Arizona’s medical marijuana industry struggles to adapt as recreational sales soar

Arizona’s commercial marijuana market
has gone through a seismic shift since 2021 began. Adult-use and
recreational sales have overtaken medical marijuana, as cardholders
abandon certifications and established businesses wrestle with the need
to change with the times.

Throughout 2022, the Arizona Mirror has tracked a 7-month downward trend in medical marijuana sales, while the recreational market continues to set records.

The medical marijuana certification
business has had to deal with economic and legislative dynamics beyond
its control, leaving dispensary owners seeking ways to strengthen the
flagging sector.

During its heyday in the years after
voters passed the Arizona Medical Marijuana Act in 2010, the number of
“qualifying patients” in the state reached more than 295,000 by the end of 2020.

Since that time, the number of people
applying for new medical marijuana cards or renewing previously issued
cards has fallen nearly by half: In its latest monthly report, the Arizona Department of Health Services shows just 158,154 active cards.

“We’re performing community service
at this point, at least in theory,” Sun Valley Health co-founder and CEO
Dustin Klein said. “We might as well be a nonprofit.”

What happened?

Between 2012, when ADHS authorized
the first dispensaries and patients were legally able to purchase
medical marijuana, and 2019, the Arizona medical marijuana market
blossomed and grew quickly. Patients were required to renew
certifications for $75 to $150 annually, and doctors charged additional
fees, generally in the same price range.

The first Arizona effort to legalize recreational marijuana, 2016’s Proposition 205, was narrowly defeated at the polls, leaving the market stable. But voters in 2020 overwhelmingly approved Proposition 207,
the Smart and Safe Arizona Act, making Arizona one of 15 states, two
territories and Washington, D.C. to legalize marijuana for recreational
use. (Adult-use, recreational is now legal in 18 states and the District
of Columbia and medical marijuana is legal in 36 states.)

The seeds of the decline of the medical marijuana program began in June 2019, when Gov. Doug Ducey signed Senate Bill 1494
into law. Among other things, SB1494 was intended to streamline the
certification process by creating an electronic card system and lowering
patient costs by extending the life of a card to two years.

In 2020, the COVID-19 pandemic
shut-down led to record sales — Arizonans purchased nearly 106 tons of
various forms of medicinal cannabis, a significant increase from 2019,
which weighed in at almost 83 tons — and a boon for the retail end of
the business.

But COVID-19 proved to be both a
blessing and a curse to the cannabis business. On the positive side, for
several months during the shutdown, sales spiked in the waning days
before recreational sales began. But the pandemic also kept many winter
residents away, leading to an additional loss of revenue for the
certification businesses serving transient populations.

Recreational sales began on Jan. 28,
2021. Though recreational sales didn’t immediately overtake the
established medical market, they had done so by December — and they
haven’t looked back since.

Effects on the certification business

Over the course of 100 days, everything changed for Sun Valley Health.

While some have been able to weather
the storm, Sun Valley Health has struggled. The company at its height
had eight locations in three states — Arizona, Nevada and Florida — had
66 employees, including 22 doctors, and a $2.2 million annual payroll.

At one point, according to Klein, Sun
Valley certified 30,000 medical marijuana patients in Arizona — nearly
one in every four who got a medical marijuana card — per year at its
five locations.

It all came crashing down for Sun
Valley. The company is down to just a single Arizona location. On the
worst day, Klein said he had to lay off 43 employees, some of whom had
been with the business for more than five years.

He said there has been a 30-50% drop in revenues for certification businesses since 2020. 

In an attempt to revitalize the
business, Sun Valley has added new services such as ketamine therapy, as
well as other alternative therapies such as naturopathy and

Not all certification centers have suffered as badly as Sun Valley, though.

Taryn Tia, the Arizona operation
manager for Dr. Reeferalz, said the company was seeing 25 to 40 new or
returning patients a day at each of its five clinics at the height of
the medical marijuana market. That number dropped to about 15.

Dr. Reeferalz now has four clinics, three in the Phoenix area and one in Tucson. 

“We probably saw a 35% to 45%
decrease in business between the start of two-year cards and the start
of recreational sales,” she said. “But we’ve seen an increase in 2022
since that dip.”

The increase has come from a
concerted effort to reach out to renewal patients and partnering with
dispensaries and pain clinics for referrals. 

There has also been an increase in
certifications for 18 to 21 year olds, since adult-use is only legal for
those over the age of 21. She also believes the novelty of legal
purchases has worn off.

“A lot of our patients were discouraged by long waits [at retail outlets], low-dosage products and high taxes,” Tia said.

But one of the most important aspects
to reviving the certification business for Dr. Reeferalz is educating
patients on the benefits of possessing a medical card.

Benefits of the medical program

Cardholders in the medical marijuana
program enjoy many benefits not available to recreational users. They
pay lower taxes on cannabis, can possess more marijuana, have legal
protections in housing and employment, can grow more cannabis at home
and have legal access to at-home delivery.

Medical patients can possess up to
2.5 ounces of cannabis “flower,” while recreational users are limited to
one ounce and five grams of concentrates or extracts. Edible products,
such as gummies, are limited to 10mg THC per serving and 100mg packages
for recreational, but medical patients can purchase products with much
higher THC dosages.

Medical marijuana patients can grow
up to 12 plants, but without a card, persons 21 years of age and older
can grow six plants per adult in an individual’s primary residence.

One of the biggest draws to maintaining a medical card, though, is savings on commercially available marijuana.

Medicinal products have a state sales
tax rate of 6.6%, with an additional 2% to 3% local tax, depending on
the jurisdiction. Recreational sales are charged a 16% excise tax plus
the TPT and local taxes, meaning the average recreational cannabis user
can pay up to 25% in taxes.

According to Klein, medical patients
spend 30-50% more than recreational customers. Medical patients average
$3,500 a year, while recreational customers spend an average of about

“The savings is unbelievable: If a patient spends $77 a month, the card pays for itself,” he said.

Dr. Reeferalz has a calculator on its
website that estimates how much medical patients can save over
recreational costs, given the higher taxes paid by the latter.

“It helps being able to understand if
it’s worth it,” Tia said. “If you’re not spending that much a week, you
don’t need delivery, you don’t care about any of that, then it makes
sense to buy recreational.”

Card holders cite costs, inconvenience as reasons for leaving the program

While there are likely many reasons
for patients to leave the program, the cost of certifications and the
added inconvenience of the process have been cited.

Green Valley resident and former
medical cardholder Greg Knowles first got a card in December 2018, but
recently let it expire because he does not purchase enough to make it
worth his while.

He “got his calculator out” and
decided he would have to buy at least $1,000 of marijuana a year in
order to justify keeping his card.

“I probably spent a total of $300,
not more than $350 that entire first year,” he said. “It cost me $150 to
spend that amount of money. I did renew the second year and got to
checking and thought, ‘What am I doing here?’”

Knowles, who received his card for
chronic pain, learned a lot about the program from the employees at Hana
Dispensary and settled on low-dosage gummies. He appreciated having his
card when recreational became legal because of the initial lines and
wait times for service, but says now that “the shine has worn off” of
legal sales, he doesn’t have to invest so much time anymore.

“People are finding the same thing
that I found out, that it’s an absolute rip-off,” he said. “I can go in
there as a private citizen, buy what I need, pay the 24%, but I’m never
going to reach that threshold to break even.”

Inconvenience can be another reason people are walking away from the program, or at least delaying renewal.

Arizona NORML acting Executive
Director Jon Udell said he has procrastinated getting his medical
certification renewed because of the time involved and the easy
availability of recreational cannabis.

“I have strong support for the
medical marijuana program,” he said. “But for me, there’s no
certification centers close by: The closest one is like 45 (minutes) to
an hour-long round trip. That’s a significant chunk of my day.”

As to the long-term costs, Udell says
it is easier to think more immediately, even if over time recreational
purchases end up costing more, but it is in the patient’s best economic
interest to remain in the program.

“Human nature is that we value
immediate costs more than we value distant costs,” he said. “If I spend
$80 at the dispensary, I pay $12 in taxes—$12 is a lot less than $300,
so I’m gonna pay less money, right? Then we discount the fact that,
every single month, we’ll be paying $12 or more than. I’m guilty of that
as well.”

Changes in the market lead to changes in thinking

Ryan Hermansky, founder of
Flagstaff’s Noble Herb dispensary, PURE Edibles and president of the f
has seen many sides of the economic dynamics play out over his nine
years in the industry. Dispensary owners, he said, are aware of the need
to maintain a strong medical market.

Hermansky, his brother Brandon and
partner Doug Daly, opened in June 2013 as Greenhouse of Flagstaff and is
one of the remaining original licensees in the state.

“We’re very aware of these declining
numbers happening, I think, far faster than anybody expected,” he said.
“Now there’s going to be a big focus on what we can do to strengthen the
program and keep it strong in Arizona. We’re all founded off of a
strong medical program and I think as we move forward as a marijuana
state, it’s important to have a strong medical program as well as a
strong adult use program.”

Despite his belief in the medical
program, Hermansky’s PURE edibles has begun to tailor its products to
the recreational market by focusing on low-dose gummies, as are other
edible producers in the state.

The company intends to roll out a new
product in the fourth quarter of 2022 that will be 10mg in 100mg
packages, the maximums allowed for recreational sales.

He says that higher-dosage products
have become something of a niche market, but he is convinced the need
for medical-grade products will always be there.

“We’re making some slight changes
(because) we’re seeing it not only on our retail side, as far as people
coming in our store, but it’s also what’s being purchased (from) PURE
throughout the state,” he said. “We’re absolutely seeing it and making
some adjustments to our product portfolio moving forward.”

Hermansky added that the Arizona
Dispensary Association is strategizing and reaching out to potential
partners, including AZNORML, to find a way to revitalize the sector.

“I don’t think the medical program
will go away and we’re going to do everything we can to not only keep
it, but strengthen it,” he said. “There’s certainly some goals in line
with (AZNORML) on trying to strengthen the program and get numbers back

Udell says it is in dispensary
owners’ best interests to shore up the medical program and welcomes
conversations that can accommodate more consumer-friendly laws and
ultimately lower prices for patients and recreational users alike.

“This is a very big concern of many
people who are either industry adjacent, or CEOs of dispensaries,” he
said. “It’s in their own economic self-interest to expand the medical
program, and there’s been a variety of interesting conversations that
have been happening.”

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