Business of pot in Minnesota is high-risk

  • Article by: ADAM BELZ , Star Tribune
  • Updated: August 12, 2014 - 11:40 AM

Two tightly regulated companies to be allowed.

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The mothballed warehouse and laboratory building in Willmar, Minn., where Marshall Brinton hopes to be allowed to grow marijuana for medical use.

Photo: Glen Stubbe, Star Tribune

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– Marshall Brinton owns a 15,000-square-foot building on the east side of town, just off the railroad tracks, where he once ran a business concocting vaccines for poultry farmers.

Now he’s dreaming that someone will grow marijuana there.

The retired veterinarian mothballed the property after his back gave out. He’s been unable to sell the place, but he thinks it could be ideal for growing marijuana and extracting the oil for medicine.

It has a big boiler, lab equipment and ventilation hoods jutting from the back wall. “I have almost all the equipment needed,” he said.

Brinton and hundreds of other Minnesotans are swarming at medical marijuana, an industry state lawmakers created this spring when they legalized cannabis oil for people with some types of cancer, epilepsy and other illnesses.

Almost all of these prospectors will give up or fail. Marijuana will be an odd, tightly regulated market — controlled by two companies, expensive to enter, legally complicated and initially limited in its rewards. The law creates a marijuana duopoly, and investors hope the two firms that win permits will dominate the market — even if competitors eventually are allowed in.

“I don’t think that anybody’s looking at the current opportunity as an amazing business opportunity,” said Kris Krane, co-founder of 4Front Advisors, a cannabis industry consulting firm in Arizona. “There’s going to be a first-mover advantage. If you’re granted one of these permits early on, you’re in. You’re in the system, you’re going to have the ability to lobby to change and expand the system.”

Flower and vegetable growers are thinking of cultivating cannabis. Investors are quietly hiring consultants from other states. Lawyers are trying to position themselves as experts. A meeting last week for interested people drew about 200 people who are studying whether they can make money on pot.

The rules on how to grow marijuana, extract the oil, package it and sell it are still in draft form, with much work ahead for rule makers at the Department of Health. But in less than two months the department expects to receive applications from would-be growers and sellers.

The program will favor well connected, deep-pocketed coalitions with expertise in law, health care and agriculture. They’ll need to afford pharmacists, warehouses or greenhouses, laboratories, third-party lab testing and storefronts for dispensaries.

“I think it will reframe some people’s thinking, about thinking this is some dude in a patchouli shop,” said Manny Munson-Regala, assistant health commissioner for the state. “That’s the part about this that’s been really interesting, is to see the evolution from counterculture to mainstream medicine. We’re not there all the way, but that transition has been fascinating.”

‘The long view’

The pool of patients with diseases severe and painful enough to qualify for medical marijuana under current law is about 5,000, according to the state’s conservative estimate. Those people will be able to buy cannabis pills or oil, but not marijuana in plant form, from one of two companies that receive permits.

Trent Woloveck, chief operating officer of the Denver-based American Cannabis Co., estimates the average patient will spend about $126 per month on marijuana. If none of the 5,000 qualifying patients buys pot on the black market, that’s $7.6 million in total annual revenue for two companies to fight over.

Experts disagree on the specific numbers, but start-up costs will be in the multimillions. Woloveck says a business could start with $2.1 million in initial investment. Brendan Kennedy, CEO of Privateer Holdings, a marijuana private equity firm, said the cost should be closer to $5 million. Others put the number higher.

Each of the two permitted companies in Minnesota would eventually set up four dispensaries, and a pharmacist would be required to hand the product to a patient. Add in the costs of water and energy, 15 to 20 employees, and building rents, and the barriers to entry are high.

“It’s expensive to do this well and to do it right,” said Kennedy, whose firm has a $22 million marijuana business portfolio and just raised another $50 million. “In some of the states, it’s so tightly regulated and there’s so much animosity that it doesn’t seem like a great business opportunity.”

Minnesota will seem like a better opportunity if the law is relaxed. The Department of Health will decide by the summer of 2016 whether to include “intractable pain,” as defined by Minnesota law, among the medical conditions that qualify for cannabis treatment. If a more general definition of chronic pain is added to the list of qualifying conditions, the number of customers could rise dramatically, to more than 100,000.

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