Licensing fees soar under proposed Texas medical marijuana legislation | Crain's Austin

Licensing fees soar under proposed Texas medical marijuana legislation

Kayla Brown, executive director for the Texas Cannabis Industry Association, said the state's revised regulations would make it harder for small businesses to break into the industry. | Photo courtesy of the Texas Cannabis Industry Association.

Earlier this year, medical marijuana advocates were applauding the state of Texas for giving the green light to license businesses to grow, process and dispense non-psychoactive cannabis for medical use starting in 2017.

The state had given the Texas Department of Public Safety the authority to decide on the regulations, and the department announced it would issue the first licenses in June 2017, three months ahead of its mandated Sept. 1 deadline. While use was limited to patients with intractable epilepsy, there was potential for expanded indications—and at $6,000 a year, the licensing fees did not present a substantial barrier to entry.

But on Oct. 13, the Public Safety Commission considered revised regulations that, if passed, would be dramatically change the original law. The proposed amendments, which would hike the initial license fee to $1.3 million, will be published in the Oct. 28 issue of the Texas Public Register. 

"In calculating the costs of administering the statute, the department considered the type of employees to be involved with processing applications and inspecting facilities," the department states in its proposed rulemaking action. "A percentage of salary, fuels, consumables, and other operating costs are included. Also included are estimated costs for license cards; increased oversight of security; and FBI and state background checks."

For those who've been following the process, the about-face is shocking.

Franklin G. Snyder, a law professor at Texas A&M University in Fort Worth who has done research on the business and regulatory aspects of marijuana legalization, said the new rules would make it extremely difficult for smaller companies to get into the medical marijuana business in the Lone Star State.

“The earlier version of the regulations seemed to be based on the idea that there would be many potential businesses in the industry, that private enterprise and competition would be good for patients, and that entrance and regulatory fees should be limited,” he said. “The goals appeared to be to ensure easy and inexpensive access to patients and to give smaller entrepreneurs a chance to succeed.”

The turnaround essentially closes off competition, he said, and would result in limited access to the medicine for the estimated 150,000 Texans with intractable epilepsy.

This means, according to Snyder, that smaller operations would be shut out of the business, and patients would have to pay more for the medicines they need. 

“It’s almost as if they don’t want the program to succeed,” he said. “The only companies that will be able to afford the fees are big pharma.”

High cost of entry

Because insurance companies generally do not cover medical marijuana, patients have to pay for it out of their own pockets, and in severe cases — some sufferers face more than a hundred epileptic seizures a day — a substantial amount of the medicine would be required.

Other proposed changes to the regulations include:

  • The state intends to make it much more expensive to operate a dispensary.  One of the additions to the regulations is a requirement that cannabis businesses carry minimum levels of insurance, which Snyder describes as “reasonable.” But the new proposed fees are now easily among the highest in the country. Specifically, the application fee for a dispensing organization soared from $6,000 to $1.3 million, and the biennial license renewal fee went from $6,000 to $975,000.  The application fee for each employee who is registered to work in such dispensaries is $4,820 and the biennial renewal fee is $2,875, both up from the previously proposed $150.
     
  • The state now intends to severely restrict the number of dispensaries. The earlier regulations allowed anyone who met the standards to open a dispensary, while the new ones would allow the state to decide whether any particular applicant is “necessary.” 
     
  • Texas would also impose more stringent security regulations such as secure facilities and high-tech surveillance systems.

“Those upfront costs will have to be paid before the business can begin operating, which means applicants who don’t have millions in cash on hand will be unable to apply,” Snyder pointed out. “Worse, all of those costs will have to be passed through to the patients who need the medication.”

Kayla Brown, executive director for the Texas Cannabis Industry Association (TCIA), said that before the proposed revisions came out there was a good deal of interest from people wanting to start their own businesses related to the law passage. The association helped the budding entrepreneurs with startup cost estimates, business plans and connecting with lawyers providing pro bono work. It was also planning to help them review their applications to the state. 

She estimates there were at least 15 companies interested in seeking a license. When the proposed regulations came out, she said she was flooded with calls from the incubator and business members. If passed, the revised regulations would be a “huge deterrent” to the smaller players, she said.

Market considerations

Patrick Moran, who co-founded the TCIA, was considered to be the first mover in the burgeoning legal cannabis industry in Texas. He founded Acqui-Flow in April 2014 to serve the ancillary market with lighting and cultivation technology, then founded Texas Cannabis, a startup specifically designed to be a hands-on plant in Gunter, about 40 miles north of Dallas. He has raised $4.5 million for Texas Cannabis alone, which he said would provide “effective, compliant medicine” under Texas’s Compassionate Use Program. He recently broke ground on a cultivation, processing and dispensing facility designed to produce oil to be packaged as tinctures, capsules and sublinguals for the diagnosed intractable epileptics that the state program is designed to serve.

Prior to the proposed revisions, Moran predicted “it was a given” that indications would expand. “Texas is huge so if you put us in a fully-regulated open market. You could see revenues for the epilepsy market alone in the range of hundreds of millions of dollars a year,” he said.  “There’s enormous potential.”

He declined to discuss what impact the potential new regulations would have on his plans, saying only that he was “still breaking the proposed regulations down line-by-line to assess the potential state industry impact.”

The Department of Public Safety is accepting public comment on the proposed amendments through Nov. 28 via email or by mail to Steve Moninger, Regulatory Services Division, Department of Public Safety, P.O. Box 4087, MSC-0240, Austin, TX 78773-0246.

October 20, 2016 - 5:00pm