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May 13, 2014

Cashing in on pot market proves a pipe dream for traditional pharmacies

NEW YORK — Americans seeking medical marijuana for anything from pain to seizures must turn to a patchwork of small startups for help as U.S. laws keep traditional pharmacies out of a market that may exceed $6 billion by 2019.

While more than 21 states have legalized pot for medicinal use, the drug remains illegal under federal law and banks are hesitant to accept money from its sale. That's keeping drugstore chains CVS Caremark, Walgreen and Rite Aid, out of the market, leaving local entrepreneurs in control.

"We aren't going to see a big guy enter this market within the next few years," said David Yang, an analyst with research firm IBISWorld. "There are just too many regulations and too many elements that make this impossible for them."

In one state alone, Colorado, more than 400 companies are licensed as medical marijuana centers, with government officials predicting sales there could soon reach $1 billion. For Colorado businessman Kayvan Khalatbari, a former electrical engineer who started his business with just $4,000, federal limitations on the drug are a major benefit.

Khalatbari, who has poured $500,000 into pot production and $150,000 into a store, started in the industry by delivering medical marijuana door to door. This year, he expects sales of almost $2 million, which may rise to $5 million once he can also begin selling the drug commercially under Colorado law, he said.

"We're making money, we're employing people, we're being a beacon of light for this industry and showing it can be done professionally," Khalatbari said in a telephone interview. "That to me is a success."

Traditional pharmacies, meanwhile, face a hurdle that keeps them from competing with entrepreneurs like Khalatbari. Even though almost half of states and the District of Columbia accept the drug's use for medical purposes, marijuana isn't deemed legal by the federal government. The drug is classified as a Schedule I controlled substance, defined as having a high potential for abuse with no accepted medical use.

Schedule 1 drugs, which includes heroin, can't by law be prescribed or dispensed. Pharmacies must register with the U.S. Drug Enforcement Agency to dispense controlled substances, making it illegal for them to sell medical marijuana.

Walgreen, Rite Aid and CVS said in separate statements they have no plans to sell medical marijuana. Doing so, according to CVS spokeswoman Carolyn Castel, would violate the company's registration with the DEA.

 That may change if the U.S. Congress sees taxes on the drug as a way to raise money, said Brad Barker, an analyst with Bloomberg Industries in New York.

 "The second this is legalized they will start rolling out the marijuana cigarettes the next day," Barker said. "I think the same thing can be said with everything else. Then you'll have all the big boys jumping into this space."

More pharmacies would sell medical marijuana if drug companies created cannabis products that can be approved by federal regulators, like drugs or tobacco products, said Mark Kleiman, a professor of public policy at the University of California at Los Angeles School of Public Affairs.

"It's not drug stores that have to make these decisions, its pharmaceutical companies that have to decide if they want to make cannabis products," Kleiman said in a telephone interview. Eventually, that could fuel a "big threat to the medical dispensary business model."

Existing pharmaceutical cannabis products include Marinol, a prescription pill made with synthetic cannabinoid for uses including treating nausea associated by chemotherapy, sold by AbbVie, and Sativex, a spray form of marijuana produced by GW Pharmaceuticals, a Britain-based medical marijuana research and development company. Sativex isn't available in the U.S.

Shareholders are already investing in publicly traded marijuana companies like GW Pharmaceuticals and Advanced Cannabis Solutions, a company that leases growing facilities to licensed growers and dispensaries. Barker said he's tracking 160 public marijuana companies.

American depositary receipts for GW Pharmaceuticals have increased more than sevenfold in the past 12 months to $69.77, raising the company's market capitalization to $1.24 billion. Shares of Colorado Springs, Colorado-based Advanced Cannabis Solutions, with a market value of about $210 million, has risen more than ninefold to $15.75.

Next Gen Metals Inc., a mineral exploration company, is among the investors preparing to put private capital into marijuana startups.

"You can certainly believe the large industries, the large pharmaceutical companies, that they're looking into it," Jay Oness, Next Gen's chief operating officer, said. "When the time is right, I'm positive they'll want to be a part of it either through acquisitions or by themselves."

Until legalization or more products are marketed by pharmaceutical companies, it will be an industry dominated by small dispensaries set up to serve about 1.4 million medical marijuana cardholders using the drug to treat their symptoms.

Three states allow medical marijuana companies to make a profit from the sale of pot. The remaining 18 states that approve of the use of medical marijuana require distribution only by nonprofit organizations and cooperatives, according to the Marijuana Policy Project.

         

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