No longer illicit, but not fully legit, the market for legal marijuana is anticipating big changes — soon?
Future’s so bright: George Hodgin, MBA ’17, inside Biopharmaceutical Research Company’s “mother room.” | Drew Kelly
The Biopharmaceutical Research Company’s “mother room” is in a warehouse-like building attached to a cinderblock office that’s as inconspicuous as the startup’s name. Entering is momentarily disorienting: A high-powered fan thrums overhead and every inch of the spotless white space is suffused in intense pinkish light. Visitors put on specialized sunglasses to filter out the mix of red and blue wavelengths calibrated to encourage maximum growth in the 177 female cannabis plants growing inside.
Decked out in white coveralls and hair, beard, and shoe coverings, George Hodgin, MBA ’17, surveys the crop arrayed along two 30-foot-long tables. “Kyle, do you have any favorite moms yet?” Hodgin, BRC’s founder and CEO, asks director of production Kyle Ruddy.
“This one’s growing very nice,” Ruddy says, motioning to a plant that, to the untrained eye, looks exactly like each of its neighbors sticking out of cubes of growing medium. “But I try not to really pick my favorites at this stage.”
Over the next few months, up to 80% of these plants will be culled. Each of the survivors will be trimmed to create 30 to 40 new plants, which will be transplanted and harvested in March and again in June. “Until we see the flower,” Ruddy says, “I don’t really like to make any judgments.”
After it’s been picked, the marijuana flower will be processed here in Castroville, California, and then sent to customers across the country. Ordinarily, shipping cannabis across state lines is a federal crime — yet BRC operates entirely within the law and with the blessing of the Drug Enforcement Administration (DEA). “We grow federally approved cannabis plants,” Hodgin says. “We manufacture drug substance here, which means we extract, isolate, and process it, and then ship it to research partners, clinical trial sites, finished product formulators, biotech companies, and pharma companies.”
When he was a student at Stanford Graduate School of Business, Hodgin discovered a glaring disconnect in the cannabis industry: Millions of Americans were gaining access to legalized marijuana, yet research into the drug’s medical potential was stagnant. He began the laborious process of securing the DEA licenses necessary to produce the plants that might birth a new generation of cannabinoid-based pharmaceuticals. “Is there a way to crack the federal code around cannabis?” he recalls wondering. “The answer is yes. And it took us a lot of years.” The next question was, “Could you build a venture-backed business designed to help people researching cannabis? We think the answer is yes.”
BRC closed a $20 million funding round in 2022 and now employs 19 people. It’s building a clean manufacturing room in preparation for scaling up its operations. “Our vision is to use the power of cannabinoids to treat unmet medical needs to help patients around the world,” Hodgin says.
As one of the few federally approved cannabis producers, BRC occupies an unusual spot in the United States’ cannabis industry. But then, almost everything about this industry is unusual. No longer totally illicit, but not fully legit, it operates in a regulatory and financial gray area. Yet it’s no longer a taboo or a punch line.
Hodgin, a former Navy SEAL who had no connection to the cannabis world before he founded BRC, has seen this shift firsthand. A few years ago, he says, it wasn’t uncommon for potential funders or partners to brush off the entire industry. “Anybody that didn’t like cannabis for whatever reason — philosophically, morally — they could kind of ignore it.” Today, like it or not, that’s changed. “You can’t really ignore it anymore.”
In November 2023, Ohio became the 24th state to legalize cannabis for recreational use following the passage of a ballot measure approved by 57% of voters. More than half of all Americans now live in a state where pot is legal, and nearly 9 in 10 adults say it should be legal for medical or recreational use.
The U.S. market for legal recreational and medical cannabis was nearly $30 billion in 2023, according to BDSA, an industry analyst. It could be more than $44 billion by 2027, which comes out to about 10% annual growth.
Tom Manning, MBA ’79, is the chairman and director of Cresco Labs.| Courtesy of Tom Manning
“That developed out of a near-standing start 10 years ago,” says Tom Manning, MBA ’79, the chairman and director of Cresco Labs, a publicly traded company that operates 70 dispensaries and manufacturing facilities across eight states. It is one of a handful of large “seed to sale” companies that have been riding and guiding the industry’s expansion. Cresco’s revenue, Manning says, grew from zero to about $800 million in four and a half years.
Manning joined Cresco in 2016, following a career in which he spent nearly 20 years running companies in East Asia and served as the chairman and CEO of Dun & Bradstreet. He was drawn by the chance to apply his background in strategy and finance in a fast-moving environment. “The notion of working for a hypergrowth company captivated me,” he says. “One doesn’t normally get that type of experience.” He’s led Cresco’s efforts to build a board of directors and overseen its corporate governance and compliance.
“When I joined the company as a board director, it probably raised some eyebrows in the sense that it was an unusual move to an industry I had never worked in — and where I’m not particularly experienced with the product,” he says. Having seen the market’s rapid expansion, Manning thinks we’re past the “tipping point” where most Americans accept cannabis as a legitimate product. “I think the industry is normalizing,” he says, “and we are very excited to be a leader in assisting with that normalization.”
Yet many features of the cannabis industry are far from normal. Behind the shiny new dispensaries and slick packaging, prohibition still looms large. Like heroin and LSD, marijuana is a Schedule I controlled substance, which means that the federal government does not recognize any potential for its medicinal (never mind recreational) use.
State-legal cannabis businesses are unlikely to get busted by the feds, but they operate under unique constraints. Growers are not eligible for forms of federal aid handed out to other farmers. Federally chartered banks will not touch cannabis producers’ money, lest they run afoul of anti–money laundering laws. And the IRS prohibits any business involved in the “trafficking” of controlled substances from deducting normal overhead expenses.
Kim Sanchez Rael, MBA ’91, is the co-founder and CEO of Azuca.| Courtesy of Kim Sanchez Rael
Since interstate trade is illegal, each state market is isolated from the others. “There’s no one market. There are dozens of different markets because it’s regulated on a state-by-state level,” explains Kim Sanchez Rael, MBA ’91, the cofounder and CEO of Azuca, a New Mexico–based manufacturer of fast-acting delivery systems for cannabis-infused edibles and beverages. “We’ve got mature markets and emerging markets, and they have their different price dynamics on the exact same product just from one state to the other because of supply and demand.”
Azuca’s proprietary formulations are designed to boost the speed and efficacy of cannabis products. “We call it the ‘Intel Inside’ model,” says Rael, who got her start in VC and tech. “I spent seven years with Intel.”
By supplying its customers with “the magic ingredient that makes them really magical,” Azuca has managed to avoid the limits on banking and financial services faced by “plant-touching” companies. “You can’t move active product across state lines or jurisdictional lines. So our business model is that we ship the non-infused precursor anywhere in the world, and then our partners infuse it with the active THC,” Rael says, referring to cannabis’ main psychoactive component.
Azuca has seen enviable growth. Last year, it was ranked 214 on Inc.’s list of the fastest-growing private companies in America, having reported 2,628% revenue growth over three years. Nonetheless, Rael strikes a note of caution when discussing the state of the industry. Growth has been uneven: Markets in states that just legalized, like New York and Missouri, have boomed, while established markets in California and Colorado have slowed as competition has driven down prices. “That really constrains the capital markets for cannabis,” she says. “And there’s a real shortage of capital in the industry right now.”
Combined with what Rael calls “regulatory whack-amole,” this makes for a particularly challenging business environment. “It’s the hardest thing I’ve ever done,” she says. “But it’s the most fun thing I’ve ever done because it’s so hard.”
Blast From the Past
In February 1968, MBA students in the GSB’s organizational behavior course surveyed their classmates about drug use. Of the 374 respondents, 30% reported that they had tried marijuana. No one over 30 had used it, and unmarried students were more than three times as likely to have tried it than married students. Users’ GPAs were slightly lower, though The Reporter, the school’s newspaper, was careful to note that “whether this is either a cause or effect is unclear.” It concluded, “The study proves nothing, but is nevertheless enlightening.”
Maggie Connors, MBA ’16, first envisioned the future of the cannabis industry when she was a student at the GSB. She’d come to California in 2014 after working in brand management at PepsiCo in New York. Though full legalization was still a couple of years away, she was struck by the sophistication of the state’s medical marijuana market. “I was really blown away by how much closer to consumer packaged goods it was,” Connors recalls. “There were retail shelves full of early brands and professional packaging. It was like a real consumer product — just with a Schedule I substance.”
She “nerded out” on the marketing and branding of cannabis, crafting an independent study project overseen by lecturer in strategic management Bill Meehan. (Meehan died in 2023.) “I was inspired by the leadership and management opportunity of helping shape a newly legal industry.”
California voters approved the legalization of marijuana in 2016, and the following year Connors founded Besito, which produced a stylish vaporizer and “mini joints” targeted to “lower dose” consumers. She sold the company in 2021 and is currently the vice president of marketing at Garden Society, a women-owned producer of “hand-crafted cannabis products” based in Sonoma, California. Connors thinks that region’s signature product could provide a model. “Right now the landscape is akin to wine,” she says. “Ultimately, it’s a crop. It’s about growing conditions and terroir, and people really care about where it was grown, which doesn’t happen with beer or chips.”
As more “suits” have gotten into the market, Connors has seen smaller players moved aside. That includes many people who were growing or selling cannabis before it was legal, as well as women and people of color. “You need a lot of capital to even get in the game and to keep up with expensive regulations in inefficient state-by-state markets,” she says. But, she adds, “I’d be surprised if it went the way of beer, where basically you have a handful of giant companies — we’ll see.”
Manning is also confident that cannabis is ready to join the ranks of diversified, conventional products. “Our feeling is that over time, the industry will approximate consumer products and beverage and food are probably going to be affiliated industries,” he says. “Of course, a wildcard would be the pharmaceutical industry.”
Rael agrees. “From a product perspective, cannabis is ready to go mainstream,” she says. “It’s just the regulatory frame: It’s not ready for us.”
There’s plenty of buzz that change is in the works. In October 2022, President Joe Biden initiated an administrative review of cannabis’ status as a Schedule I drug. (In January, a dozen Democratic senators went beyond that, urging the DEA to stop classifying marijuana as a controlled substance altogether.) Just as this article was going to press in late April, it was reported that the DEA was planning to move cannabis to Schedule III, the same category as prescription drugs like Tylenol with codeine and anabolic steroids.
Maggie Connors, MBA ’19, is the is the vice president of marketing at Garden Society. | Courtesy of Maggie Connors
Other reforms at the federal level may be a ways off. In 2022, a measure that would have decriminalized cannabis passed in the House but got no further. Bills that would pave the way to legalization or lift limits on cannabis-related banking and tax restrictions have not come to a vote.
Rael is bearish about the pace of change at the national level. “I’ve always said, do not ever base your business strategy on the assumption that Congress is going to do something,” she says. In the past few years, she’s seen companies make risky investments on the assumption that something big was around the corner. “A lot of people have lost their shirts betting that there’s going to be full federal legalization in the near term.”
Likewise, Connors says real reform will be more complicated than just rewriting the rules. “It’s not going to be an overnight thing. Even when there is regulatory change, it’s going to be a slow process to adopt,” she says. Rescheduling would bring obvious benefits such as opening up access to banking and interstate commerce. But, she adds, “It will take time to really unleash the potential of this industry because right now every state has its own regulatory framework. There’s no governing body to connect the dots.”
Cresco has been working behind the scenes to nudge lawmakers in Washington. In 2023, it reported spending more than $900,000 on federal lobbying. On an earnings call last November, CEO Charlie Bachtell said he was “optimistic” that rescheduling would happen in the near future.
Such a change would clearly benefit the company, though Manning notes that it would also shake up the competitive landscape as beverage, food, and pharma incumbents come off the sidelines. “Many of the larger companies are still cautious about getting involved in a Schedule I drug,” he says. “Obviously, if regulatory conditions do change fairly quickly over the next year or two, that would open up the game for other participants to come in and play a more significant role.”
If and when things open up, an already competitive, capital-intensive, growth-focused market will become even more so. Like the underperformers in the mother room, many of today’s cannabis companies may not make it to the next harvest.
Back at BRC’s headquarters, Hodgin is comfortable in the niche he’s carved out. “We can do everything we want to do right now because we have all these regulatory permits,” he says. “But it’ll be a lot easier to operate without having a million different barriers in front of us every time we want to do something.”
Some of those barriers are meant to ensure that BRC remains sealed off from the parallel universe of cannabis just outside its razor-wire-topped fence. Hodgin stops outside the massive metal door of a walk-in safe protected by two keypads and a thumb scanner.
“I don’t even have the combo to this thing,” he says. “I’m not allowed to.” The DEA requires BRC to keep its harvest inside the vault — safe from anyone who might come looking for a score. “It’s weird,” he says. “You could just go buy it down the street at a dispensary.”
Waiting to Exhale
As legalization spreads, sniffing out workplace drug use is getting trickier.
In 2022, Quest Diagnostics analyzed 6.3 million urine samples collected at workplaces across the United States. A little more than 4% tested positive for marijuana. A British tabloid trumpeted the news, claiming that “one in 25 American workers are high on marijuana at work.”
Not exactly. The most common drug screening methods do not determine if someone is under the influence when a sample is collected. Urine tests detect pot use within the past 30 days. Hair tests go as far back as three months. (More than 10% of Quest’s hair samples tested positive.) Saliva tests can pick up use within the past day — but they can’t distinguish between someone who only partakes after hours and someone who comes to work stoned.
On-the-job drug testing isn’t just logistically challenging. It’s becoming legally tricky as more states enact workplace protections for recreational and medical marijuana users. As of January, employers in California may no longer ask job applicants or employees if they use marijuana on their own time. And employers may not hire or fire workers based on urine or hair tests. Employers may still prohibit on-the-job marijuana use, however. And the new laws do not apply to construction or jobs requiring a federal background check or drug test.
Steve Lewis, MBA ’84, sees this as a step in the right direction. “Here in California, I have the right to consume cannabis tonight but show up for work and know that I’m not going to be tested unfairly,” he says. Lewis is not against workplace drug testing — far from it: He’s the CEO of Hound Labs, the maker of the first commercial cannabis breathalyzer. “There’s a need to test,” he says, “but there’s a need to do it fairly.”
Hound Labs is marketing its portable breath test as the solution. It’s more sensitive than saliva tests and less invasive than blood tests, which are still allowed in California. It homes in on THC, marijuana’s psychoactive component, only detecting use within the past two to three hours. While it can’t tell if someone is too impaired to work safely or efficiently, it can tell if they’ve recently smoked, vaped, or taken edibles. “What we’re trying to do is deter workday use,” Lewis says. Hound plans to roll out a rapid-test version of its device later this year.
Drug use at work appears to have increased with the spread of legalization. According to Quest, more than 7% of urine samples taken after workplace accidents tested positive for marijuana in 2022 — twice what it was in the mid-2000s. The post- accident positivity rate in federally regulated industries such as airlines, trucking, and nuclear power is relatively low, but it too has doubled in the past few years.
“If we stop testing, our accident rates will increase, and we don’t want that,” Lewis says. Even if the DEA reschedules marijuana, the need for effective screening will remain, he says. “What’s invariant is the need to test, the need to be safety-sensitive in a process industry, in manufacturing, in a construction site, in a distribution center. That’s not changing.”
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