Pennsylvania’s Medical Cannabis Operators Grapple With Price Compression, Illicit Market

Despite steady growth in patient count in Pennsylvania’s medical cannabis program, executives from vertically integrated operators Ethos Cannabis and Jushi Holdings say that price compression and competition from a still-thriving illicit market continue to put pressure on the state’s regulated industry, which launched in early 2018.

There were 842,021 patients and caregivers registered in the program—including 423,443 active patients who have purchased medical cannabis at least 10 times in the past year—as of November 2022, according to data from the Pennsylvania Department of Health (DOH).

“That’s one of the better medical markets across the country,” Trent Woloveck, chief strategy officer for Jushi, a multistate operator that has 18 dispensaries in Pennsylvania, tells Cannabis Business Times. “About one in 10 adults in the state of Pennsylvania has a medical cannabis card. That’s a massive number.”

Photo courtesy of Ethos Cannabis

Ethos has operations in Ohio, Massachusetts and Maryland in addition to Pennsylvania.

Demand continues to increase with patient count, says Blandine Jean-Pierre, VP of marketing for Ethos, which operates in Ohio, Massachusetts and Maryland in addition to Pennsylvania.

“We’re not seeing demand drop. Sales are up. They still continue to grow,” Jean-Pierre says, adding that the real issue lies in declining cannabis prices.

Woloveck says an overall increase in supply has contributed to price compression in the state; as CBT previously reported, wholesale flower prices tumbled from $10.65 per gram in January 2021 to $4.16 per gram in October 2022, while retail flower prices dipped from $14.90 per gram to $10.95 per gram during the same timeframe.

As the wholesale and retail prices of cannabis continue to drop, multistate operators Columbia Care and Trulieve have announced layoffs in Pennsylvania’s market.

RELATED: Trulieve Layoffs Continue, Now in Pennsylvania

However, Woloveck says that price compression may have an upside, as it more closely aligns the cost of regulated cannabis with products sold in the illicit market.

“We’re seeing prices come down, but we’ve also seen more people coming to the regulated cannabis industry on the medical side,” he says, pointing to Pennsylvania’s steadily growing patient registry. “Quite frankly, that’s why you have such a strong medical adoption rate because the prices are becoming equal to, if not better than, the illicit market.”

Photo courtesy of Jushi Holdings

Jushi’s BEYOND / HELLO dispensary in Center City, Pa.

Woloveck is confident that vertical integration (Jushi became vertically integrated in Pennsylvania when it acquired Vireo Health’s cultivation and processing facility in August 2020) and a right-sized grow operation to supply its stores will allow the company to steadily increase its margin even as more licensed operators come online and prices decline even further.

Jean-Pierre says Ethos is carefully evaluating its pricing to stay afloat in Pennsylvania.

“We’re looking at all of our pricing and where we need to be as our baseline numbers, and then [we’ll] go from there for our mainstream brand and then premium and value [brands] so that we are priced accordingly,” she says. “We are seeing that people are showing up at the dispensaries, so it’s not a demand issue. We’re seeing that they want a deal, so the loyalty’s not there. If you can get a deal someplace else, you’re not going to go to your favorite dispensary anymore. You’re going to go to the dispensary that’s going to give you the deal.”

Building a strong brand is one way to combat the race to the bottom, Jean-Pierre says.

“People will follow brands,” she says. “[Ethos is] growing in Massachusetts and growing in Pennsylvania, and it has historical value. People love it for the quality. So, when we put things out, we see value in the execution, we see value in the relationships, we see what we need to do to create a space in the marketplace to protect our business.”

Ethos’ partnership with Thomas Jefferson University also helps to establish brand credibility in Pennsylvania’s market, Jean-Pierre says.

The state’s 2016 medical cannabis law allows medical cannabis operators to seek a special “clinical registrant” license to partner with one of Pennsylvania’s medical schools, called “academic research centers,” to facilitate patient-facing clinical studies on the benefits of medical cannabis.

“We have a doctor on staff who is our chief medical officer who works with us to develop products that are ailment solution-focused, which I think is a unique proposition that not a lot of cannabis companies can really tell,” Jean-Pierre says. “I think the leveraging of this medical relationship that we have to deliver products that specifically target ailments that people constantly cite as the top one, two, three reasons that they would consider cannabis is going to set us apart and not only sustain the medical market but create new revenues in [any potential] recreational market.”

RELATED: Ethos Cannabis and Jefferson University Launch Their First Studies Under Pennsylvania’s Medical Cannabis Research Program

Ethos also carefully tracks its spending during these difficult economic times.

“[We’ve invested in] the technology platforms that help streamline our business and give us 360[-degree] views of the consumer, or [technology that] can track our P&Ls down to the penny for our products and for our brands and for our retail outlets,” Jean-Pierre says. “We’re putting in a lot of structure to ensure we understand where every dollar is coming from and how we’re making every dollar and how it affects the bottom line.”

Photo courtesy of Ethos Cannabis

Ethos has a doctor on staff to help develop ailment-focused products.

With these strategies, she says Ethos aims to steadily grow its Pennsylvania business.

“It’s not about big revenues for us; it’s about even growth,” Jean-Pierre says. “The more margins we bring in, the better business that we have. Even if it’s half the revenue that we expected but the margins are great, we’ll take it because that means we have a healthy business, and the revenues will follow.”

The bigger challenge, Woloveck says, is the illicit market and regulatory loopholes that allow smoke shops and convenience stores to sell delta-8 and delta-10 THC products.

“I’m more than happy to run a 40-yard dash if we’re both starting at the goal line,” Woloveck says. “I’m starting 20 yards behind the goal line and they’re starting 20 yards ahead of the goal line. That’s where we’re at right now, where you’re seeing no age verification in these stores. You’re seeing no standardized testing or independent third-party testing in these stores. You’re seeing mislabeled products. You’re seeing packaging that is very, very mainstream packaging—Cheetos, Doritos, Nerds. You name it, people in the illicit market are knocking it off. So, it’s very confusing to the consumer but also rather appetizing for kids under the age of 21, ranging all the way down to kids that are five and under.”

RELATED: Testing Rules Included in Pennsylvania’s Final Medical Cannabis Regulations Prompt Concern Among Industry Stakeholders

Woloveck and Jean-Pierre are looking to adult-use legalization to help quash the illicit market.

“I think we’ve seen it in other markets,” Woloveck says. “When a consumer is presented with a chance to buy from a regulated source or an illicit source, they’ll choose the regulated source as long as pricing is somewhat comparable, and that [grows] the market overnight. So, a lot of this pricing pressure, a lot of the ‘additional supply’ that’s out in the market right now, that goes away literally overnight.”

Pennsylvania Gov. Josh Shapiro (D) took office this year after defeating State Sen. Doug Mastriano (R) in the November election, and Shapiro has been outspoken about his support for adult-use cannabis legalization.

“I think we get there with the current administration and the current makeup of the Legislature,” Woloveck says of adult-use legalization in Pennsylvania, adding that he also expects lawmakers to take aim at illicit operators in the near future. “I think you’re going to see that legislation come in the next couple months to be able to identify and enforce those that aren’t participating through a legal channel.”

RELATED: What Does Josh Shapiro’s Win Mean for Pennsylvania’s Cannabis Industry? Q&A With Jushi Chief Commercial Director Trent Woloveck

Jean-Pierre echoes these sentiments.

“I think there’s a high probability that [adult-use legalization is] going to happen in 2024, maybe early 2025,” she says. “I think we’re in a place where the market is going to completely shift, some of which you saw in Massachusetts. It started out medical and quickly shifted to rec. I think that Pennsylvania needs to go rec at some point. I think people want to access cannabis … [and] if we stay medical, we don’t really address the problem of the illicit market.”

In the meantime, Woloveck says businesses that offer a wide variety of consistent products will be able to weather the industry’s economic storm.

“Being able to have that quick, seamless transaction and get what you want is always going to be centric to our retail footprint,” he says.

Jean-Pierre says Ethos has similar goals.

“The best products will win,” she says. “It is really going to come down to your cultivation and your processing process—those are the things that are going to drive it. I think brands are coming. … I am a big proponent that once you have a brand that resonates, your job is to ensure that the accessibility and the quality are always consistent.”

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