Questions swirl over financial viability of Minnesota’s medical marijuana program

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By John Schroyer

Is Minnesota’s highly restrictive medical cannabis program viable in the long term? Or will it prove to be an extremely expensive but failed experiment?

Both questions are being raised after a recent report revealed that the state’s two MMJ producers lost a combined $11 million in less than two years of sales.

According to The Associated Press, LeafLine Labs lost $2.2 million in 2015 and $4.7 million in 2016, and Minnesota Medical Solutions lost roughly $3 million in 2015 and $1.2 million in 2016.

While industry observers believe the two MMJ companies are in financial trouble, the firms’ CEOs maintain they’re on track and will ultimately become profitable.

“This program is 100% viable,” MinnMed CEO Kyle Kingsley told Marijuana Business Daily. “As volumes expand, and both companies’ financial realities continue to improve, we’re just going to see nothing but improvement in the program and expansion of offerings.”

Anyone who doubts both companies can sustain multiple years of losses hasn’t seen their business plans, according to Kingsley and LeafLine CEO Andrew Bachman.

Bachman added: “LeafLine will be here next week, next month, next year and beyond. That, I can say definitively.”

However, both declined to discuss how much capital their businesses have on hand or how much they’ll be able to lose year after year.

And asked about the state of their company finances, both said only that they are “very well-capitalized.”

That hasn’t kept others from speculating that the program – and both companies – are ultimately doomed.

“I really think the losses and the limited number of patients is demonstrative of overregulation, and I think we all know that the program cannot sustain itself as it is,” said Maren Joyce Schroeder, the president of marijuana advocacy group Sensible Minnesota. “No company can sustain losses like this for an extended period of time.”

Nic Easley – a national cannabis consultant and CEO of Denver-based 3C Consulting – also was pessimistic about MinnMed and LeafLine’s survival chances.

“I wouldn’t give it more than 50/50 that either one is going to be able to make it through,” he said, “unless they have significant backers and are going to be willing to bleed for that long until the medical program expands to include edibles, flower and more dispensaries.”

What’s known

LeafLine and MinnMed were required to demonstrate during the state’s licensing application process in 2014 that “they could sustain losses for three years,” said Scott Smith, a spokesman for the Minnesota Department of Health. The agency, which oversees the state’s MMJ program, chose the two companies from a pool of a dozen applicants.

Smith also noted the companies have already re-registered for their licenses this year, meaning they’re not planning a sudden market exit.

Still, the losses can be counted as some of the most dramatic in the cannabis industry to date, especially for large-scale, for-profit commercial operations.

Potentially offsetting those losses is the fact the companies have been on fundraising sprees since winning their licenses in late 2014. They raised a combined $30 million as of April 2015. LeafLine began another $21 million fundraising round about a year ago, and MinnMed’s parent company, Vireo Health, began a $31.5 million round in January 2016.

“Our goal was never to turn a profit early,” Leafline’s Bachman said. “We capitalized fully anticipating the initial outlay necessary to do the industry properly … I’m pleased to report that we’re ahead of our plan, given the pace of growth.”

Bachman and Kingsley attributed their losses to the cost of overhead and low patient counts initially.

“The biggest reason for the losses in the first two years was the infrastructure investment,” MinnMed’s Kingsley said. “You have to build the production facility, outfit and put together the dispensaries. We did two additional dispensaries in 2016.”

LeafLine and MinnMed each have four operational dispensaries, which were required to be functioning by mid-2016. That means the companies had to pay those costs even though they may not have been hitting the sales marks they’d envisioned.

Patient counts, meanwhile, are on the rise.

A week before MMJ sales began in Minnesota in July 2015, only 65 patients had registered. By the end of March 2017 – thanks in part to the addition of intractable pain to the qualifying conditions list in August 2016 – patient counts had jumped to 5,137. And that number will likely continue to increase, especially once patients with post-traumatic stress disorder can begin registering this August, Kingsley said.

Potential license loss?

MinnMed may have a more uncertain future than LeafLine. State lawmakers introduced at least two bills this past legislative session containing provisions that could have cost MinnMed its MMJ business license, but both ultimately died.

The bills included language that would have allowed the state’s health commissioner to revoke MinnMed’s license if at least one of two employees pleads guilty or is convicted of illegally transporting cannabis oil from Minnesota to New York.

The cases – involving former MinnMed officers Laura Bultman and Ronald Owens – are working their way through the Minnesota courts.

However, a compromise bill awaiting the governor’s signature still gives the state health commissioner the power “not to renew the registration” of MinnMed if either Bultman or Owens is found guilty.

But Sensible Minnesota’s Schroeder said she believes that even if the governor signs the measure, the new law can’t be applied retroactively, meaning MinnMed should be off the hook as long as no future company officers are similarly implicated.

Other issues

Schroeder said more problems underlie LeafLine’s and MinnMed’s finances than meet the eye, but she again emphasized the fault lies with strict state regulations that prevent the MMJ market from flourishing:

  • The state has just eight dispensaries, which means many patients must drive hours to get to a storefront.
  • Many patients can’t afford medical cannabis, given that Minnesota’s prices are among the nation’s highest.
  • Both companies must conform to costly regulations such as using armored cars for transporting product.

“Most patients at this point aren’t even bothering with registration,” Schroeder said. “And of the ones that are, a vast majority that I know … are supplementing on the black market. They’ll make a small purchase of program meds to get them through a week or two, and then they’ll go and purchase on the black market.”

Schroeder also criticized a state requirement that intractable pain patients try all other available treatments before MMJ, including opiates.

“It’s the whole damn system,” Schroeder said. “It’s not allowing flower, it’s not allowing smokable, it’s only two companies, it’s the rules they have to abide by.”

John Schroyer can be reached at