New Frontier Data

Texas poised to issue first medical marijuana licenses

Read the original story on My Statesman.

By Bob Sechler

POSTED: 09/01/17

Three small companies — two of them in the Austin metro area — are on the verge of making history by winning the first Texas licenses to grow, process and sell a form of medical marijuana in the state.

But the renown isn’t expected to equate to quick profits, and success over the long haul likely depends as much on the Texas Legislature as on their business acumen. The companies – Compassionate Cultivation, Surterra Texas and Cansortium Texas – are facing strict state regulations that limit their customer bases and how they formulate their products, on top of investment costs running into the millions of dollars.

“It is safe to say that it is a challenging market,” said Morris Denton, chief executive of Compassionate Cultivation, which is retrofitting a 7,200-square-foot Manchaca warehouse with customized equipment for growing and processing cannabis.

Surterra Texas is planning to operate on Wells Branch Parkway in North Austin, according to documents filed with the state, while Cansortium Texas will be on West U.S. 90 in Schulenburg. Neither Surterra nor Cansortium made executives available for comment.

“For us in Texas, the opportunity is long term,” Denton said. “The market holds promise for the future.”

He said an initial goal for his company is simply to prove that medical marijuana can be dispensed safely in Texas and is beneficial to patients, in the hopes that state leaders increase access to it in coming years and render the business more lucrative. Proponents of medical cannabis in Texas already are anticipating a major push during the next regular session of the state Legislature in 2019 to try to make it more readily available to patients.

Final state licenses for the three companies — giving them green lights to begin growing their medical cannabis — are expected to be issued soon under the Texas Compassionate Use Act, which was approved by the Texas Legislature and signed into law by Gov. Greg Abbott in 2015. The companies were selected from 43 applicants for conditional licenses in May, triggering a series of inspections of their facilities leading up to final licensing.

The Texas Cannabis Industry Association recently filed a formal complaint regarding the roll out of the program with the Texas Department of Public Safety, which is in charge of regulating it, and with Abbott. The group’s complaint — endorsed by 10 of the unsuccessful applicants — seeks issuance of an additional nine dispensary licenses, beyond the minimum of three mandated by the Compassionate Use Act, and accuses Abbott of “a conscious ongoing effort to severely undermine” the program.

Neither Abbott nor representatives of the Department of Public Safety have commented on the complaint.

As things stand, each of the three companies selected to receive licenses will be required to pay a $488,520 fee upon final approval, followed by a license renewal fee of $318,511 in two years if they want to stay in business. The fees are designed to cover the cost of regulating the new industry, state officials have said.

The DPS announced Friday that Cansortium has passed its final inspection and will become the first to be issued a final license, once payment of the fee is confirmed by the state.

The Compassionate Use Act legalized the production and sale of cannabidiol, an oil derived from the cannabis plant that doesn’t produce a high, for medical purposes by the state-licensed dispensaries. But it limits use of the oil, commonly called CBD, to certain patients suffering from intractable epilepsy — and only if they have a doctor’s prescription for it and already have tried two conventional drug treatments that proved to be ineffective.

Observers of the burgeoning legal marijuana industry in the U.S. say the new Texas law is significantly more restrictive than medical marijuana laws in the 29 other states that have enacted them.

“We have not yet seen any other state try to launch a medical cannabis program based solely on a single condition,” said John Kagia, executive vice president for industry analytics at New Frontier Data, a cannabis market research firm based in Washington, D.C. “Under the (Texas) law as it is currently structured, it is going to remain a fairly narrow, constrained market. It is going to be a relatively limited business environment.”

The Epilepsy Foundation of Texas has pegged the number of Texans with intractable epilepsy at about 150,000.

But only a fraction are expected to meet the Compassionate Use Act’s eligibility requirements for CBD, want to try it and know a doctor willing to write a prescription for it.

New Frontier Data hasn’t yet estimated the monetary value of the Texas medical cannabis market under the new law, but Kagia said it’s clearly just a sliver of what it could be.

He said a broad medical marijuana program in Texas could put the state’s market in the same ballpark as the California medical marijuana market — the largest in the country and on track to hit nearly $2.8 billion in sales this year. The potential is why the nascent Texas market has drawn so much interest, he said.

Texas “could be an enormously substantial market” because of its size and population, Kagia said. “It could be right up there in the top tier of state markets” for medical cannabis.

To emulate California, however, Texas would have to make cannabis-derived products accessible by many more patients suffering a much greater variety of ailments, and it would have to lift constraints on the amount of tetrahydrocannabinols, or THC, they are allowed to contain. THC induces a high but also is considered to have therapeutic effects for patients with chronic pain, autism, post-traumatic stress disorder and other medical conditions.

The Compassionate Use Act allows CBD oil produced by the licensed Texas dispensaries to contain no more than 0.5 percent THC, which is barely above the trace THC content in over-the-counter CBD oils that some out-of-state companies already sell in Texas. For comparison, marijuana for recreational purposes generally contains 9 percent to more than 30 percent THC.

Heather Fazio, a proponent of marijuana legalization, said the extremely low THC cap in the Texas medical cannabis law will limit the effectiveness of the CBD oils produced under it, because the various components of the plant are most therapeutic when they work together.

“It’s a touch better than what we have now” in terms of THC content, said Fazio, Texas political director for the Marijuana Policy Project, a national nonprofit group focused on reforming marijuana laws. “We said from the beginning that this isn’t going to help people much more than they can already get.”

Still, she said the three companies on the verge of receiving the new dispensary licenses clearly have their eyes on the future.

“These first few years are not going to be very profitable, and it is going to be more about being first and establishing your brand” in advance of a hoped-for expansion of the law, Fazio said.

There’s no guarantee when or if or that will happen, however. Dozens of patients and caregivers from around Texas traveled to the Capitol to advocate for increased availability of medical marijuana during the most-recent regular legislative session that ended in May — delivering personal testimony to lawmakers regarding their inability to obtain relief using conventional medical treatments — but bills that would have substantially expanded upon the Compassionate Use Act never came up for votes by either the full Senate or House.

While another push is in the works for the 2019 legislative session, the newly minted Texas dispensaries are making substantial investments before knowing if it will be successful

Kagia, of New Frontier Data, estimated the cost of establishing from scratch a relatively low-volume facility to grow, process and dispense medical cannabis at about $2 million, although he stressed that he isn’t familiar with specifics of the planned operations in Texas and said it’s possible it could be done cheaper. He said large-volume facilities in other states have cost upwards of $20 million to establish, however.

Compassionate Cultivation’s Denton declined to reveal the amount his company is spending, except to call it “a multi-million-dollar” venture.

“If we were trying to run this business to be profitable (indefinitely under the existing constraints of the Compassionate Use Act), we probably would not start with a facility of this size,” Denton said of the Manchaca warehouse.

Still, he said he thinks his company could turn “a narrow profit” under the current law, provided the business is “managed very efficiently.”

Denton, an Austin native who began Compassionate Cultivation with five partners, said he isn’t expecting to make money initially — similar to startups in other sectors — but he said losses should decline every quarter.

The company’s products will be more effective than the general-purpose, over-the-counter CBD oils available in Texas now, he said, because they’ll be cultivated and processed specifically to enhance properties known to be therapeutic for epilepsy. Compassionate Cultivation’s CBD oil is expected to be ready for sale about 90 to 100 days after the company receives its final license, he said.

Surterra Texas is a division of Surterra Wellness, an Atlanta company. Cansortium Texas is a division of Knox Medical, based in Florida.

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