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What are the medical marijuana business hurdles in Minnesota?

What are the medical marijuana business hurdles in Minnesota?
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Minnesota has one of the country’s most restrictive medical marijuana programs, and MMJ businesses in the state have experienced significant financial, management and legal issues.

However, it isn’t necessarily all gloom and doom when it comes to the future of Minnesota’s MMJ businesses.

Nic Easley, a national cannabis consultant and CEO of Denver-based 3C Consulting, said that based on market growth, the industry in Minnesota soon could prove lucrative for two to three players.

He views Minnesota’s medical cannabis industry as nearly ripe for entry as part of a regional acquisition strategy, a trend he believes will become more pronounced over the next several years.

“Minnesota could be a regional play for a company that is in the Midwest already, say in Illinois,” he observed.

The good news

The Marijuana Business Factbook 2018 notes Minnesota’s current hurdles but also suggests things might improve through the year. It projects Minnesota’s MMJ sales could increase to $25 million-$30 million in 2018.

Other potential barometers of a brighter future for the market include:

  • Registered patients surpassed 10,000 last month, nearly double from the same time last year.
  • Sales have more than doubled, from $4 million in 2016 to $10 million in 2017, according to audited financial statements filed with the state by the two licensees.
  • The addition of post-traumatic stress disorder and chronic pain to the list of qualifying conditions is driving market growth.

The bad news

There’s no denying, however, that stumbling blocks exist, including:

  • The Land of 10,000 Lakes currently allows for only two vertically integrated licenses.
  • Both companies with licenses have faced big problems, and there are questions whether they can shed their red ink and address other issues fast enough – or if the market will need to open up to new investors.
  • Market reform has been difficult because of resistance from members of the state Legislature and the governor.

A tale of two licensees

LeafLine Labs and Minnesota Medical Solutions are the companies that possess the two vertically integrated licenses Minnesota allows.

Both are beset with issues. This recently prompted lawmakers to consider adding a third licensee, but no bill passed.

Here’s a snapshot of some of LeafLine’s challenges:

  • Financials: The company has lost $12 million since its inception, including $10 million in 2016 and 2017 combined. Financial statements show that LeafLine spent $2.9 million on its payroll in 2017 – more than what its competitor spent on all of its operating expenses for Minnesota.
  • Management turmoil: Executives have turned over frequently. Last fall, co-Founder and Chief Medical Officer Gary Starr and Chief Financial Officer Colin Kelley left the company. Additionally, a few weeks ago, co-Founder and CEO Andrew Bachman departed and the entire four-member board was replaced. Kelley came back on a new, five-member board.

LeafLine interim CEO Bill Parker declined to comment about his company’s turnover issues.

But he told Marijuana Business Daily the company is cutting expenses and is only one to three months from being in the black.

He likened Minnesota’s MMJ industry to hockey stick economics, with the market now at an “inflection point” marked by a sharp increase in growth since PTSD and chronic pain were added to the list of qualifying patient conditions.

“We’re not in a desperate state right now,” Parker said, adding that LeafLine could use additional capital to make its cultivation operation more efficient.

Minnesota Medical Solutions also is facing headwinds, including:

  • Financials: The company finished with a slight profit of $67,000 on sales of $4.7 million in 2017, but the audited financial statements – which state regulators provided to MJBizDaily – reflect a distribution of nearly $1.4 million in 2017 and 2018 to its parent company, Vireo Health.
  • Alleged criminal activity: Two former executives were charged with felonies for allegedly conspiring in late 2015 to illegally ship $500,000 of cannabis oil from Minnesota to Vireo’s New York operation. If they are found guilty, Minnesota regulators could strip the company’s license.

Minnesota Medical Solutions declined a request for an interview but said in a statement:

  • The state MMJ program’s growth has helped bring the company closer to profitability.
  • The firm anticipates strong growth in the coming years.

The company also has distanced itself from the legal issues of its former employees, saying it is not a party to the criminal case.

Losing business to the black market?

3C Consulting’s Easley observed that for an MMJ company to be successful in Minnesota it must have a good business model, make high-quality products that customers want and have a strategy for scaling up.

Is that happening?

Maren Joyce Schroeder, president of MMJ advocacy group Sensible Minnesota, said she knows a lot of patients who continue to buy medical marijuana products on the black market – taking away potential business from the licensees. Why?

“We have this market limited to two producers,” she said, “and those two producers aren’t necessarily producing the medical cannabis products that a lot of patients want to use, and they’re incredibly expensive.”

For example, she said licensees aren’t making high enough quality products in some cases and she questioned whether they are even using the latest equipment.

Parker of LeafLine said the company recognizes it needs to continue to invest, such as bringing more technology into its cultivation business to increase yields.

Market opportunities ahead?

It’s too early to know whether political changes will lead to MMJ reform in Minnesota. Those might include the possible addition of flower, which Minnesota doesn’t currently allow, or a third licensee, or a more open market in general.

Several gubernatorial candidates have voiced support of both medical and recreational marijuana.

Easley believes better business opportunities could indeed arise in Minnesota, and investors should be at the ready to act quickly if that happens.

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