney General Eric Holder announced that the DoJ will comply. However, in 2011, the DEA and DoJ attorneys stepped up aggressive prosecution of medical marijuana growers and dispensaries. This move has introduced greater uncertainty for industry operators, resulting in higher operating costs from legal fees and risk mitigation.

Currently, Colorado is the only state that allows for the sale of marijuana as a for-profit business, resulting in some large marijuana growers. In 2012, the state further loosened marijuana restrictions by passing Amendment 64, which legalized marijuana for

Proponents of medical marijuana have pushed individual states to recognize marijuana as a treatment for a range of diseases. Currently, 21 states and the District of Columbia have laws permitting the use of medical marijuana. These laws have been adopted by public referendums as well as legislation. In late 2009, the US Justice Department instructed federal prosecutors in states with medical marijuana laws not to prioritize prosecuting individuals and businesses complying with state laws. Consequently, these conditions have facilitated industry performance.

The nature of medical marijuana treatment is rather unconventional. Although expenditure on products essential for health are less susceptible to

fluctuations in consumer expenditure, medical marijuanas unique nature makes it subject to changes in disposable income. Because industry revenue is paid out of pocket by consumers, growth in per capita disposable income boosts demand for industry products. Per capita disposable income is expected to grow 1.2% per year on average over the five years to 2014 as the economy recovers from the recession. Rising income levels have likely bolstered spending on medical marijuana products.

Changing attitudes and disposable incomes

New medical research and changing public opinion have boosted industry growth



The outlook for the Medical Marijuana Growing is largely positive, with the industry expected to achieve new highs over the five years to 2019. The industry will continue to benefit from increasingly favorable attitudes toward medical marijuana-based treatments as industry products acceptance and legitimacy continue to grow, building on a trend from the past five years. A growing number of doctors and patients will turn to the unconventional treatment offered by medical marijuana for conditions such as arthritis, migraines and Alzheimers disease. Although Colorado is currently the only state where growing medical marijuana for a profit is allowed, the expected boost in demand for industry products will strengthen profit as a share of revenue, in turn attracting new operators. As a result of these trends, combined with an expanding proportion of adults aged 50 and older and rising disposable incomes, IBISWorld forecasts that revenue will skyrocket at an annualized rate of 23.3% to $6.1 billion in the five years to 2019.

An increase in per capita disposable income is projected to drive demand for industry products. Per capita disposable income is expected to rise 2.2% annually during the five years to 2019, driven by gradual improvement in the domestic economy and the labor market. This

trend is important: Although prescription products are essential for health and are therefore less susceptible to fluctuations in consumer expenditure, the unconventional nature of the industrys products make it subject to changes in disposable income. Because industry revenue is paid out of pocket by consumers, growth in disposable income will help boost demand. Similar to the previous five years, rising demand will cause more firms to enter the industry. In the five years to 2019, the number of enterprises is projected grow at an annualized rate of 19.6% to 3.5 million, while industry employment is forecast to increase an average of 20.5% per year to 4.2 million.

Industry Outlook

recreational use. Colorado accounts for only about 11.8% of total industry revenue, however, so overall industry profitability is slim at an estimated 1.2% in 2014. Nevertheless, Colorados ability to generate profit has made it the fastest-

growing producer of medical marijuana. In 2014, Colorado is anticipated to generate as much as $40 million in marijuana-related tax revenue, which may provide an incentive for other states to legalize for-profit marijuana sales.

Regulation weighs on the industry continued

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Conventional healthcare and regulation threaten

Growing acceptance of medical marijuana will produce numerous business opportunities in the coming years. Development of value-added, high-quality marijuana products will also drive industry growth. At the same time, industry operators face significant risks and hurdles. In the next five years, conventional healthcare providers will continue challenging alternative care presented by medical marijuana products. Despite growing acceptance of marijuana-based treatment, traditional healthcare providers will continue to pose a threat to the industry due to substantial skepticism related to the legitimacy and effectiveness of marijuana. Consequently, medical marijuana growers will continue to suffer from inadequate capital investments.

The Medical Marijuana Growing industry is subject to heavy regulation from governments at all levels, with state and federal governments having conflicting regulations at times. The Department of Justice (DoJ), through the Drug Enforcement Agency (DEA), raids and prosecutes marijuana dispensaries and growers in the United States. Although the industry has mainly flourished under the Obama administration, its future remains hazy. Nevertheless, the relative success of Colorados marijuana legalization initiative, which is anticipated to generate as much as $40 million in tax revenue over 2014, can potentially spur more states to legalize for-profit marijuana.

The rising number of US adults aged 50 and older is expected to bolster demand for medical marijuana products. In the five years to 2019, IBISWorld anticipates that this demographic will grow at an annualized rate of 1.6% to 116.1 million. In comparison, the total US population is forecast to grow at an average annual rate of 0.8% over the same period. This trend suggests that people aged 50 and older will constitute an increasingly significant proportion of the population. As the population ages, more healthcare services and products will be required. This trend will lead to a growing number of people with health conditions that can be treated with marijuana (e.g. cancer and glaucoma), which increase in incidence with age. Additionally, longevity is projected to accelerate as people live longer due to continually improving healthcare technologies.

The number of physician visits in the United States is expected to rise in line with the senior population, increasing at an average annual rate of

2.2% to 1.3 billion. Although doctors cannot legally prescribe marijuana to patients because the plant remains a Schedule I substance, they can assign a right to visit a company or a cooperative that provides medical marijuana to patients. Therefore, although medical marijuana treatment is not covered by insurance, demand for medical marijuana will grow accordingly as the number of physician visits increases. Chronic health ailments, such as obesity and diabetes, will augment healthcare use as these patients increasingly require checkups. The rising prevalence of these chronic diseases is also expected to boost demand for medical marijuana.

Aging population An aging population and increasing physician visits will help drive strong growth


Industry PerformanceThe industry has stepped up efforts to increase its legitimacyThe industry is growing at a faster rate than the US economyThe number of industry establishments is expanding robustlyCustomer acceptance of industry products is increasing

Life Cycle Stage


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DeclineShrinking economicimportance

Quality GrowthHigh growth in economic importance; weaker companies close down; developed technology and markets

MaturityCompany consolidation;level of economic importance stable

Quantity GrowthMany new companies; minor growth in economic importance; substantial technology change

Key Features of a Growth Industry

Revenue grows faster than the economyMany new companies enter the marketRapid technology & process changeGrowing customer acceptance of productRapid introduction of products & brands

Tobacco GrowingFertilizer Manufacturing

Distilleries

Pesticide Manufacturing

Cigarette & Tobacco Manufacturing

Medical Marijuana Growing



Industry Life Cycle The Medical Marijuana Growing industry is in a growing life cycle stage. Over the 10 years to 2019, its industry value added, which measures the industrys contribution to the economy, is expected to grow at an annualized rate of 19.1%. This rate is faster than the 2.7% projected growth for US GDP, indicating the industry will make up a larger share of the economy in the years ahead. The industry is growing due to widening acceptance of its safety and legitimacy, which is causing more people to use its products. Although an increasing percentage of Americans have been using medical marijuana products to alleviate pain and to treat other health conditions during the past five years, a large share of the population still does not use them. This factor suggests that there is significant room for growth in the industry in the years ahead.

The aging US population will also promote demand for products offered by this industry. Chronic illnesses and disabilities are more frequent among the

elderly, and medical marijuana products are increasingly being used to treat these ailments. As such, this demographic groups expansion is forecast to boost demand. Still, a preference for conventional care offered with Medicare and other insurance providers could dampen this growth.

Organizations such as the National Cannabis Industry Association have worked toward increasing the legitimacy of medical marijuana use by working on creating industry standards. This, in turn, has helped spur demand. Over the five years to 2014, the number of industry operators has increased as a result of rising demand and favorable legislation. Additionally, a rising number of physician visits have also created opportunity for potential market entrants. These factors will likely contribute to further industry growth in the five years to 2019, when the number of operators is forecast to rise an average 17.8% annually to 3.5 million.

This industry is Growing


Products & Services

Products and Services are segmented by the two strains of medical marijuana that are primarily used in the United States.

Cannabis indicaIndica marijuana can be used to treat anxiety, chronic pain, insomnia and muscle spasms. In general, indica provides more physical relaxation in comparison to the second strain, sativa. Common indica strains include White Berry, Blueberry and Northern Lights. Some patients also use indica as a sleep aid because it can cause sleepiness. Over the past five years, demand for indica was relatively stable because it treats a wide range of illnesses. In 2014, indica is expected to generate

56.1% of industry revenue.

Cannabis sativaSativa marijuana is used as a stimulant to improve appetite, relieve depression, migraines, pain and nausea. This is especially beneficial for patients suffering from eating disorders, cancers and other debilitating diseases that cause a loss of appetite. Sativa is also more popular for patients during the day because it can increase alertness. Popular strains include Haze and Trainwreck. Again, demand for sativa was relatively stable over the past five years because it treats a wide range of illnesses. In 2014, sativa is expected to generate 43.9% of industry revenue.

Products & MarketsSupply Chain | Products & Services | Demand Determinants Major Markets | International Trade | Business Locations

KEY BUYING INDUSTRIES

99 Consumers in the US Consumers are members of medical marijuana collectives and the primary market for medical marijuana.

KEY SELLING INDUSTRIES

32531 Fertilizer Manufacturing in the US Some medical marijuana growers use fertilizers to improve soil nutrient.

32532 Pesticide Manufacturing in the US Some medical marijuana growers use pesticides during the growing process.

33511 Lighting & Bulb Manufacturing in the US Indoor medical marijuana growing is heavily dependent on artificial lighting.

Supply Chain

Products and services segmentation (2014)

Total $2.1bn

56.1%Indica marijuana products

43.9%Sativa marijuana products



Products & Markets

Major Markets

Medical marijuana is currently used to treat many ailments, but it is most commonly used to relieve pain. The industrys customer markets can be segmented by the ailment its products help treat.

Patients with severe painSevere pain is the mostly commonly

cited reason for medical marijuana use. Severe pain can result from a variety of chronic diseases and injuries. Medical marijuana can help alleviate severe pain and help patients relax and rest. Over the past five years, this market has remained relatively stable, because many health problems can cause severe pain.

DemandDeterminants

Government regulations and policies have a significant influence on demand for medical marijuana. A total of 21 states and the District of Columbia have some level of legalization of marijuana for medical uses. Eight of the 21 states passed related legislation in the past five years, which has stimulated strong demand for medical marijuana. The federal government regulates marijuana as a Schedule I controlled substance, though, and considers all marijuana cultivation and consumption to be illegal. Federal policy prevents the widespread use of medical marijuana in states without medical marijuana laws. In addition, federal policy still limits some consumer demand in states where medical marijuana is legal due to the fear of violating federal law.

Household income also determines a patients ability to acquire medical marijuana products. The legalization of medical marijuana has created a market for high-quality marijuana, which can be expensive. In addition, medical marijuana is typically not covered under health insurance plans, which makes its demand more dependent on patient income levels.

Population demographics, particularly age, also dictate demand trends for medical marijuana. Adults aged 50 and older are more likely to develop health conditions such as cancer, Alzheimers, chronic pain, glaucoma and other diseases that can be treated with medical marijuana. Over the past five years, the percentage of older individuals in the population increased, slightly boosting demand for medical marijuana.

Major market segmentation (2014)

Total $2.1bn

67.5%Patients with severe pain

1.3%Patients with cachexia

18.4%Patients with muscle spasms

1.1%Patients with glaucoma

0.7%Patients with HIV/AIDS

6.1%Patients with severe nausea

3.0%Patients with cancer

1.9%Patients with seizures



Products & Markets

International Trade The Medical Marijuana Growing industry does not participate in international trade. Medical marijuana cannot be imported or exported because it is a controlled substance at the federal level. Additionally, medical marijuana is only

legal and regulated by participating states and cannot be transported across state lines at a wholesale level. Some states, however, such as Arizona, allow patients from other states to bring medical marijuana across state lines.

Major Marketscontinued

Patients with muscle spasmsMuscle spasms, which can be caused by multiple sclerosis, Lou Gehrigs disease, cerebral palsy, quadriplegia, cranial and spinal nerve injuries and Tourettes Syndrome. Medical marijuana can help patients relax and sleep better. The wide variety of diseases that cause muscle spasms has kept demand stable from this market over the past five years.

Patients with severe nauseaA variety of diseases can cause nausea and migraines, including digestive disorders. Medical marijuana can provide relief and muscle relaxation, which helps alleviate

nausea. This market has not significantly changed over the past five years.

Other patientsMedical marijuana is used to help provide pain relief in a variety of more specific diseases and conditions, such as patients suffering from cancer and seizures. Cancer treatment can be painful, and medical marijuana can help patients relax and rest to accelerate the recovery process. Over the past five years, demand from other patients has remained stable, because the incidence of these diseases has not significantly changed.


Products & Markets

Business Locations 2014

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Products & Markets

Business Locations Only 21 states and the District of Columbia have laws permitting the use of medical marijuana. The vast majority of industry establishments are concentrated in the West and Rocky Mountains, where there has been extensive marijuana legislation over the past decade. Together, California and Colorado alone are home to an estimated 64.3% of industry establishments and nearly

96.0% of industry revenue. Colorado is the only state where for-profit medical marijuana businesses are legalized, which has provided an incentive for individuals to open businesses there. California only allows nonprofit collectives to provide marijuana for its members, but the states high population and long history of legalization has contributed to a high concentration of industry establishments.

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Cost Structure Benchmarks

ProfitProfit, measured as earnings before interest and taxes, is not applicable to most industry operators. With the exception of Colorado, in the states where medical marijuana is legal, industry operators are required to be a part of nonprofit marijuana collectives (also known as dispensaries) to grow cannabis. Additionally, because the sale of marijuana is still prohibited, vendors only provide marijuana to the collective in exchange for donations. Consequently, industry profit is exclusively representative of the growers in Colorado and is expected to total only 1.2% of revenue in 2014, having expanded gradually from 0.7% in 2009.

WagesWages are estimated to represent 71.9% of industry revenue in 2014. The remarkably high wage cost for this industry reflects the unique, largely nonprofit nature of this industry, where the majority of industry revenue is distributed in the form of wages to cover labor costs. Not all industry operators participate in growing cannabis on a full-time basis, thus bringing down the annual average wage. Furthermore, the industry is largely donation based, meaning growers do not get paid for the cannabis that they grow. Wages as a share of revenue have slightly declined over the five years to 2014 due to the more independent nature of the industrys private, small-scale growers. These growers

Key Success Factors Development of effective marijuana strainsGrowers that can develop the most potent and effective strains can potentially attract greater demand for their products.

Understanding government policies and their implicationsMarijuana legislation is complicated at all levels of the government. Successful operators must be able to navigate the federal and state level regulatory landscape.

Ability to attract community supportMedical marijuana growers that lack community support may attract federal raids due to complaints from neighbors.

Fast adjustments to changing regulationsRegulations are constantly changing. Growers must comply with the latest legislation or face fines and arrest, and they must be able to adjust to changing regulation quickly and smoothly.

Market Share Concentration

The Medical Marijuana Growing industry has a very low level of market share concentration. In 2014, the four largest firms are expected to account for less than 10.0% of revenue. By law, in the majority of states where medical marijuana is legal, industry operators must be a part of nonprofit marijuana collectives (also known as dispensaries) to grow marijuana. Industry operators are known as vendors and must also possess medical marijuana cards for the state where they

operate. Additionally, because the sale of marijuana is still prohibited in all states except Colorado, vendors only provide marijuana to the collective in exchange for donations. All vendors are independent and privately operated. All vendors hold marijuana ID cards, and most grow their allocated plant quota according to state law. In some states, however, patients may designate a grower to provide medical marijuana for them, resulting in some larger farms.

Competitive LandscapeMarket Share Concentration | Key Success Factors | Cost Structure Benchmarks Basis of Competition | Barriers to Entry | Industry Globalization

Level Concentration in this industry is Low

IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:


Competitive Landscape

Cost Structure Benchmarkscontinued

increasingly grow medical marijuana due to more favorable regulations under the Obama administration.

PurchasesPurchases make up a significant expense for medical marijuana growers, representing an estimated 6.5% of total industry revenue in 2014. The primary goods purchased by this industry include soil, fertilizer and seeds. Purchases have increased as a share of revenue in the five years to 2014, due to increases in the prices of the raw materials necessary to grow medical marijuana.

Other costsDepreciation, rent and utilities represent small but essential costs for medical marijuana growing, together accounting for 7.4% of industry revenue in 2014. These costs are associated with investment into hydroponic techniques, temperature, lights, humidity controls and other facilities necessary to grow medical marijuana. Other costs include liability insurance and legal costs and are expected to reach a total 13.0% of industry revenue. Marketing costs are low because major advertisers are still hesitant to carry marijuana ads.

Sector vs. Industry Costs

Profi t Wages Purchases Depreciation Marketing Rent & Utilities Other

Average Costs of all Industries in sector (2014)

Industry Costs (2014)

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Barriers to Entry Prospective medical marijuana growers face minimal barriers to entry in terms of capital costs. However, the classification of marijuana as a Schedule I controlled substance and the possibility of federal prosecution contribute to medium barriers to entry. Over the past five years, a large number of firms entered this industry due to favorable policy stances from the Obama administration. However, in 2011, the Drug Enforcement Agency (DEA) stepped up raids on marijuana dispensaries, which made prospective operators more hesitant to enter this industry.

State regulations have mixed effects. In general, increased state regulation has benefited industry operators by legalizing medical marijuana or providing more concrete regulation on marijuana growing. Over the past five years, barriers to entry have decreased because eight states and the District of Columbia passed legislation legalizing some level of medical marijuana growing. While states provide a legal avenue for growers to enter this industry, regulations are extensive and costly for prospective

growers. For example, Colorado, the only for-profit medical marijuana market in the country, requires every marijuana plant to be registered with the state. Prospective growers are subject to background checks, deposits and licensing and application fees. Licensing and registration fees can total $500,000 or more. Additionally, all growing facilities are under constant video surveillance by law enforcement personnel from the states Medical Marijuana Enforcement Division.

Additionally, because of the large number of small medical marijuana growers, competition in this industry is

Basis of Competition Due to the relatively small number of plants each individual is allowed to grow (which can range from four to 24, depending on the state), there is a large number of operators providing similar products in this industry. As a result, industry competition is very high.

Internal competitionIndustry vendors compete on product price and quality. Marijuana can have diverse properties and qualities, and only vendors that can consistently cultivate high-quality marijuana will attract demand from dispensaries. In addition, vendors must be able to provide competitive prices or donation requirements. Dispensaries can source

marijuana from all members of their collective, making it easy to only acquire products from the lowest-priced vendors. Over the past five years, favorable state legislation paved the way for a large number of new entrants to this industry.

External competitionIndustry operators face competition from pharmaceutical companies that manufacture drugs to treat chronic pain, cancer, HIV and other illnesses that medical marijuana helps relieve. Medical marijuana users typically only turn to marijuana after other treatment has failed, though, resulting in limited external competition from drug manufacturers.

Level & Trend Competition in this industry is High and the trend is Increasing

Barriers to Entry checklist LevelCompetition HighConcentration LowLife Cycle Stage GrowthCapital Intensity LowTechnology Change LowRegulation & Policy HeavyIndustry Assistance High


Level & Trend Barriers to Entry in this industry are Medium and Increasing



Industry Globalization

Medical marijuana is not traded internationally, resulting in a very low level of globalization. In addition to the United States, Canada has legislation allowing for

medical marijuana consumption. Other countries, such as Argentina and Chile, allow patients to use medical marijuana, though it is not formally regulated.

Barriers to Entrycontinued

very high. Marijuana vendors must be able to grow high-quality plants while charging competitive prices, which may push away

prospective entrants. Over the past five years, competition has increased, making it more difficult to succeed in this industry.

Level & Trend Globalization in this industry is Low and the trend is Steady


Other Companies This industry has no major players. Medical marijuana dispensaries are organized as nonprofit collectives where members can obtain marijuana in exchange for a donation. Industry vendors are members of marijuana collectives and individual vendors grow and supply marijuana to dispensaries. The majority of industry operators are independent, self-employed marijuana growers, resulting in a very low market share concentration. Depending on state law, however, industry operators may obtain the right to grow additional plants for other patients, resulting in larger marijuana farms.

High Hopes Farm Estimate market share: Less than 1.0%High Hopes Farm is a cooperative

medical marijuana grower in Oregon. The farm supplies medical marijuana to about 100 patients, growing marijuana according to a per-patient quota set by the Oregon Medical Marijuana Program (OMMP). The farm employs organic growing methods to provide natural medical marijuana products. The farm has about 68 workers total, of which 20 are full-time workers, and all workers are medical marijuana patients in the OMMP. Because Oregon legislation only allows medical marijuana growers to recoup utilities and supplies costs from patients to maintain their nonprofit status, the farm only compensates its workers in marijuana products instead of wages. The farm provides about 400 pounds of marijuana to its patients each year.

Major CompaniesThere are no Major Players in this industry | Other Companies


Capital Intensity The Medical Marijuana Growing industry has a low level of capital intensity. The majority of industry revenue is allocated in the form of wages toward labor costs due to the largely nonprofit nature of medical marijuana growing. Operators spend an average $0.04 on capital for every dollar spent on labor, though the level of capital expenditures varies between outdoor and indoor growers. Outdoor growers follow standard cultivation techniques that other farmers use, which require low capital expenditure. By contrast, indoor growers require a slightly higher level of capital expenditures, which are typically spent on hydroponic techniques, lighting and humidity controls.

Operating ConditionsCapital Intensity | Technology & Systems | Revenue VolatilityRegulation & Policy | Industry Assistance

Tools of the Trade: Growth Strategies for Success


Labo

r Int

ensi

veCapital Intensive

Change in Share of the Economy

New Age Economy

Recreation, Personal Services, Health and Education. Firms benefi t from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labor skills are key to product differentiation.

Traditional Service Economy

Wholesale and Retail. Reliant on labor rather than capital to sell goods. Functions cannot be outsourced therefore fi rms must use new technology or improve staff training to increase revenue growth.

Old Economy

Agriculture and Manufacturing. Traded goods can be produced using cheap labor abroad. To expand fi rms must merge or acquire others to exploit economies of scale, or specialize in niche, high-value products.

Investment Economy

Information, Communications, Mining, Finance and Real Estate. To increase revenue fi rms need superior debt management, a stable macroeconomic environment and a sound investment plan.

Tobacco GrowingFertilizer Manufacturing

Distilleries

Pesticide ManufacturingCigarette & Tobacco Manufacturing


Capital intensity

0.5

0.0

0.1

0.2

0.3

0.4

SOURCE: WWW.IBISWORLD.COMDotted line shows a high level of capital intensity

Capital units per labor unit


ManufacturingEconomy

Level The level of capital intensity is Low


Operating Conditions

Revenue Volatility Revenue volatility is medium for the Medical Marijuana Growing industry, with an expected peak growth of 23.1% in 2014 and a trough of 4.2% growth in 2011. Demand for industry products is rapidly expanding due to the growing acceptance of medical marijuana in treating or alleviating symptoms in a variety of medical conditions, including cancer and the Alzheimers Disease. Consumers who use medical marijuana do so due to medical needs; as a result, most use industry products regardless of

the performance of the economy. Regulatory changes in favor or against the industry also determine revenue fluctuations. In addition, the aging population has led to an increase in demand for a variety of medical services and treatments, because senior citizens consume a disproportionately large amount of pharmaceuticals relative to the rest of the population. The end result is a loyal and increasing customer base for medical marijuana, which leads to steadily increasing revenue.

Technology& Systems

Medical marijuana growing has a low level of technology change. Outdoor growers primary follow standard cultivation techniques used by other outdoor farmers. Indoor cannabis growers require containers, lighting and humidity control. Growers can also utilize hydroponic techniques, which have experienced more technology change over the past five years. Hydroponic techniques involve growing marijuana plants in water. Growers

require water filters, pumps, growing trays and humidity control.

Some industry operators also cultivate new marijuana strains. This involves finding plants with desirable characteristics then artificially fertilizing plants. However, techniques used for developing new marijuana strains is similar to general crossing techniques used for flowers and plants. As are result, technology change is relatively low.

Level The level of Technology Change is Low


Volatility vs Growth

Reve

nue

vola

tility

* (%

)

1000

100

10

1

0.1

Five year annualized revenue growth (%)30 10 10 30 50 70

Hazardous

Stagnant

Rollercoaster

Blue Chip

* Axis is in logarithmic scale


A higher level of revenue volatility implies greater industry risk. Volatility can negatively affect long-term strategic decisions, such as the time frame for capital investment.

When a fi rm makes poor investment decisions it may face underutilized capacity if demand suddenly falls, or capacity constraints if it rises quickly.

Level The level of Volatility is Medium



Regulation & Policy The Medical Marijuana Growing industry is subject to very heavy regulation from governments at all levels, with state and federal governments having conflicting regulations at times.

Federal regulationsThe Controlled Substances Act (CSA), passed as a part of the Comprehensive Drug Abuse Prevention and Control Act of 1970, classifies marijuana as a Schedule I controlled substance. Schedule I substances are those that the federal government deem to have a high potential for abuse, no currently accepted medical use in treatment and lack of safe usage of the drug. Prescriptions for Schedule I substances are not legal under federal law.

The Department of Health and Human Services (DHHS) regulates the scheduling of drugs. The DHHS operates the National Institute on Drug Abuse (NIDA), which conducts research on the efficacy of marijuana for medical uses. The DHHS has the final say on all drug scheduling.

The Department of Justice (DOJ), through the Drug Enforcement Agency (DEA), raids and prosecutes marijuana dispensaries and growers in the United States. Early during the past five years, regulation trends were promising for industry operators. During his campaign, President Obama promised to end federal government raids of dispensaries. In 2009, Attorney general Eric Holder announced that the DOJ will comply with the Presidents statements during the campaign. Later in the year, Deputy Attorney General David Ogden released the Ogden memo, which told federal law enforcement organizations to avoid using federal resources to prosecute dispensaries and growers that were abiding by state law. However, since 2011, the DEA and DOJ attorneys have once again stepped up aggressive prosecution of medical marijuana growers and

dispensaries. This has introduced greater uncertainty for industry operators, resulting in higher operating costs from legal fees and risk mitigation.

State regulationCurrently, 21 states and the District of Columbia have some regulation that allows for the use of medical marijuana. State regulations often conflict with federal legislation, in that states may allow medical marijuana use even though it is banned at the federal level.

California has extensive legislation regulation the growing and use of medical marijuana. In 1996, the Compassionate Use Act (Proposition 215) allowed for the use of medical marijuana. The legislation prohibited physicians from being punished for recommending medical marijuana. In addition, California Senate Bill 420 was passed in 2003, which further clarified the states medical marijuana legislation. The legislation implemented the organization of nonprofit marijuana collectives, where members can cultivate and provide marijuana for each other. Collectives provide marijuana to members in exchange for donations, because the sale of medical marijuana is still prohibited.

Colorado is another state with a history of medical marijuana laws. In 2000, the state passed Amendment 20 for its constitution, which legalized medical marijuana for patients and primary caregivers. In 2009, the state enacted the Colorado Medical Marijuana code, which regulates and licenses dispensaries, growers and infused products manufacturers (e.g. edibles). In 2012, the state further loosened marijuana restrictions by passing Amendment 64, which legalized marijuana for recreational use. Colorado is the only state that allows for the sale of marijuana as a for-profit business, resulting in some large marijuana growers.

Level & Trend The level of Regulation is Heavy and the trend is Increasing



Industry Assistance Across the country, 21 states and the District of Columbia allow for medical marijuana. Over the past five years, Arizona, Illinois, Delaware, Connecticut, the District of Columbia, Maryland, Massachusetts, New Jersey and New Hampshire all passed laws allowing some use of medical marijuana. Oregon has the most lenient laws regarding medical marijuana possession, allowing up to 24 ounces of usable medical marijuana and 24 plants per patient. Washington allows 24 ounces of usable medical marijuana and 15 plants. Other states have allowances that range from 2 ounces to 8 ounces, as well as regulations on the maturity of plants. On average, regulation by states has provided more opportunities for industry operators to grow plants for marijuana collectives, which benefited revenue growth.

Industry associationsThis industry benefits from relatively

widespread support from industry associations. The National Cannabis Industry Association is a trade association representing industry operators. The organization lobbies lawmakers in Washington, DC for more favorable marijuana legislation. These include legislation on banking that allows marijuana businesses to work with financial institutions. Currently, banks are hesitant to provide services to marijuana businesses due to the illegality of marijuana at the federal level.

The National Organization for the Reform of Marijuana Laws (NORML) works to repeal marijuana prohibition at the federal level. The organization supports the right of adults to use marijuana responsibility, and champions state and federal reforms that are favorable to marijuana users. NORML primarily lobbies Congress and state legislatures to enact marijuana reforms.

Level & Trend The level of Industry Assistance is High and the trend is Increasing


Key StatisticsRevenue

($m)

Industry Value Added

($m)Establish-

ments Enterprises Employment Exports ImportsWages ($m)

Domestic Demand


(Mil people)2005 698.7 551.0 586,145 586,145 681,564 -- -- 532.1 N/A 87.12006 779.6 612.9 586,991 586,991 690,578 -- -- 591.1 N/A 89.32007 842.8 659.7 604,028 604,028 702,358 -- -- 634.4 N/A 91.62008 908.0 705.1 598,378 598,378 712,355 -- -- 678.8 N/A 94.02009 1,013.7 785.9 678,751 678,751 789,245 -- -- 754.5 N/A 95.92010 1,185.7 916.1 724,784 724,784 852,687 -- -- 876.9 N/A 98.52011 1,235.8 950.3 824,438 824,438 958,648 -- -- 912.0 N/A 101.22012 1,417.5 1,085.8 895,325 895,325 1,029,315 -- -- 1,037.5 N/A 102.72013 1,743.1 1,325.1 1,160,785 1,160,785 1,365,481 -- -- 1,262.4 N/A 104.82014 2,145.6 1,628.0 1,423,077 1,423,077 1,654,741 -- -- 1,542.2 N/A 1072015 2,756.1 2,079.5 1,701,261 1,701,261 1,955,472 -- -- 1,966.5 N/A 109.22016 3,457.5 2,602.2 2,116,928 2,116,928 2,433,251 -- -- 2,460.4 N/A 111.32017 4,109.5 3,092.3 2,560,671 2,560,671 3,012,555 -- -- 2,915.6 N/A 112.62018 5,035.9 3,777.1 2,998,585 2,998,585 3,569,745 -- -- 3,550.5 N/A 114.32019 6,123.8 4,518.5 3,487,392 3,487,392 4,201,678 -- -- 4,230.7 N/A 116.1

IVA/Revenue (%)

Imports/ Demand

(%)

Exports/ Revenue

(%)

Revenue per Employee

($000)Wages/Revenue

(%)Employees

per Est.Average Wage

($)

Share of the Economy

(%)2005 78.86 N/A N/A 1.03 76.16 1.16 780.70 0.002006 78.62 N/A N/A 1.13 75.82 1.18 855.95 0.002007 78.27 N/A N/A 1.20 75.27 1.16 903.24 0.002008 77.65 N/A N/A 1.27 74.76 1.19 952.90 0.002009 77.53 N/A N/A 1.28 74.43 1.16 955.98 0.012010 77.26 N/A N/A 1.39 73.96 1.18 1,028.40 0.012011 76.90 N/A N/A 1.29 73.80 1.16 951.34 0.012012 76.60 N/A N/A 1.38 73.19 1.15 1,007.95 0.012013 76.02 N/A N/A 1.28 72.42 1.18 924.51 0.012014 75.88 N/A N/A 1.30 71.88 1.16 931.99 0.012015 75.45 N/A N/A 1.41 71.35 1.15 1,005.64 0.012016 75.26 N/A N/A 1.42 71.16 1.15 1,011.16 0.022017 75.25 N/A N/A 1.36 70.95 1.18 967.82 0.022018 75.00 N/A N/A 1.41 70.50 1.19 994.61 0.022019 73.79 N/A N/A 1.46 69.09 1.20 1,006.91 0.02

Figures are inflation-adjusted 2014 dollars.

Revenue (%)

Industry Value Added

(%)

Establish-ments

(%)Enterprises

(%)Employment

(%)Exports

(%)Imports

(%)Wages

(%)

Domestic Demand

(%)


(%)2006 11.6 11.2 0.1 0.1 1.3 N/A N/A 11.1 N/A 2.52007 8.1 7.6 2.9 2.9 1.7 N/A N/A 7.3 N/A 2.62008 7.7 6.9 -0.9 -0.9 1.4 N/A N/A 7.0 N/A 2.62009 11.6 11.5 13.4 13.4 10.8 N/A N/A 11.2 N/A 2.02010 17.0 16.6 6.8 6.8 8.0 N/A N/A 16.2 N/A 2.72011 4.2 3.7 13.7 13.7 12.4 N/A N/A 4.0 N/A 2.72012 14.7 14.3 8.6 8.6 7.4 N/A N/A 13.8 N/A 1.52013 23.0 22.0 29.6 29.6 32.7 N/A N/A 21.7 N/A 2.02014 23.1 22.9 22.6 22.6 21.2 N/A N/A 22.2 N/A 2.12015 28.5 27.7 19.5 19.5 18.2 N/A N/A 27.5 N/A 2.12016 25.4 25.1 24.4 24.4 24.4 N/A N/A 25.1 N/A 1.92017 18.9 18.8 21.0 21.0 23.8 N/A N/A 18.5 N/A 1.22018 22.5 22.1 17.1 17.1 18.5 N/A N/A 21.8 N/A 1.5

2019 21.6 19.6 16.3 16.3 17.7 N/A N/A 19.2 N/A 1.6

Annual Change

Key Ratios

Industry Data



Jargon & Glossary

BARRIERS TO ENTRY High barriers to entry mean that new companies struggle to enter an industry, while low barriers mean it is easy for new companies to enter an industry.

CAPITAL INTENSITY Compares the amount of money spent on capital (plant, machinery and equipment) with that spent on labor. IBISWorld uses the ratio of depreciation to wages as a proxy for capital intensity. High capital intensity is more than $0.333 of capital to $1 of labor; medium is $0.125 to $0.333 of capital to $1 of labor; low is less than $0.125 of capital for every $1 of labor.

CONSTANT PRICES The dollar figures in the Key Statistics table, including forecasts, are adjusted for inflation using the current year (i.e. year published) as the base year. This removes the impact of changes in the purchasing power of the dollar, leaving only the real growth or decline in industry metrics. The inflation adjustments in IBISWorlds reports are made using the US Bureau of Economic Analysis implicit GDP price deflator.

DOMESTIC DEMAND Spending on industry goods and services within the United States, regardless of their country of origin. It is derived by adding imports to industry revenue, and then subtracting exports.

EMPLOYMENT The number of permanent, part-time, temporary and seasonal employees, working proprietors, partners, managers and executives within the industry.

ENTERPRISE A division that is separately managed and keeps management accounts. Each enterprise consists of one or more establishments that are under common ownership or control.

ESTABLISHMENT The smallest type of accounting unit within an enterprise, an establishment is a single physical location where business is conducted or where services or industrial operations are performed. Multiple establishments under common control make up an enterprise.

EXPORTS Total value of industry goods and services sold by US companies to customers abroad.

IMPORTS Total value of industry goods and services brought in from foreign countries to be sold in the United States.

INDUSTRY CONCENTRATION An indicator of the dominance of the top four players in an industry. Concentration is considered high if the top players account for more than 70% of industry revenue. Medium is 40% to 70% of industry revenue. Low is less than 40%.

INDUSTRY REVENUE The total sales of industry goods and services (exclusive of excise and sales tax); subsidies on production; all other operating income from outside the firm (such as commission income, repair and service income, and rent, leasing and hiring income); and capital work done by rental or lease. Receipts from interest royalties, dividends and the sale of fixed tangible assets are excluded.

INDUSTRY VALUE ADDED (IVA) The market value of goods and services produced by the industry minus the cost of goods and services used in production. IVA is also described as the industrys contribution to GDP, or profit plus wages and depreciation.

INTERNATIONAL TRADE The level of international trade is determined by ratios of exports to revenue and imports to domestic demand. For exports/revenue: low is less than 5%, medium is 5% to 20%, and high is more than 20%. Imports/domestic demand: low is less than 5%, medium is 5% to 35%, and high is more than 35%.

LIFE CYCLE All industries go through periods of growth, maturity and decline. IBISWorld determines an industrys life cycle by considering its growth rate (measured by IVA) compared with GDP; the growth rate of the number of establishments; the amount of change the industrys products are undergoing; the rate of technological change; and the level of customer acceptance of industry products and services.

NONEMPLOYING ESTABLISHMENT Businesses with no paid employment or payroll, also known as nonemployers. These are mostly set up by self-employed individuals.

PROFIT IBISWorld uses earnings before interest and tax (EBIT) as an indicator of a companys profitability. It is calculated as revenue minus expenses, excluding interest and tax.

Industry Jargon

IBISWorld Glossary

CANNABIS Cannabis is a drug produced from the Cannabis sativa (commonly known as hemp) or Cannabis indica plant, which is related to nettles and hops.

DISPENSARY/COLLECTIVE A medical marijuana collective is comprised of patients that provide medical marijuana to each other on a nonprofit basis. It is the standard legal organization for growers in most states.

MARIJUANA The dried leaves and flowering tops of the pistillate hemp plant that yield tetrahydrocannabinol and are smoked in cigarettes for their intoxicating effect.

VENDOR A member of a marijuana collective that provides medical marijuana to other collective members on nonprofit basis.


Jargon & Glossary

VOLATILITY The level of volatility is determined by averaging the absolute change in revenue in each of the past five years. Volatility levels: very high is more than 20%; high volatility is 10% to 20%; moderate volatility is 3% to 10%; and low volatility is less than 3%.

WAGES The gross total wages and salaries of all employees in the industry. The cost of benefits is also included in this figure.

IBISWorld Glossary continued

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IBISWorld Med Pot Growth Study

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