Minnesota’s medical cannabis market poised for big growth, new MSOs

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Minnesota, long one of the country’s most heavily regulated and restrictive medical cannabis markets, is poised for dramatic growth and change – with sales expected to roughly double this year and a pair of big cannabis companies entering the state.

Two Illinois-based multistate operators – Green Thumb Industries and Verano Holdings – have acquired or are acquiring the only two vertical MMJ operations currently available in Minnesota, replacing homegrown companies.

Their acquisitions come as the governor has been pressing for adult-use legalization.

Moreover, Minnesota is loosening restrictions on the products medical marijuana companies can sell to patients.

State lawmakers passed legislation last year to permit smokable flower, and those sales will begin by March 1.

Infused edibles in the form of gummies and chews will follow on Aug. 1.

The MJBiz Factbook projected that medical marijuana sales in Minnesota could reach as much as $100 million this year and $125 million by 2025.

Sales in 2021 were in the $40 million range, according to industry officials.

"There's a big runway in just the medical market," said Aaron Miles, chief investment officer of Verano, which recently announced a definitive agreement to buy Minneapolis-based multistate operator Goodness Growth, formerly known as Vireo Health, for more than $400 million.

Goodness Growth has eight dispensaries in Minnesota under the brand Green Goods and an 87,000-square-foot indoor cultivation and processing facility.

The company also has major marijuana operations in New York and New Mexico as well as smaller ones in Arizona and Maryland.

Miles said Verano hopes to close the deal by the fourth quarter of this year and would like to expand the Minnesota cultivation facility to take advantage of the growing market.

Green Thumb Industries made its move into Minnesota with an acquisition of LeafLine Industries for an undisclosed price in a deal announced on Dec. 30, 2021.

LeafLine had five dispensaries in the state in addition to a cultivation and processing facility. GTI will be able to open three additional dispensaries.

Green Thumb CEO Ben Kovler noted in a news release that the company was excited about the opportunity to provide patients with access to broader product lines such as smokable flower and certain edibles products.

The company, through its public relations firm, declined to comment beyond the release.

Looking ahead, a bigger prize might await both Verano and Green Thumb: Tim Walz, the state's Democratic governor, continues to call on the state Legislature to legalize recreational marijuana.

Based on legislation considered last year, a recreational marijuana program would heavily consider social equity applicants and include such license types as craft cultivators and microbusinesses.

But it's unclear if and when the state might approve adult-use sales. Legislators have so far failed to agree on legislation.

Rough program start

Marijuana MSOs favor limited-license markets, and Minnesota is on the extreme end of that, with only two licensed operators.

Historically, however, the oligopolistic market was a rough go financially because of the startup costs to establish operations, low patient counts and heavy restrictions.

The two operators, according to the MJBiz Factbook, have been subject from the start to strict rules and regulations governing storage, tracking, recordkeeping, advertising, distribution, testing, transport and so on.

The dispensaries were required to have licensed pharmacists.

Annual sales didn’t even hit the $10 million mark until 2017, and the number of patients didn’t surpass 10,000 until May 2018.

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LeafLine lost $10 million in 2016 and 2017 combined, according to financial reports filed with the state, and Vireo, now Goodness Growth, managed only to break even in 2017.

But Minnesota's MMJ program has been gaining traction in recent years, with sales increasing multifold and the number of patients tripling to 30,265 as of January.

Both operators made money in 2020, the most recent available financial data.

Vireo made $3.8 million on $16.5 million of sales, while LeafLine had a net income of $1.2 million on sales of $18 million, according to 2020 financial reports filed with the state.

Opportunistic acquisitions

The Green Thumb and Verano deals come at an opportune time.

State lawmakers passed legislation last year that will permit patients to purchase up to 2.5 ounces of MMJ flower every 14 days.

Smokable medical cannabis will be available for registered patients on March 1, according to a state Department of Health bulletin, "or a few days sooner, if the state's administrative rules for smokable medical cannabis are finalized early."

Smokable flower accounts for roughly 50% or more of all medical marijuana sales in some markets, although its dominance is declining some.

Sales of gummies and chews are slated to start Aug. 1.

Despite doing well in its home state of Minnesota, Vireo, founded in 2014 by emergency room physician Kyle Kingsley, was under some financial pressure to make a move.

Last June, Kingsley announced that Vireo would change its name to Goodness Growth and told MJBizDaily in an interview that the company was open to a merger to increase stockholder value.

Goodness Growth posted a $12.5 million operating loss in the first nine months of 2021 despite slight revenue gains to $40.8 million, and its cash reserve had shrunk from $25.5 million as of Dec. 31, 2020, to $11.8 million as of Sept. 30, 2021. Net debt totaled $8.5 million.

“It was going to have to ramp up capex (capital expenditures) to expand in key markets like New York (which is preparing to launch a multibillion-dollar recreational marijuana market),” wrote Pablo Zuanic, an equity analyst for New York-based investment banking firm Cantor Fitzgerald.

Zuanic noted that while "the main value" of the deal is that Verano acquires one of only 10 MMJ licenses in New York, the transaction also enables Verano to enter the Minnesota and New Mexico marijuana markets.

"New York is the headline (of the deal)," Verano's Miles agreed.

But Minnesota also was a major component to the acquisition, he said.

"It was never an afterthought ... down the line, Minnesota can be an unsung hero in the deal."

Jeff Smith can be reached at jeff.smith@mjbizdaily.com.