Hugh O’Beirne got involved in cannabis advocacy in the 1970s when he joined MassCann, the Massachusetts chapter of National Organization for the Reform of Marijuana Laws. At the time, his involvement was mostly limited to writing checks and participating in college debates. He would go on to a lucrative career in private equity real estate. O’Beirne renewed his cannabis advocacy in 2016, when he was named president of the New Jersey Cannabis Industry Association. He recently spoke to NJBIZ about the prospects for cannabis reform in New Jersey.
NJBIZ: What more do you believe should be done concerning legalizing cannabis?
O’Beirne: First, the medical program is the right thing to do. It’s also the opportunity to optimize the supply-side architecture. We needed to look at the industry, and we need to balance those things. We need to balance that industry in New Jersey and the regulations that empower the industry need to see a broad base of participants. They need to balance multistate and international experience with local desires for capital formation and profit retention. There needs to be an understanding that the communities that have borne the brunt of the drug war so disproportionately – and as a result have been so eviscerated of the ability to participate in anything economically – need to find an avenue to participate into the capital formation and profit retention of this industry now that we’re going to make money on the backs of the suffering that they went through.
These things, broad-based participation that encourages reduced prices, innovation of product, minority inclusion — for God’s sake, we can’t let that go. This is the moment. We’re standing in the embers of the drug war, and we’re seeing all of these people that are still with us that have been victimized, and now we’re proposing to make money over the substance they’ve been victimized over. Isn’t there a noble obligation and a moral obligation to affect what we just put them through?
NJBIZ: What are the benefits to developing a wholesale market?
O’Beirne: People will begin to compete on quality, innovation and price. That’s what you want. You do that by making sure everyone’s under the same umbrella. We’ve been advocating for just the optimization of a market based on every other market, nothing exotic. We believe it’ll be easier to regulate and see, because there won’t be as much vertical integration. The other reason is that retail storefronts are much lower cost than a cultivation facility, like a twentieth of the cost.
NJBIZ: What’s the data on the profitability of the current industry?
O’Beirne: It’s artificially high. Prices are high because the conditions are low, there isn’t a wholesale market and there’s vertical integrations. All of these various factors that tend to lead to artificial price support are present. As a result, our prices are amongst the highest, if not the highest, in the States. When you see artificially high prices you know what you see with it? Lower quality. The reasons you see artificially high prices is because you don’t have to try, and there’s something about the political or regulatory system that leads to me sitting here. We want to avoid that experience and the best way to do that is by competition. This isn’t a knock on the guys who are working it. They are under even more pressure. … They want it to be good. This is the consequences of when you screw up a system intentionally, like Chris Christie did.
… We don’t want the market to be saturated like Colorado. We’re much more likely to be like Delaware or Connecticut, which are way undersupplied. When you’re either oversupplied or undersupplied, you set perverse incentives into the black market. If I’m overly supplied, I’m incentivizing people to make money by selling product export. The West Coast has been selling to the East Coast. If you’re undersupplied, which the majority of medical programs are, you set perverse incentives that are like ‘I’m gonna buy this cannabis from Oregon because it’s just a good quality and it’s cheaper.’ Undersupply leads to import perverse incentives; oversupply leads to export-perverse incentives. I suppose you’d rather want to have export-perverse incentives if you had to pick because the import-perverse incentives invites illegal market participants that sell heroin and amphetamines and kill people, whereas export guys, not so much. You don’t want either, though. What you want is a market with innovation, rational prices and quality which out competes this market.
NJBIZ: So is decriminalization a good substitute for legalization?
O’Beirne: It’s a spectacularly horrible idea. … We absolutely believe in decriminalization, expungement, clemency — all of these social justice things — in being absolutely necessary for us to be considered good people. … [But] if it’s decriminalization only, [the cannabis is] coming from exactly the same place that ultimate total prohibition couldn’t stop — the illegal market. You’re making a decision to start a massive stimulus to the illegal market. Now the illegal market is made up of different people, some of whom are very quality people who just know the laws are BS and they don’t want to follow them. But also, in the illegal market [there are] people who spray their crops down with Raid and don’t mind selling it to you to smoke anyway, and also people who will sell heroin or kill people. There are good people in the illegal market, but then there are also people of various agendas — and organized crime [groups] — who make money doing a variety of things. They’re going to get a massive benefit from decriminalization and some will use it as an opportunity to upsell you on something more profitable. … Do you know how much more money someone can make on selling heroin than cannabis? [Some of them] are going to try to sell you that.
The other problem is the people who say they’re in favor of decriminalization [and] say they’re in favor of medical [marijuana], which is nice in theory. But in practice, when you decriminalize, the enrollment in a state medical program plummets. Why? Because the cost of opting out of the medical program [and into the black market] drops below the cost of complying with the medical program. People will go with the low-cost option every time.
NJBIZ: How would it effect those still in the medical program?
O’Beirne: Less demand, so supply is constrained and prices will still be high. Innovation will be down because there will be less desire on behalf of the industry to come up with something better. Bottom line: It’s not a good idea. You want to see patients onboarding; you want to see patients being considered by doctors; you want to see the data of what works being collected and understood; you want to see the supply chain and industry responding to what works; and you don’t get that if you slow that process down by encouraging people to stay with their black market dealer.
NJBIZ: If decriminalization would expand the black market, what would legalization do?
O’Beirne: Properly done, shrink it. With a legalized market that’s accessible where price points aren’t out of reach through taxation is responsive to customer demand [and] is innovative in that response, we’ll see prices drop, quality go up and innovation occur where they have something new they can’t get from the black market. The impetus to interact with the black market goes away because I can get better, safer and more interesting products in the store. Think of the illegal liquor market. What killed the illegal liquor market? The end of Prohibition did. Cannabis could be the same thing.
NJBIZ: You said the black market in New Jersey is $1 billion. How would that change with legalization?
O’Beirne: Yes, and the black market in the U.S. is about $46 billion. Two things would change — a large migration of that billion dollars from black market sources into legal sources: regulated sources and then, new money from new entrants. One of the largest growing demographics in consumption is 65 and older. They’re not really black market consumers. They’re just entering into the space. Different age groups tend to attract different delivery systems. When you shift the illegal market, you get the tax benefits you don’t get now, and then you hurt the people doing bad things.
NJBIZ: You have a background in finance. How do you feel like this experience is translating to your current position?
O’Beirne: I was the general counsel of a public real estate trust, opened the stock exchange twice — rang the bell once — then I did private equity stuff. How does it translate to this? First of all, the industries are highly regulated. Understand regulation, and understand why [we have] regulation. So much of that isn’t just applying to a checklist, but understanding why it’s there, who the regulators are, what success looks like for them and how you can be seen as a partner and not a problem. You [need to] understand the development of markets, innovation, competition, the importance of team. At the end of the day, 99 percent of business is the team. And then you begin to understand markets, optimizing markets, capital equations, market structure.
NJBIZ: You’re part-owner of a dispensary license in Pennsylvania; do you invest in the cannabis business elsewhere?
O’Beirne: I fully intend to be in this industry in New Jersey, but I want this to be good for New Jersey first. Step two, once we get this done, I’ll figure out how to get into it. But I don’t want to mix the two because it’s kind of like bad karma. You can do well while doing good, but it’s super hard to do. But I think that people understand I can’t make a dime off of anything that I’m suggesting right now. I can in the future, but so can everyone else. As a trade association, I tell my members that our goal is to simply try and recommend for an industry and market what is best for New Jersey, with the understanding that if we’re good at what we do, it’s good for ourselves too. I have another job, also not paid — my other job is to generate member value. People who become members of our association have a right to expect that value is going to be generated for them by that association. The major value is that we create context for their participation in the industry.
NJBIZ: Getting capital is an issue. What are the options?
O’Beirne: Other players, that’s one. Some of the other cannabis operators become investors in other companies. Angel investors, friends and family, family offices. Wealthy individuals under the radar. That’s really it. In Canada, it’s on the stock market, so you can raise money like any other business. You can’t even get a business bank account in the U.S.
NJBIZ: How many jobs do you think the cannabis industry could create?
O’Beirne: By 2020, the U.S. cannabis industry could create 450,000 new jobs, In New Jersey, maybe 30,000. That’s the jobs in the cannabis industry, but what about the people building the facilities and installing the lights? So all of them get jobs. Along with the real estate brokers.