St. Anthony: Minnesota, federal policies made state's flagship cannabis company a takeover candidate

Patricia Gates has Ramsay Hunt syndrome, a shingles-related disease that causes partial facial paralysis, nerve damage and hearing loss.

She was diagnosed in 2017. And she has felt much better since 2019, when she started treating it with cannabis creams and oils she buys at the downtown Minneapolis Green Goods dispensary, instead of myriad other pharmaceuticals. The pain, stomach trouble, depression and other maladies markedly subsided.

"I feel so much better physically and psychologically," Gates said. "I used to be afraid, before cannabis, that 'this would be the day' when the pain would just be too much. Cannabis has been a hail Mary for me and my medical team at Noran Neurological."

But the cannabis treatments are expensive — $800 a month for Gates. A law that had bipartisan support and was signed into law last spring by Gov. Tim Walz for the first time expands medical marijuana treatments to cannabis flowers.

On Feb. 28, Gates became the first customer to buy, and she estimates it will cut her monthly costs by 40%.

"This is about my health and appropriate use," said Gates, a mental health professional.

About 35,000 are enrolled in the state's medical cannabis program. Minnesota still bans cannabis for adult recreational use.

Dr. Kyle Kingsley, chief executive of cannabis company Goodness Growth Holdings, expects the natural flower product to accelerate sales among patients who previously could not afford cannabis, which is approved to treat about 20 conditions.

"Allowing the sale of cannabis flower will greatly benefit existing patients, bring new patients into the program, and ensure the continued viability of Minnesota's medical cannabis program," Kingsley said last week.

However, despite the promising product, Minnesota is losing its two homegrown medical cannabis companies to acquisitions.

That includes Goodness Growth, which owns 18 dispensaries, including Green Goods, and a greenhouse cultivation facility. It employees 500 employees and serves five states, including New York, which will soon have legal recreational use for adults.

Verano, a larger, Chicago-based cannabis-industry consolidator, is buying Goodness Growth in a $413 million stock transaction.

Verano's CEO said a key to the deal was Goodness Growth's operation in New York.

The board of Goodness Growth, with a lagging stock price, decided the deal would be best for shareholders.

"We... believe it's in the best interests of Goodness Growth stakeholders to partner with a larger, scaled operator with access to lower-cost capital to optimize long-term outcomes for our business," Kingsley said in February.

Federal rules do not treat the cannabis industry in the same way as pharmaceuticals, and Minnesota's slow movement toward legal recreational use has slowed growth and profitability enough to make Goodness Growth an acquisition target.

Goodness Growth posted an operating loss on revenue that rose 11% to $40.8 million during the first nine months of 2021. It had predicted profitable growth for 2022.

Legislation passed by the U.S. House but blocked in the Senate would have extended banking rights and relaxed punitive tax treatment of licensed cannabis transactions and the companies that made them, according to the National Law Review. In other words, it would have legitimized the industry.

In an interview last week, Kingsley said federal restrictions had forced Goodness Growth to finance its growth with expensive non-bank borrowing, including $30 million last fall at 13% interest.

"We couldn't keep taking capital at those rates," Kingsley said. "The bigger operators can access capital for under 10%.

"Cannabis is considered a controlled substance [like heroin or LSD], and the IRS won't allow us to deduct standard business expenses, such as pharmacist salaries," Kingsley said. "That's lunacy. I've got a pharmacist giving sometimes life-giving medicine to kids with terrible seizure disorders, and we're not allowed to deduct the salary of that medical professional. And the pay of the entire dispensary staff is not deductible."

Minnesota tax law has been changed to treat cannabis as a legitimate business. And more than 30 states allow at least some use of cannabis.

Kingsley, who was an emergency room physician and a Minnesota National Guard medic before starting Goodness Growth, eschewed cannabis until he realized that most of his night patients were affected by alcohol or opioids that contributed to the car crashes, family violence, PTSD and their other medical calamities he helped treat.

His research into cannabis, introduced into Western medical practices in the 19th century, revealed that it could often displace booze and pharmaceuticals with minimal side effects.

There is archaeological evidence that cannabis has been around in some form for centuries. Criminal regulation in the U.S. began in the 1930s, driven by FBI Director J. Edgar Hoover, who also linked marijuana to madness, subversion and communism.

Kingsley, 46, hopes to remain with Verano in Minnesota.

"I will advocate for Minnesota patients and bring them the products," he said.