Texas issues first medical marijuana license; two more on tap


Highlights

First license goes to the Texas division of a Florida-based firm that will operate a facility in Schulenburg.

2 Austin companies are expected to be awarded state marijuana licenses soon.

Medical pot success in Texas in the long haul might depend as much on the Legislature as on business acumen.

A Florida company has made history by winning the first Texas license to grow, process and sell a form of medical marijuana in the state — but only for patients suffering from a rare form of epilepsy.

Cansortium Texas, a division of Florida-based Cansortium Holdings, which sells medical cannabis under the Knox Medical brand, was awarded the license Friday and will operate a facility on West U.S. 90 in Schulenburg.

Two other companies — Compassionate Cultivation, which is retrofitting a 7,200-square-foot warehouse in Manchaca with customized growing and processing equipment, and Surterra Texas, which will operate on Wells Branch Parkway in North Austin — are expected to be awarded state licenses soon after final reviews by the Texas Department of Public Safety, rounding out the three medical cannabis licenses that the agency has said it will issue.

José Hidalgo, chief executive of privately held Cansortium Holdings, said he was “humbled” to receive the first Texas license, adding in an interview that Cansortium is committed “to establishing the industry and to becoming the most respected company in the medical cannabis space.” Cansortium already has medical cannabis licenses in Florida, Pennsylvania and Puerto Rico.

The Texas licenses won’t equate to quick profits, however, and success in Texas over the long haul might depend as much on the Legislature as on business acumen. Cansortium and the two other companies expected to operate in Texas are facing strict state regulations that limit their customer bases solely to patients with intractable epilepsy and that constrain 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.

Denton said an initial goal for his company will be to prove that medical marijuana can be dispensed safely in Texas and that it is beneficial, with the aim of persuading state leaders to make it available to patients suffering from a wider variety of ailments in coming years.

Hidalgo said Cansortium considers the market among Texas patients suffering from intractable epilepsy potentially lucrative enough and didn’t opt to expand into the state because of the prospect that additional medical conditions eventually will be made eligible. Still, he said he considers it likely that future discussions among the state’s leaders regarding medical marijuana will revolve around “what conditions and for what reasons they are considering expanding” its availability.

“I think it remains to be seen what will happen (in Texas), but the evidence is out there,” Hidalgo said.

Proponents in Texas already are anticipating a major push during the next regular session of the Legislature in 2019 to try to increase patient access to medical cannabis. Some industry experts have said the Texas market for medical cannabis could rival California’s estimated $2.8 billion market, if restrictions are loosened and it becomes more widely available.

Compassionate Use Act

The state licenses — giving the companies green lights to begin growing medical cannabis — are being issued under the Texas Compassionate Use Act, which was approved by the Legislature and signed into law by Gov. Greg Abbott in 2015. The companies were selected from 43 applicants for conditional approval 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 rollout of the program with the DPS, 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 DPS representatives have commented on the complaint.

As things stand, each of the three companies selected for licenses is 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 Compassionate Use Act legalized the production and sale of cannabidiol, an oil derived from the cannabis plant that doesn’t produce a high, by the state-licensed dispensaries. But the law 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. “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 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 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.

Tight restrictions

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 advocates say it also has 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 low THC cap in the Texas medical cannabis law will limit the effectiveness of the CBD oils produced under it, because the 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.”

She said the companies that have been vying to operate the new Texas dispensaries 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 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 must make substantial investments before knowing if it will be successful.

Neither Cansortium’s Hidalgo nor Compassionate Cultivation’s Denton would give specifics on what they have spent to get their Texas facilities up and running, although both pegged the sums in the millions of dollars. Surterra Texas — a division of Surterra Wellness, an Atlanta company — didn’t make an executive available for comment.

“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 operation.

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, began Compassionate Cultivation with five partners.

Hidalgo said he’s confident Cansortium’s Texas subsidiary can be operated profitably under the state’s existing constraints. The company expects to start cultivating medical cannabis at the Schulenburg facility this month, he said, with CBD products available by the end of the year.

“If this is the way that it stays, there is a very large population” of people with intractable epilepsy who can be served, Hidalgo said.



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