Emerging Markets - Texas
To date, in the United States, 37 states, 4 territories & the District of Columbia have reformed their laws to permit legal access to medical cannabis; and 19 states, 2 territories & the District of Columbia have done the same for adult-use cannabis. Yet many of the residents in these states don’t actually have legal access. Why you ask, and why is that important? Policy my friends, policy. And it matters because ample legal access is the cornerstone of a functional cannabis marketplace.
While it is aspirational to believe that first-time cannabis policy reforms will perform perfectly, there are enough existing state reform programs to provide regulators with the lessons they need to build systems that better serve legal consumers and patients. So what key lessons can the gigantic marketplace of Texas utilize to improve legal access to the state’s 30 million residents?
Making Policy Reform Work
All policy change should begin with defined goals, be based on factual information, and provide realistic timelines to deliver defined outcomes to policy stakeholders. And these tenets are critical in reforming federal, state and local cannabis laws, as these policies intersect in key ways with other laws that affect our everyday lives.
For example, as cannabis laws change, considerations must be made to optimize policy correlations with public health and safety, housing and community development, energy and the environment, civil rights and social justice, financial services, economic development and innovation and education. Only through such a comprehensive approach will policy perform in a manner that truly meets the needs of stakeholders – governments, businesses, communities, consumers and patients.
So for cannabis reforms to be successful, the fundamental question that must be asked is – What changes to existing laws in each of these areas will optimize consumer and patient access to safe, affordable and legal cannabis?
Don’t Mess with…Going Too Fast into Cannabis Policy
Legal cannabis in Texas is moving forward but at a slow pace, and down a long road. Texas first authorized medical access in 2015 through the enactment of the Texas Compassionate Use Act (TCUA), however patient qualifications (there was only one) and THC volumes (0.5% THC cap) were extremely limited. Only in recent years (2019 & 2021) has the Texas legislature voted to reduce enrollment requirements, expand patient eligibility, and increase THC volume from 0.5% to 1% by weight. Regarding legal access, Texas has only issued three medical cannabis business licenses to date, and of those three just two are in operation. So, while extremely limited access to extremely low-dose cannabis has been achieved, the Lone Star state has a very long way to go to build a fully functional medical cannabis program.
Consider for a moment the sheer size of Texas, with almost 30 million people spread across 261,232 square miles, 966 cities and 254 counties, it is the second largest state in the nation by both population and landmass. And for this sizable population, there are only two operating medical cannabis license holders, Texas Original Compassionate Cultivation and Surterra Texas LLC (d/b/a goodblend). These two operators currently have a combined total of 23 pickup locations in the state, and many of those locations are open just two days per month for limited hours. To recap, two licensees and 23 pickup locations to service 30 million people across 261,232 square miles.
While Texas’ two operating license holders have done a tremendous job expanding access through increased pickup locations and delivery, the limited model under which they operate means that the majority of Texans (with a qualifying medical condition) have no reasonable expectation of accessing legal cannabis medicine. Further, the extremely low cap on THC, and the narrow definition of “medical use” under the Texas Occupations Code excluding smokable cannabis, deeply constrains product diversity, potentially forcing many patients to seek relief from the illicit market.
The logical remedy to access limits in any state, let alone one as big as Texas, is to expand the market to meet consumer and patient demand by issuing additional licenses. But current policy ambiguities may hinder market expansion. The TCUA does not cap the number of licenses the state can issue and in fact mandates that a minimum of three (vertically integrated) licenses be issued. However, there is no language compelling the state to issue more than three licenses to ensure geographically dispersed access.
Further, the TCUA program indicates that it will base expansion on need. So, theoretically the more patients that successfully register, the more licenses they will issue. However, in the past year patient enrollment has more than tripled jumping from over 5,000 to over 22,000 enrolled patients, yet the number of license holders has remained the same. So, at what patient threshold does need occur? Additionally, should the state decide to issue supplementary licenses to meet a need, the current cost structure may be prohibitive for many applicants.
Regarding patient costs, Texas does not tax the purchase medical cannabis. This is extremely important in creating tax parity between state-licensed medical cannabis products and FDA-approved pharmaceutical products, and maintaining low costs for patients. Excellent work on patient pricing Texas! But what about that access?
So You Want to Help Expand Access in Texas?
The application and registration cost for a medical cannabis license in Texas starts at $814,919.00, a significant barrier to entry for most cannabis operators. This price tag buys a two-year license, which isn’t that bad considering businesses won’t be burdened by a myriad of state and local taxes.
However, applicants must also be able to demonstrate that they have the capital to operate their business for the full two-year license period, in addition to fronting the millions of dollars required to establish a vertically integrated operation. This means that the licensee must be able to grow, extract, process, produce and dispense their own low-THC products to registered patients. All of which comes with a hefty operational price tag. That’s good news if your company can do businesses on this scale, but unwelcome information for single-business license category applicants, such as companies that operate solely as cultivators, manufacturers, distributors and retailers.
Other bad news for perspective applicants is the challenge of recouping costs or turning a profit when their customer base is restricted to registered patients (currently about 22,000 people) who may or may not be able to access their product. While the Texas cost model may eventually prove extremely lucrative for businesses, the current multi-million dollar upfront price tag combined with a potentially slow rate of cost-recovery will likely deter many potential applicants and definitely exclude small businesses.
When is Texas Fixin’ to Fix All of This?
Texas is still very much an emerging market, so legislators have plenty of room to update policy and implement reforms. However, the sparse nature of the Texas legislative calendar does not lend itself to expedient remedies for much-needed reforms. Texas state lawmakers only meet every two years, and when they do it is only for 140 days. The last regular session in Texas concluded in May of 2021, which means the new session won’t commence until January 2023.
So, while reforms to cannabis policy in Texas have been trending in the right direction, they may take a while to summit. But don’t worry, we have a sneaking suspicion that a healthy legal cannabis market will eventually join the ranks of things that are just bigger in Texas.
Square Root Group is organizing Texas State and local strategies to improve policy outcomes for cannabis businesses and patients in the New Year, so let us know if Texas is on your 2023 target market list. In the meantime pour out some low-THC gummies and tinctures for your Texas patient friends and savor every bit of safe and legal access you can enjoy in your home state.