It’s Not Easy Being Minnesota Green

It’s Not Easy Being Minnesota Green

The little cannabis industry on the prairie is pioneering a new model for medical marijuana. But its future is up in the air, given its high costs and restricted access.

Lee Meyer knows pain. Mysterious aches and swollen hands plagued his childhood. In his 20s, a bulging disc made his nerves scream and his legs go numb. Surgery brought relief, but also months on the couch and a daily tasting menu of codeine, Dilaudid and Vicodin. His breaking point came after a fibromyalgia diagnosis a year ago, when the pain had become so unbearable he could no longer hold his two young daughters.

Dreading a life on opioids, Meyer approached his doctor about an alternative painkiller. Pill, oil and liquid extractions from the cannabis plant for medical use had become available to Minnesotans in July 2015, the result of a compromise bill signed by Gov. Mark Dayton a year earlier. To access the newly legal medicine, patients needed a healthcare provider to certify that they were suffering from at least one of 10 qualifying conditions.

Meyer had two such ailments—intractable pain and chronic muscle spasms—making him an ideal candidate. His doctor felt otherwise.

“A couple days after I asked my physician about cannabis, he told me it’d be a good idea if I found a different provider,” says the 30-something Twin Cities resident. “I think he got cold feet because of the stigma attached to it.” Though changing laws and attitudes have performed an exorcism on the once demonized plant, cannabis remains illegal in the U.S. at the federal level, a “Schedule 1” controlled substance in the same category as heroin. Many in traditional Western medicine are skeptical of marijuana’s efficacy, citing a lack of evidence, as was the case when the Minnesota Medical Association refused to support the state’s cannabis legislation in 2014. (At the risk of annoying those who argue that “marijuana” is loaded slang originally used by pot prohibitionists in the 1930s, that term will be used interchangeably with the Latinate cannabis in this article.)

The plant’s Schedule 1 status creates a Catch-22 for American researchers, who’ve had a tough time running controlled clinical trials even as medical cannabis is now legal in 28 states. There is a small but growing collection of compelling data, but much of it is coming out of Israel, the U.K., and other countries whose governments have opened the door to marijuana research.

Meyer eventually found a clinic to OK him for Minnesota’s cannabis program, which is managed by the state department of health. He paid the state’s $200 enrollment fee, met with a pharmacist at LeafLine—one of two private medical cannabis manufacturers and distributors in Minnesota—and in August 2016 received his first prescription. “Within 40 minutes of my first dose, my muscle spasms were totally gone,” says Meyer. “Up until then, not a day went by where I didn’t have at least 15 spasms. It felt like a miracle.”

But this miracle isn’t cheap. Medical cannabis is neither FDA-approved nor covered by insurance. Meyer pays $300 out of pocket each month for tinctures of oral solution and two .5 mL oil cartridges for vaping. For a time, he picked up a second job to cover the cost. (LeafLine sets its prices according to the volume of active ingredients in the medicine as well as benchmarks with the broader industry; its patients spend an average of around $200 per month on its products.)

Prices have been especially high in Minnesota and New York, the only medical programs in the U.S. that forbid the sale of raw plant material. Rather than selling easier-to-produce, lower-cost-to-customer buds to patients for old-fashioned toking, Minnesota’s producers must go a step further and make derivative products using expensive extraction methods. The statute also requires third-party lab testing for contaminants.

LeafLine Labs and Minnesota Medical Solutions (Minn­Med)—the state’s other cannabis outfit—view this “medicalized” approach as a virtue. “Minnesota is strict . . . but unlike other states that aren’t as tightly regulated, our model requires consistency and reproducibility. That’s what makes it medicine,” says LeafLine CEO Dr. Andrew Bachman, a former E.R. physician, whose great-great grandfather, Henry Bachman Sr., founded a very different kind of greenhouse operation, the Bachman’s floral empire.

Weed advocates argue that Minnesota’s limited program serves just a fraction of those who need it. “We got ripped off with medical cannabis,” says Michael Ford, executive director of marijuana reform group Minnesota NORML. “It’s a hard program for patients to get into and it’s extremely expensive.”

One thing everyone can agree on: Cannabis in the Land o’ Lakes is not the cash cow it’s been elsewhere. The Minnesota producers have yet to turn a profit, and their revenues make up a sliver of the country’s marijuana marketplace. Financial audits provided by the Minnesota Department of Health show that LeafLine and MinnMed netted a combined $680,000 in sales in 2015, the most recent data available. By comparison, legal weed sales in the U.S. reached $5.4 billion in 2015, according to Arcview Market Research.

In February, Minnesota’s program hit another bump when two former MinnMed employees were charged with illegally transporting $500,000 worth of cannabis oil from the company’s Otsego production facility to a manufacturer in New York owned by MinnMed’s parent, Vireo Health. In an ironic twist, the workers were allegedly trying to bolster the New York outfit, which had been struggling to meet a production deadline. Dr. Kyle Kingsley, CEO of both Min­n­Med and Vireo, refused to comment on the case, which was pending at press time.

Despite dismal financial results thus far and the recent negative PR, MinnMed and LeafLine argue it’s too early to panic. Both companies say they planned for years of calculated losses while waiting for the program to get on its feet. But measuring the viability of Minnesota’s fledgling marketplace is like trying to pick the future president from a group of kindergarteners. As Meyer learned the day his doctor fired him, legal cannabis is complicated business.

Down on the pharm

Andrew Bachman
Kyle Kingsley

MinnMed’s production facility is hidden in plain sight off I-94 in Otsego, camouflaged by surrounding farmland and an adjacent business that specializes in prairie restoration. On the off-chance that evil stoners ever raid the place, they’ll face a gauntlet of barbed wire fencing, 24-hour monitored security and bank vaults (LeafLine’s facility goes a step further with retinal scanners and ballistics-grade glass). It’s telling that one of the defendants in the MinnMed case is the company’s former security director—only an insider could pierce all that armor. The layers are understandable. The Otsego complex houses millions of dollars’ worth of lab and growing equipment, as well as the crown jewels themselves: plants of all shapes and sizes topped with fuzzy, musty-smelling buds.

CEO Kingsley plays tour guide on a recent visit. Tall and trim in a navy power suit, Kingsley has the Type-A intensity you’d expect from an E.R. physician (he was formerly affiliated with St. Francis Regional Medical Center in Shakopee). “As you can see, it’s pretty sparse in here,” he says of the austere entryway. “Not a lot of bells and whistles. Our job is to maximize value for patients.”

The tour begins at the facility’s elaborate antimicrobial, reverse-osmosis water treatment system, which creates ultra-purified water for hydroponic growing (no soil at MinnMed). Next is a stop at a storage area containing several large blue bins filled with ground buds waiting to be extracted. Kingsley opens one of the bins and a strong, hops-like scent wafts out. “There is several months’ of medicine here,” he says.

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In the vegetation room, female plants, some of them five feet tall, wait to be moved to temperature-controlled greenhouses where they will flower and eventually be harvested. Kingsley explains that weed’s medicinal magic comes from compounds known as cannabinoids, of which THC is the most infamous (it’s the one that scared Nancy Reagan and still scares law enforcement and federal legislators). THC gets you high, but it’s also been shown to alleviate pain and nausea. The other big-name cannabinoid, CBD, comes without a buzz, but will potentially reduce your seizures and muscle spasms.

MinnMed products come in four categories: THC dominant, CBD dominant, CBD only, and a blend of the two. Kingsley says there’s a misconception that THC-heavy extractions are Snoop Dogg strength. The truth is, he says, THC levels in medical extraction products are typically very low—they’re more apt to make you sleepy than stoned.

Kingsley then shows off a lab area that’s outfitted with exotic-sounding equipment. After the flowers cure in the storage room, they’re baked in a decarboxylation machine to maximize their medicinal properties. Then it’s time for extraction. Barring any impurities found during testing, the oils, pills, and liquids are packaged and shipped to the four MinnMed dispensaries.

As he leads the way back to the facility entrance, Kingsley bends down, straightens out a rug and notes some chipped paint on the floor. “I’ll get someone to take care of that,” he says, giving the sense he wants his marijuana business to appear as professional as possible.

From cynic to champion

Three and a half years ago, I was firmly a [medical] cannabis skeptic. I felt it was justified recreational use,” Kingsley says. “We learned nothing about it in medical school.”

He’s not alone. Though cannabis has been used as medicine for thousands of years and could be found in pharmacies in 19th-century America, it became the target of prohibitionists in the early 1900s. Propaganda such as the 1936 movie Reefer Madness framed marijuana as a violence-inducing narcotic—“the sweet pill that makes life bitter,” according to the film’s poster. Congress criminalized the drug in 1937, and it was blacklisted by Western medicine as a result. After a lengthy counterculture phase, marijuana dipped a toe into the mainstream in 1996, when California became the first state to legalize the plant for medical use.

The Players

How Minnesota’s only medical marijuana producers compare.

LeafLine Labs

Headquarters: Cottage Grove
Number of employees: 60+
Product lines (3): Tangerine (high THC), Heather (equal parts THC and CBD), Cobalt (high CBD)
Patients who use its products each month: 1,500
Average price for a month’s supply of medicine: $225
Dispensary locations: Eagan, St. Cloud, St. Paul, Hibbing
Affiliations: None

Minnesota Medical Solutions (MinnMed)

Headquarters: Minneapolis
Number of employees: 30
Product lines (34): A unique variety of products from different formulations—THC-dominant; THC/CBD blends; CBD dominant and CBD only
Patients who use its products each month: n/a
Average price for a month’s supply of medicine: $100 to $200
Dispensary locations: Bloomington, Minneapolis, Moorhead, Rochester
Affiliations: Owned by Minneapolis-based Vireo Health, which also owns Vireo Health New York

Kingsley began to change his mind about cannabis after meeting a U.S. Army vet who had used marijuana to calm the muscle spasms and pain left by a bullet wound from the second Gulf War. The physician heard similar anecdotes from other patients and began to wonder about medical cannabis as an alternative to prescription opioids, which in 2016 caused more than 17,000 overdose deaths in the U.S. Cannabis, by comparison, has yet to cause a single fatality by overdose.

By the time Minnesota’s marijuana bill passed in May 2014, Kingsley was a cannabis convert. He paid a non-refundable $20,000 deposit to vie for one of two licenses to produce medicine from the plant and sell it in clinic-like dispensaries.

The state required each applicant to submit a detailed business plan and build a prototype growing facility. MinnMed’s first million in funding came from the collective support of residents from Kingsley’s hometown of Harmony, Minnesota. He was amazed by the response, and says it’s proof that the public is coming around on the plant. (His opinion is bolstered by a recent Associated Press survey in which six in 10 Americans said they’re now in favor of some form of legal marijuana.)

In December 2014, MinnMed and LeafLine beat out 10 other applicants for the state licenses. MinnMed/Vireo Health raised an additional $21 million in capital from mostly in-state investors, and opened its Otsego facility and a dispensary in downtown Minneapolis in conjunction with the program’s July 1, 2015, start date. Dispensaries in Bloomington, Moorhead and Rochester followed.

LeafLine, for its part, raised $14.9 million in initial capital. Some of that came from Andrew Bachman’s family members, though the iconic nursery business is not involved in the day-to-day operations of the company, which boasts a 42,000-square-foot production facility in Cottage Grove and dispensaries in St. Paul, Eagan, Hibbing, and St. Cloud.

Despite impressive funding, Minnesota cannabis got off to a slow start. Six months in, fewer than 1,000 total patients had enrolled in the program, far below the state’s projection of 5,000. As a result, MinnMed posted a $3 million loss in 2015; LeafLine lost $2.2 million in the same year. Both companies were also in the red in 2016, but Kingsley’s not worried. “We put together a plan to endure those losses.”

Several factors explain the sluggish growth, says Kingsley, including the high cost to patients and the fact that Minnesota uses a different playbook for an industry that’s used to looser rules. “There’s nothing to compare us to,” he says. “In many states—Colorado, California, Washington—there’s not a lot of accountability. But in Minnesota—and New York, which uses our model—there’s strict safety standards, standard dosing, standard science.”

Kingsley is optimistic about the future. There are now 10 qualifying conditions in the program, compared to seven when it started. These include cancer, seizures, HIV/AIDS and glaucoma. When the Department of Health added intractable pain to that list in August 2016, active enrollment in the program spiked from around 1,500 to more than 4,000 by the end of the year. At press time that number was up to 4,696, with 100 new enrollees each week, according to the Department of Health. Kingsley expects another jump in enrollment when PTSD joins the list of qualifying conditions in August (cannabis-based lotions will become available then as well). He won’t say how many patients MinnMed supplies per month, but believes that continuous linear growth will lead to profits down the line.

Stigma, lobbyists, laws and taxes

Ask Kingsley and Bachman about the financial challenges of their industry and they’ll tell you about how many people their medicine has helped. It’s deflection via altruistic mission statement, a reminder that you’re talking to CEOs who are also doctors.

But there are clues in the numbers. A 10,000-square-foot commercial cannabis-growing facility will set you back about $1 million, says Robert Kressa, CEO of Grow Contractors, a Nevada firm that consults with cannabis companies and builds custom greenhouses for marijuana cultivators nationwide. If your business involves extractions, Kressa says you’ll need an additional $1 million. “Every different method of extraction is another quarter-of-a-million-dollar piece of equipment—CO2 machines, fractional distillers, they’re all very expensive. Then you have to pay for a lab tech and testing fees.” As a result, says Kressa, extraction products cost twice as much to produce compared with solid flower products.

LeafLine COO and CFO Colin Kelley confirms the added costs. He says the company’s operating expenses in 2016, its first full year in business, were $5 million, with 60 percent of that going to its 60 employees. Its staff includes chemists and licensed pharmacists, the latter of whom create dosages based on proprietary algorithms related to the patient’s condition. “We will always do what is required to operate at the highest standard and provide quality care for our patients,” says Kelley.

But before a cannabis startup can philosophize about its mission, it’ll have to break the law. Legal growers face what’s known as the “immaculate conception” paradox. Obtaining seeds is a felony in most states, including Minnesota, which creates a “don’t ask, don’t tell” scenario where producers stay quiet about the source of their plant genetics while regulators look the other way (“Our plants just showed up one day,” says Kingsley, only half-joking).

What They Mean

Cannabis |‘kanəbəs|
Latin word for marijuana, pot, weed, ganja, reefer…

Cannabinoids |ˈkanəbəˌnoid, kəˈnabə-|
Chemicals found in pot.

THC |ˌtetrəˌhīdrəkəˈnabəˌ nôl, -ˌnäl|
The psychedelic, buzz-feeling chemical found in pot believed useful in masking pain and reducing nausea: full name, tetrahydrocannabinol.

CBD |ˌkanəbəˈdīäl|
The non-buzz-feeling cannabinoid thought to have more significant medicinal benefits: full name, cannabidiol.

Schedule 1 Drugs
Considered by the U.S. Drug Enforcement Agency to have the highest potential for abuse with no currently accepted medical treatment use under federal standards.

Banking poses another challenge. Wells Fargo and U.S. Bank have been vocally opposed to working with growers for fear of federal crackdown (both outfits refused to loan to LeafLine, says CEO Bachman). Yet as with so many obstacles in the cannabis industry, there’s a loophole. In 2014, U.S. Deputy Attorney General James Cole wrote a memo stating that going after state-licensed cannabis companies was a low federal priority. The U.S. Department of Treasury has also offered guidelines to banks wanting to work with said businesses.

In this gray area, cannabis companies essentially have to pitch themselves to banks. Kelley says Minnesota’s strict market actually works as an advantage during this awkward dance: “Our banks see that we’re professional, that Minnesota follows a medical model. We pay our taxes and have an annual audit.” He won’t name the banks they work with, but he says they’re state-chartered outfits that face less federal oversight.

And then there’s the matter of taxes. On top of paying the usual corporate taxes, cannabis companies must completely absorb their costs of operation. For this, they can thank a Minneapolis drug dealer, who in 1981 took legitimate write-offs on his federal taxes, causing the IRS to rethink its policies. Now anyone selling a controlled substance that’s illegal in the eyes of the feds is prohibited from writing off operational expenses. That puts LeafLine’s effective tax rate at 70 percent, says Kelley. “Congress has proposed reforming this policy for the past 15 years,” he says. “It’s never happened.”

Dr. David Casarett believes federal reform would remove many industry obstacles. “The best way forward, I think, for medical cannabis is to push for de-scheduling [cannabis] entirely and regulating it as an herbal supplement,” says Casarett, chief of Palliative Care Services at Duke University and author of Stoned: A Doctor’s Case for Medical Marijuana. “There are theoretical reasons not to regulate it as a medication . . . because it’s not a drug with a single active ingredient, like Viagra. Cannabis is a whole bunch of things, which makes it hard to regulate. But that doesn’t mean it shouldn’t be.”

That said, Casarett doesn’t expect any major changes under President Donald Trump, whose Attorney General Jeff Sessions is a long-time opponent of legal cannabis. In February, however, the White House backed a proposed law that would make it easier for terminally ill patients to tap experimental drugs; some argue medical marijuana could eventually fit within such a provision.

On the rare occasion that the law does favor the marijuana industry, it can still pose challenges, especially in tightly regulated states like Minnesota. With legal cannabis on the table during the 2014 legislative session, Gov. Dayton said he wouldn’t sign anything without the blessing of his longtime supporters at the state’s law lobbies. Denny Flaherty, director of the Minnesota Police and Peace Officers Association, puts it more bluntly. “[MPPOA] was holding the gates to prevent the bills that had been introduced while we looked at other alternatives,” he says of the separate pieces of cannabis legislation put forth by Rep. Carly Melin (DFL-Hibbing) and Sen. Scott Dibble (DFL-Minneapolis).

The tide turned when parents of children who could benefit from medical cannabis held a protest outside the governor’s mansion in March 2014. In a subsequent meeting with parents, Dayton and lobbyists were moved by stories of kids suffering from debilitating epilepsy and other conditions. “It was gut-wrenching and emotional for anyone, including law enforcement representatives, to see the young children suffering from seizures,” says Flaherty. He and other lobbyists ultimately favored Melin’s bill, working with her in a closed-door session to limit the number of manufacturers and qualifying conditions, and to remove smokeable medicine.

“I’m glad we passed something,” says Dibble of the resulting legislation. “But the fact that the form and substance of cannabis has to be refined and can’t be the whole plant is ridiculous.” Dibble is also concerned that Minnesota’s vertically integrated, two-grower system limits competition and drives up prices.

Other marijuana activists aren’t as diplomatic. “My thought is that [the bill] wasn’t written to benefit patients,” says Maren Schroeder, vice president of Sensible Minnesota, a nonprofit dedicated to research and policy work to benefit medical marijuana patients. “Whether or not that was to keep patients out, I don’t know. But it’s sure what the result has been.”

Schroeder says at least 35,000 Minnesotans qualify for medical cannabis, based on the number of patients suffering from qualifying conditions. The resulting program serves roughly 15 percent of that number. Schroeder bemoans the high cost of the cannabis here and believes law enforcement is to blame for the state’s slow-moving, conservative program. “The law lobbies outdid the cannabis lobbies in 2014, plain and simple,” she says.

If there’s a state that hits the sweet spot between patient-centric and profitable, Schroeder points to one of the programs that inspired the original bills written by Dibble and Melin. “Arizona is a well-regulated, well-utilized, well-working program,” Schroeder says. Like Minnesota’s program, Arizona’s is regulated by the Department of Health and has a similar list of qualifying conditions.

But, she adds, key differences explain Arizona’s success. For one, it has more than 100 vertically integrated grower-dispensaries, which drives down prices. Research conducted by Sensible Minnesota in early 2016 found that the average cost of a milliliter of high THC cannabis oil in Arizona was $65 compared to $214 in Minnesota. Arizona also allows smokeable cannabis, which is cheaper to make and offsets the production costs of more expensive derivatives. Finally, patients who live more than 25 miles from a dispensary can grow cannabis at home.

At the end of its first year in 2012, Arizona’s program had 36,000 active enrollees. By June 2016, that number was up to 100,000; adjusted for population differences between Arizona and Minnesota, that total is still significant (around 80,000). Thanks to strong growth, the Grand Canyon State saw $367 million in revenue from medical cannabis sales in 2016.

In Minnesota’s slow-moving cannabis market, meanwhile, some patients who can’t afford legal cannabis seek it out on the black market. We spoke to Todd, who asked that we use only his first name; the Minneapolis resident’s chronic migraines qualify him for medical cannabis. But rather than pay the $200 enrollment fee, along with steep prices for medication, he buys cannabis gummies and chocolates from a friend who smuggles them in from Colorado. “My last purchase cost about $150 and lasted me more than a month,” he says.

Kingsley and Bachman both point out that you don’t know what you’re getting on the street, nor do you have the benefit of working with health care professionals to figure out the right product and dosage. But for Todd, who spent years using migraine meds that made his fingers numb and his brain foggy, cannabis is a friendlier, fuzzier painkiller. He says he doesn’t care where it comes from as long as it brings relief.

Reasons for optimism

So why would anyone want to get into a business that requires you to break the law? And where your effective tax rate is 70 percent? And where banks, government officials, and even some of your customers look at you suspiciously?

Explosive potential, for one. By 2020, revenues from legal cannabis in the United States are expected to hit $20.6 billion, bolstered by a growing number of legal recreational markets like Nevada and California.

But what does that mean for programs that are losing money? Kressa, the cannabis consultant, describes Minnesota as a “quiet cousin” to the louder, less restrictive markets. “There’s not a lot of market opportunity in Minnesota right now. But is it a smart bet for manufacturers and investors … to plant a flag? You bet.” He adds that companies that tough it out stand to make a lot of money if and when regulations are loosened.

Government coffers could benefit as well. Minnesota’s medical program currently brings in zero tax revenue, but a taxed recreational market here could bring in millions annually, as it has in other states that tax legal weed like alcohol and tobacco.

Schroeder of Sensible Minnesota doesn’t think we’ll see legal recreational marijuana any time soon. Such a change would take a miracle almost as astounding as the drug’s benefits to people such as Lee Meyer: unity between the cannabis and criminal justice communities—and politicians, too. Two bills seeking to legalize recreational cannabis hit the table at this year’s legislative session, though nothing had been signed at press time. Schroeder and others think it’s a long-shot given the republican-controlled legislature.

Bachman and Kingsley won’t speculate on the recreational space, but they admit to betting on a future where legislation might eventually allow them to help more people. “That’s really our goal—to help patients,” says Bachman during a walkthrough of his Cottage Grove production facility in January.

He’s a smoother customer than his more buttoned-up counterpart at MinnMed. He wears his hair slicked back in a near-pompadour and sports designer sneakers and a tailored pinstripe suit. He often speaks in inspirational quotes and taglines (“It’s health care from the heartland,” he says at one point). But like Kingsley, Bachman seems dead-serious about his medical mission. “Minnesota was the 22nd state to add medical cannabis, not the second,” says Bachman. He compares our program to the measured innovation of Minnesota’s biotech giants.

Plus, he adds, those who criticize Minnesota cannabis are missing the point. “Think about the research it takes to get a new FDA-approved drug to market. It costs $300 million to $1.4 billion,” he says. “At end of the day, medical cannabis is incredibly cost-effective medicine, shown via research to effectively treat 80 conditions across multiple different organ systems. I’d prefer our medicine was free, but it will continue to drop in price as more patients enroll.”

According to Kelley, LeafLine’s patient volume increased by 700 percent between December 2015 and December 2016, and it now sees more than 1,500 patients a month. Kelley says if linear growth continues, the company stands to be in the green by the end of 2018. But Bachman would prefer to talk flora. He grows animated when the tour reaches the greenhouses, each one filled with row upon row of cultivars at different stages of growth. Some are tall and elegant, others short and fat, with leaves adorned with black zigzag stripes.

At one point, he stops in front of a plant whose buds have an electric orange hue that practically glows under the grow lights. “Rub it between your fingers,” says Bachman. It’s sticky as sap. “Smell it.” It’s redolent of citrus. “Now taste it.” Licking one’s fingers delivers a hit of cinnamon and orange peel. “That’s medicine,” he says, grinning.

Chris Clayton is a Twin Cities writer and editor, and a frequent contributor to TCB.