Licensing Medical Marijuana Stirs Up Trouble for States

The seven lucky balls that popped out of the Arizona Department of Health Services lottery machine in October produced big winners — not in the state’s Powerball game, but in the competition to make money in the medical marijuana industry.

The prize winners were granted licenses to open a medical marijuana dispensary in a state where patients with prescriptions to treat conditions such as glaucoma and cancer spent $215 million last year on marijuana products. Arizona’s public health officials awarded most licenses based on rules designed to place new dispensaries within range of the greatest number of medical-marijuana patients. But when it wasn’t clear which applicant was in the most patient-dense area, they used a lottery to randomly select the winners, hoping to sidestep conflict.

States have struggled with how to give out potentially lucrative medical marijuana licenses — trying to balance public health concerns against an entrepreneurial spirit and avoid a bevy of lawsuits. Many want to ensure the businesses are well run and are supplying quality products. But even in states like Arizona where dispensaries are required to be nonprofits, competition for licenses can lead to a gold rush mentality and lawsuits as entrepreneurs eye a medical marijuana industry with $4.2 billion in sales in 2014.

“There’s a lot of cash that goes through these businesses,” said Kris Krane with 4Front Ventures, a medical marijuana consulting firm. “As [marijuana] becomes more legitimate and more legal, it’s only going to be a growth industry. People are looking to get in now because as the industry grows and expands they’re positioned to be market leaders.”

Medical marijuana businesses often have between $1 million and $5 million in sales annually, Krane said, though he’s seen some that do more than $20 million.

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