Big losses for Minn. medical marijuana providers

Tubes of terpenes
Test tubes of terpenes were displayed at LeafLine Labs in Cottage Grove last year. Terpenes are the oils that produce the various aromas of medicinal cannabis.
Jeffrey Thompson | MPR News 2015

Minnesota's two licensed medical marijuana manufacturers each posted millions of dollars in losses in their first full year of operations, according to financial documents obtained by The Associated Press.

Minnesota Medical Solutions posted a $3 million loss in 2015, a period that included the rush to build up facilities, grow and cultivate medicine and the first six months of legal medical marijuana sales. The company also said it lost more than $542,000 in 2014.

Meanwhile, LeafLine Labs lost roughly $2.2 million in 2015. Their audit does not include information from 2014. The AP obtained copies of the documents through an open records request.

The heavy losses illustrate the financial difficulty of running a medical marijuana business in Minnesota's tightly regulated structure and confirm some fears among patient advocates that the restrictive program can't survive long-term. Minnesota's program is only open to patients with 10 severe conditions, and using the plant form is banned. Intractable pain, a qualifying condition that supporters think will greatly broaden the customer base, was only recently added.

Between start-up costs associated with growing facilities and dispensary openings, the high costs of processing the plants into pill and vapor forms and the layers of required laboratory testing, manufacturers expected a rough go in the first years. Coupled with lackluster enrollment -- fewer than 900 patients had signed up within the first six months of sales -- Minnesota Medical chief executive Kyle Kingsley called 2015 "an unusual year, and future years won't be like that."

"In year one, we needed to strike a balance between minimizing expenses and building a company that would be financially sustainable over the long haul," he said in a statement.

Minnesota's Legislature in 2014 approved one of the most restrictive medical marijuana laws in the country. Minnesota Medical Solutions, or MinnMed, and LeafLine Labs were chosen as the state's two sole manufacturers later that year, and legal medical marijuana sales began in July 2015.

Minnesota Medical Solutions raised more than $16 million in capital to weather the high start-up costs. Publicly available financing documents show LeafLine Labs had also raised a similar amount and announced plans earlier this year to raise another $20 million.

Despite the high prices of medicine -- monthly costs can quickly exceed $1,000 for some patients -- the documents show that Minnesota Medical Solutions made just 65 cents for every $1 it spent to produce the marijuana pills, oils and vapors. In its audit, the company noted the high production costs and discounts offered to first-time patients to explain the loss.

Patient advocates had expected both companies to post heavy losses in the first years, blaming the bevy of restrictions for high production costs. Patrick McClellan, who lobbied lawmakers for years so he could treat severe muscle spasms with medical marijuana, was surprised MinnMed didn't lost even more money.

"It's not sustainable. I think the program itself was designed to fail," McClellan said. "I think anybody who didn't know this was kidding themselves."

Kinglsey has said he hopes that the recent expansion of the program to include patients suffering intractable pain will boost the program. Nearly 500 pain patients signed up in the first month it was allowed, and subsequent registrations have brought patient count above 2,300.

"We've never seen our patient count grow faster than it has this month, so we are feeling cautiously optimistic about our future," Kingsley said.

But McClellan doubted whether that expansion would be enough for manufacturers to cut prices for patients. For him and others, the only solution is to loosen the program's restrictions by opening the door to more conditions and relaxing the ban on using the raw plant. State officials and lawmakers have shown little interest in making drastic changes to the law.

"I can't see that happening any time in the future unless if major changes are made to this law," he said. "The only other option is that these companies are going to go out of business."

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