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Medical marijuana: Despite restrictions, pot-repreneurs want into Minnesota market

James Nord//May 29, 2014

Medical marijuana: Despite restrictions, pot-repreneurs want into Minnesota market

James Nord//May 29, 2014

The American Cannabis Company produced this estimate of projected costs and revenues under the rules of the Minnesota marketplace. They cautioned that it's based on the track record in other states and might not prove accurate here.
The American Cannabis Company produced this estimate of projected costs and revenues under the rules of the Minnesota marketplace. They cautioned that it’s based on the track record in other states and might not prove accurate here.

Sellers, consultants say industry is banking on future growth

The Office of Medical Cannabis will soon have a home at the Minnesota Department of Health. Following Gov. Mark Dayton’s signature of the state’s new medical marijuana law on Thursday, that much is certain.

But even though the state is moving ahead to implement its new program, suspicions still linger that the terms of Minnesota’s law – the strictest in the nation – won’t be economically attractive enough to convince established businesses to step into the breach.

“It’s an entirely new proposal. It’s something no state has ever tried before. I’m cautiously optimistic that it will be effective,” said Heather Azzi, political director at Minnesotans for Compassionate Care, which advocated for a more far-reaching medical marijuana bill.  “But I have heard from several businesses that operate in other states that they are definitely not going to take the risk to be the first entrants into this market.”

Supporters of a more extensive – and less idiosyncratic – medical marijuana measure, such as the one that passed the state Senate this year, have raised a litany of practical worries about the bill. Those apprehensions start with fears that the high upfront cost of entering the Minnesota market, coupled with a modest patient base, will prove unattractive to entrepreneurs. But that’s not all: Many observers also question whether doctors will want to participate and whether prospective patients will embrace a system that does not allow them to consume plant marijuana by smoking, as many are currently accustomed to doing.

All told, skeptics say, fewer patients and more restrictions mean less incentive to start a business.

Since the Minnesota bill’s passage, Capitol Report has spoken with medical marijuana businesspeople around the country – dispensary operators, consultants who specialize in navigating complex and disparate state-by-state guidelines, industry trade groups, current and former regulators, and government officials.

Their verdict: Despite its limitations, Minnesota’s program will attract plenty of business interest. State officials confirm as much, saying they’ve already received inquiries from several individuals and companies asking for details about the plan.

But the seeming thumbs-up from the market is laden with caveats and criticisms. Most sources familiar with the evolving medical cannabis business say the Minnesota model is of dubious long-term viability, and that most of the interest from entrepreneurs in other states reflects a desire to break into a new market on the proverbial ground floor.

“I think the [Minnesota] program, as it’s currently constructed, is not going to allow for a particularly viable business model,” said Kris Krane, a managing partner of 4Front Advisors, a marijuana consulting firm based in Arizona. “Typically the thinking behind companies that do decide to get involved is that they see it as a foot-in-the-door opportunity to essentially get a license to produce and distribute medical cannabis legally, with the hope that at some point the program would be expanded.”

Concerns about access, participation

Most of the economic worries about Minnesota’s marijuana program come down to questions of access and the ultimate size of the state’s market.

Backers of the bill that passed in the Minnesota Senate said its more extensive list of authorized treatment conditions would have made about 38,000 Minnesotans eligible to participate in the medical cannabis program.

Under the law now being enacted – which excludes conditions such as “intractable pain” and post-traumatic stress – that figure is around 5,000. Some advocates and lawmakers have argued that such a limited pool would not be economically attractive to businesses, especially when you consider that the market is to be split between two vendors.

The law stipulates that the Department of Health will contract with two firms, each charged with running a single production facility and four distribution sites across the state. Production facilities will not only cultivate marijuana plants but also process them into the liquids, pill and extracts called for in the bill. Before being distributed, the medicine would undergo stringent laboratory testing. A pharmacist must be employed at each dispensing facility to hand out the marijuana to patients who obtain certificates from their doctors.

Beyond concerns about the limited number of potential patients, some business analysts think the terms of Minnesota’s program will limit access and participation even further.

On the access side, Chris Reilly, who works as an adviser to the Thomas C. Slater Compassion Center in Rhode Island, said that Minnesota’s detailed and potentially onerous reporting requirements – implemented in the interest of facilitating medical research on treatment efficacy – could dissuade doctors from participating in the program.

Azzi further noted that doctors who work for large research institutions that receive significant federal funding likely wouldn’t deal with medical marijuana patients for fear of jeopardizing those federal dollars – leading, she says, to some “mandated doctor shopping probably going on.”

“I suspect that doctor participation is going to be fairly limited,” she said. “That’s probably going to shrink the patient pool a little bit.”

On the participation side, analysts fret that Minnesota’s prohibition on smoking flower marijuana– which, according to dispensary owners in New Mexico and Colorado, makes up the bulk of their business – may prompt a significant number of adult patients to continue buying from illegal sources.

“If we weren’t selling flowers, those patients would be buying on the street,” said Len Goodman, executive director of New MexiCann Natural Medicine. “By not selling flowers, they’re encouraging the black market.”

The projected 5,000-patient market in Minnesota mystified Elan Nelson, who works with Medicine Man Denver, one of Colorado’s busiest dispensaries. Colorado has more than 100,000 medical marijuana patients, and it is legal for those over the age of 21 to consume the plant in a variety of forms.

Medicine Man serves about 300 people a day, selling about eight pounds of flower marijuana on an average day and roughly 10 pounds on busy days.

“In the end, I just don’t foresee a lot of players being interested in the way they’ve got it set up [in Minnesota],” Nelson said. “It’s really not conducive to good business.

“Of course we always try to weather the storm,” Nelson added, “but some storms you just don’t want to enter.”

Sen. Scott Dibble, DFL-Minneapolis, the chief author of the more expansive Senate bill, said he believes this year’s compromise will be workable. But, he added, that doesn’t mean that concerns over the economic viability of the proposal are unfounded.

“In terms of considering the business model stuff, no, I don’t think we paid enough attention to those dynamics,” Dibble said. “We were being pushed by law enforcement to make as few forms of cannabis available in as few places as possible for as few people as possible.”

Interest exists despite limitations

Despite the concerns, the Department of Health has already received inquiries about Minnesota’s medical marijuana program. Manny Munson-Regala, an assistant commissioner at the department who is overseeing the rollout, said he’s gotten around 10 requests for additional information from producers and other entrepreneurs.

“It’s hard to scale how serious that interest is and what kind of resources they have and all that,” he cautioned.

Without question, the most attractive facet of the Minnesota market is its future. Almost every person involved in the business in other states offered the same view to Capitol Report: Minnesota will have no trouble attracting two businesses to come here – because medical cannabis entrepreneurs everywhere are banking on the promise of loosened regulations in years to come, as the practice becomes more accepted across the United States.

“It’s about the long run, and so a lot of these business owners are willing to put up a huge amount of money to get their foot in the door even if they won’t be profitable for the first three, four years,” said Andrew Livingston, a policy analyst at Vicente Sederberg, a firm based in Colorado that specializes in marijuana law.

Livingston and Trent Woloveck, chief operating officer of the American Cannabis Company, a consultancy based in Colorado, said both their firms were looking into the Minnesota market on behalf of clients.

“We have a couple different clients that are interested in moving into the space,” Livingston said.

According to news reports, Realm of Caring, a non-profit that produces the high-profile Charlotte’s Web marijuana used to treat persistent seizure conditions, is reportedly interested in moving into Minnesota. Rep. Carly Melin, DFL-Hibbing, who chief-authored the scaled-back House bill, said she had previously heard that the organization was considering the move, and media reports this week confirmed the interest. Realm of Caring didn’t respond to multiple requests for comment for this article.

Melin expects out-of-state companies to dominate the application process because of certain criteria the Department of Health is to consider in contracting with a firm to produce the medicine. Those criteria include proving that the firm has enough money and technical expertise to produce quality products.

Munson-Regala said he hopes to have a director of the program in place by mid-summer, when there is likely be a conference of interested manufacturers and other parties to discuss the opportunities in Minnesota.

Though interest doesn’t mean a solid commitment, nor guarantee economic viability, a dollars-and-cents analysis suggests that doing business in Minnesota, even under the current rules, is likely to become profitable quickly.

American Cannabis Company provided Capitol Report with some economic modeling for the Minnesota market – with the caveat that their assumptions are based on other markets and may not prove accurate here – over the first three years of the program, which is scheduled to begin providing marijuana products in July 2015. “These operators that would be looking to break into the market are going to have to realize that the first year or so of operations [will] be at a loss, but see this as more of a long-term play,” Woloveck said.

The firm’s analysis projects that a vendor would take a first-year loss of $224,000, but amass a year-two profit of $1.73 million and a year-three profit of $1.95 million.

Those predictions are based on numerous assumptions, including an average patient consumption of 2.8 grams of marijuana oil each month at $45 a gram spread across a 2,500-patient market share. The scenario also assumes roughly $2.11 million in capital and operating expenses in the first year and $1.83 million in ongoing annual operating expenses. That is set against a projected $1.89 million in revenue from half a year’s worth of sales in 2015, and $3.78 million a year in revenue thereafter.

Connecticut experience

William Rubenstein, commissioner of the Connecticut Department of Consumer Protection, which oversees that state’s medical marijuana program, seemed incredulous about worries that Minnesota’s program might not be viable. His state’s market is even smaller.

Connecticut recently approved four production facilities and six dispensaries for roughly 2,000 patients, and medical marijuana is expected to start flowing to consumers by the end of this summer. The state received 16 applications for the four producer slots and 27 applications for the six dispensary openings, he said.

“We didn’t think we had to make the economic case for people,” Rubenstein said. “We think that people who want to get into this business are really capable of doing that economic evaluation themselves.”

Judging by the level of business interest in Connecticut, he added, “You should have some viability [in Minnesota].”

Rubenstein said he also anticipates growth in the Connecticut market.

“I think so. It remains to be seen,” he said. “More importantly, the people who make the economic investment in production facilities and dispensary facilities believe so as well.”

In Minnesota, both Melin and Dibble would like to see expanded access.

“If it is working well but it’s not getting to the folks who need it, which it won’t be by definition [because of the strict limitations] … we still have a strong argument to say, ‘Hey, fourth graders aren’t selling drugs on the playground, Sen. Ingebrigtsen. Everything’s fine. There’s no reason to not do this,’” Dibble said.

Munson-Regala said he expects to bring technical changes to the bill authors for next session as the department works through implementing the proposal.

In discussing the bill’s passage shortly after the Legislature adjourned, Dayton acknowledged that the law could need future tune-ups.

“I don’t know the economics of whether it’s profitable or not, especially given the start-up costs involved,” Dayton said. “There’s only one way to find out, and that’s to go ahead and do it and see what develops – and come back to the Legislature next session if there are parts of it that need to be worked out.”

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