National cannabis companies eager to expand their share of the growing U.S. medical marijuana industry are poised to acquire companies with Maryland licenses despite a state rule that limits such consolidation and a new law barring any ownership changes for another year.
A Baltimore Sun investigation has found that several out-of-state firms have told investors they are moving ahead with deals to take over Maryland marijuana companies by the end of this year.
For instance, Massachusetts-based Curaleaf, which has two of its own licenses in Maryland, has offered $30 million to acquire a small Frederick County company authorized to grow, process and sell cannabis.
Other large, national companies — MedMen, MPX and GTI — also have pending deals for Maryland firms. Their plans are raising concerns that companies are trying to monopolize the Maryland market.
And some question whether the Maryland Medical Cannabis Commission — which was unaware of three of the deals until notified by The Sun — is up to its task of regulating the industry.
“I don’t know how the commission is allowing this to happen,” said Del. Cheryl Glenn, a Baltimore Democrat who has worked to establish regulations overseen by the commission. “We are adamantly opposed to large out-of-state companies coming in and buying up licenses.”
A law signed in May “prohibits the flipping of any of the licenses,” Glenn noted. “This needs to cease and desist.”
The $30 million that Curaleaf has offered for HMS Health — a single company in a year-old Maryland industry that recorded just $67 million in sales over the first nine months of 2018 — shows how lucrative the state market is expected to become.
Maryland regulations allow companies to own no more than one license in each of the state’s three categories — growing marijuana, processing it into medical products and selling them from retail stores. And a new law that took effect May 15 imposed a moratorium on sales for at least another year, in part, to avoid the type of consolidation that companies are trying to execute.
The Maryland Medical Cannabis Commission says it does investigate ownership changes and can impose penalties, including revoking a license, if it discovers violations of those rules.
The commission acknowledges, however, that it knows of such transactions only if the licensed companies follow the state rules and report when someone acquires 5 percent or more of their ownership. Since May 15 the commission has responded that it will reject all such changes.
But some companies moving to enter the Maryland market have been structuring take-over bids as management agreements that give them nearly all of the revenues without actually owning the licensed firm, said commission spokeswoman Jennifer White.
For now such deals are not covered by state regulations and do not have to be reported, White said.
The commission was unaware of Curaleaf’s proposed acquisition of HMS Health and of the GTI and MPX deals until notified by The Sun, she added. MedMen notified the commission about its merger with PharmaCann, which currently holds a license to sell cannabis in Rockville. White said the commission will now investigate the deals involving MedMen, GTI and MPX.
White and state lawmakers said the General Assembly will address the possible loophole involving management agreements when it meets in January for its 2019 legislative session.
“When this is all said and done, every page of [state regulations] will have been deciphered to say exactly what was meant,” White said.
Del. Sandy Rosenberg, a Baltimore Democrat tapped by House Speaker Michael Busch to oversee the committee that recommended the moratorium law, said the state is trying to keep up with how companies are operating.
“We will clearly look at it again,” Rosenberg said. “This is an ongoing process. We need to respond to what people are doing in a way that furthers our policy goals.”
In June the commission warned companies to avoid deals that violate the state’s license limits.
The Sun reported a month later that several such deals were nonetheless in the works, spurring Rosenberg to ask the Maryland Attorney General’s office to clarify the commission’s authority to restrict such transactions. The attorney general’s office confirmed last month in a letter to Rosenberg that the commission can enforce both the moratorium law and the regulation limiting license ownership.
Since then The Sun has discovered several new deals through public records filed with the Canadian Securities Exchange. There are currently 121 cannabis companies that trade in Canada — which legalized all cannabis use last month — and 55 of them have operations in the United States, said exchange CEO Richard Carleton.
Most cannabis companies do not list on U.S. stock exchanges because marijuana is still illegal under federal law. Companies are going public to capitalize on investors’ enthusiasm for a nascent industry expected to generate $23 billion in North American sales within five years, according to analysts at Arcview Market Research.
In 2017, publicly-traded cannabis companies raised $2.9 billion to support their expanding operations, market analysts say.
Acquiring government licenses is essential for the companies to grow.
“Bigger companies are trying to expand their breadth by going after state licences,” said David Kretzmann, an analyst with Motley Fool who tracks the cannabis industry.
Because companies cannot transport marijuana across state lines, Kretzmann said they must “start from scratch” in each state — ideally by acquiring licenses to grow, process and sell. Such so-called “vertical integration” is essential to make these businesses profitable, since other laws restrict their ability to conduct traditional banking and deduct certain U.S. taxes.
Curaleaf, which is traded on the Canadian exchange, holds two of its own Maryland licenses: one to sell medical cannabis from a Reisterstown store and one to make products at an Allegany County facility. Curaleaf attained that processing license in 2017 by paying $2 million to acquire majority ownership of the former Maryland license holder, PharmaCulture, according to corporate records.
In an Oct. 26 filing with the Canadian exchange, Curaleaf reported that it has entered into a $30 million “purchase agreement” to acquire HMS Health LLC, a family-owned firm in Frederick County that holds Maryland licenses to grow marijuana, make products, and sell them from a Gaithersburg store. The deal also included taking over a second Gaithersburg store owned by MI Health, which is affiliated with HMS Health.
Once the “Maryland acquisition” is completed, Curaleaf “intends to build out its third dispensary and operate it in Gaithersburg,” the document states.
The disclosure states that Curaleaf is aware of Maryland’s limits on license ownership. The acquisition is “subject to regulatory approval” in a state where “no one company can directly own more than one license of the same class,” the disclosure states.
But it makes no mention of the moratorium on sales until at least December 2019 — a measure that became law months before Curaleaf says it entered into the HMS deal in August 2018. The acquisition is scheduled to close before the end of the year, according to the company disclosure.
The deal sheds light on what critics say is a loophole to take control of licenses through management agreements, rather than outright acquisitions. Curaleaf states that it controls new companies either “through the purchase of the business or control through a management agreement.”
A Curaleaf spokeswoman said in an email that the company’s “public disclosure should not be read to imply that they are planning to acquire ownership of licenses in violation of restrictions in MD law or of not complying with any approval or disclosure requirement.”
HMS Health was one of the first companies to emerge in Maryland’s new medical marijuana industry. It is run by a family team of Meher, Shakil and Haris Siddiqui that built their operation on a 150-acre former tree nursery. Their security director is former Frederick County Sheriff James W. Hagy.
Phone calls to the company and its executives were not returned.
Lawyers for several cannabis companies argue that Maryland’s regulations can be interpreted in different ways to support certain acquisitions. But the Maryland attorney general has confirmed the meaning of the rules as interpreted by the commission and state lawmakers.
“The intent was very clear,” said J. Darrell Carrington, executive director of Maryland Cannabis Industry Association, a trade group. “One of the fears that the General Assembly had was creating ‘Big Cannabis,’ of having monopolies.”
Companies that control too many operations would be able to sell their products more cheaply to their stores while inflating prices for competing dispensaries, Carrington said.
The Maryland Attorney General’s office agreed in a letter to Rosenberg. Assistant Attorney General Sandra Benson Brantley wrote that allowing companies to control multiple licenses could “put smaller operations out of business and risks the creation of monopolies.”
When The Sun reported on such deals in July, Chicago-based Green Thumb Industries, or GTI, had told investors it held “controlling ownership over five retail dispensaries” in Anne Arundel, Harford and Montgomery counties.
GTI reiterated its Maryland footprint just last month in an Oct. 10 prospectus filed with Canadian regulators to raise $88 million. The company says it “holds” or operates dispensary and processing licenses in Joppa, Centreville, Silver Spring and Bethesda, and is set to close two dispensary deals in Abingdon and Gambrills.
The deal for the Abingdon store, currently run by Revolution Maryland Retail, illustrates the use of management agreements. In its disclosure, GTI states that the deal is a “management services agreement” that includes “purchasing of 100 percent” of Revolution for cash. The sale is anticipated to close before the end of this year, “subject to applicable regulatory approvals,” the document states.
“GTI is fully compliant with all Maryland laws and regulations” — including the two-year moratorium, said company spokeswoman, Linda Marsicano.
Also in early October, MedMen, a Los Angeles company that trades on the Canadian exchange, announced a stock deal worth $682 million to acquire Chicago-based PharmaCann, which owns the Verilife store Rockville in Montgomery County. The combined company now holds licenses in Maryland and 11 other states.
And in late October, MPX Bioceutical Corp. of Toronto announced that the company has opened three Health for Life stores in Baltimore, Nottingham and Bethesda.
MPX “manages three full service dispensaries and one producer in Maryland,” the company said in records filed with the Canadian exchange, using language that hints at a management agreement.
That announcement came shortly after the company merged with another national firm to form an operation spanning 10 states with 56 cannabis stores, including in Maryland.
The merger establishes what the new company calls “super-regional footprints in both the eastern and western United States.”