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Business Observer Friday, Aug. 11, 2017 1 year ago

'Long Haul'

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Companies that seek an edge in Florida's budding medical marijuana industry need fortitude, and lots of financing — for starters. Will AltMed rise to the top?
by: Mark Gordon Managing Editor

Michael Smullen isn't a pot guy. The 30-year pharmacy industry veteran and son of a pharmaceutical sales rep just isn't into it.

“I'm pretty conservative,” says Smullen. “I've never been around it or used it.”

But medical marijuana, says Smullen, is different.

At least if it's grown and delivered to patients in a responsible way. Says Smullen: “There is an opportunity to build a medical cannabis company using the same rigorous testing and science used for biopharmaceutical companies.”

With that in mind, Smullen, through Alternative Medical Enterprises, or AltMed, is at the forefront of the burgeoning medical marijuana movement in Florida. He co-founded Sarasota-based AltMed in 2014.

AltMed, in a partnership with fourth-generation agricultural business Plants of Ruskin, recently formed AltMed Florida. Plants of Ruskin will handle the grow side of the venture from a 150,000-square-foot facility in Hillsborough County, where it already has zoning approval and permitting. AltMed will handle medical cannabis products, testing, marketing and sales from its Sarasota office, where it has about 10 employees.

The venture is the ninth in Florida to receive a Medical Marijuana Treatment Center license. The license was awarded under new state regulations that stem from the passage of Amendment 2 in 2016.

AltMed also operates a state-of-the-art, $10 million plant in Arizona. AltMed marketing director and spokesman Todd Beckwith says sales, through distributing to dispensaries, have surpassed 50% in market share in Arizona. In addition to Arizona, the company sells medical cannabis products in Colorado, with an eye on adding at least 12 states and five countries in the next few years. Executives decline to disclose specific sale figures or projections, including in Florida.

“We are trying to bring a biotechnology and pharmaceutical approach to this nascent industry,” says Beckwith. “We want to bring cannabis out of the shadows.”

Yet AltMed almost was knocked off before it really got going.

Passion play

The concept for the company came to Smullen in the late 2000s, while thinking about his daughter and brother. His daughter suffered from epilepsy; she had her first grand mal seizure when she was 2. She struggled to find pain relief and medications for years, until recently, when she was medically cleared as a teenager. Smullen's brother, meanwhile, died from bladder cancer. His sibling also struggled to overcome addictions to opioids designed to ease his pain while sick. “Both of those things were in the back of my mind,” says Smullen, who studied medical cannabis companies, reports and journals everywhere from Canada to Israel.

Smullen had the passion, and the time, for the project. Smullen's last pharmacy startup, MedImmune, created and brought a drug to market that prevents and treats respiratory tract infections. The company drew attention from industry giants in the mid-2000s, after that drug surpassed $1.5 billion in sales. In 2007, one of those leaders, AstraZeneca, bought MedImmune for $15.8 million.

Smullen was suddenly a 51-year-old retiree. He and his family moved from Maryland to the Lakewood Ranch area of east Manatee County.

Smullen moved quickly on AltMed after he spent time in research. He hired a team of scientists and retired pharmaceutical executives, signed partnerships with area doctors and bought a 20-acre property in rural east Sarasota County to house the operations. He invested at least $5 million in the company, including $1.8 million for the land and pre-construction.

Then the first push for medical marijuana in Florida, Amendment 2 in 2014, failed. Smullen and AltMed officials nearly gave up. The company never built the facility, but kept an office. “After the Amendment 2 failure,” says Beckwith, “we needed to decide if we were going to fold our tent or stay in it.”

The company decided to stay in it. It focused on Arizona, which already approved medical cannabis, and it built a facility in Phoenix. Arizona and Florida, which covers 20% of the total medical cannabis market nationwide, says Beckwith, citing data from Arcview Market Research, are the top long-term states the firm targets for business. That makes sense, considering both states have populations that skew older, and that comes with more long-term pain issues.

Florida's potential patient pool could reach 300,000 people by 2020, according to a June report from Marijuana Business Daily. Also, a late 2016 report from New Frontier Data and Arcview, which specializes in medical cannabis data and consulting, projects Florida's market will grow to $1.6 billion by 2020, with a compound annual growth rate of 140%. That would surpass the projected $1.5 billion medical marijuana market for Colorado, the report adds. (It has a long way to go to catch California, projected to reach $2.6 billion by 2020.)

Do it right

The heart of the AltMed mission, to bring medical cannabis from the shadows to mainstream, begins in its Phoenix facility.

Run by an affiliated business, AltMed Arizona, the lab recently obtained ISO 9001:2015 Certification, a high-barrier designation usually given to manufacturing entities that have been operating several years. In a July statement, AltMed Arizona Lab Manager Ashley Vogel says the designation, “is significant because it holds our organization accountable for the quality of our cannabis and products on an international level.”

The 33,818-square-foot facility includes two air showers, manufacturing suites and fully instrumented grow rooms. A large portion of the space is devoted to a greenhouse, where, through April, it was home to more than 6,000 plants and 32 strains of medical cannabis. All the products are tested using methods from the American Herbal Pharmacopeia, say company officials. The facility has about 50 employees.

“We could've done things a lot quicker and a lot cheaper,” says Beckwith, “but we are in this for the long haul.”

The Phoenix facility has been great for lab work, and also product development, adds Beckwith. With the recent AltMed Florida and Plants of Ruskin partnership, that gives the company a competitive head start in Florida. “Shifting to Arizona was a blessing in disguise,” Beckwith says, “because it allowed us to refine our business model.”

That vertically integrated model, says Beckwith, is to combine top-shelf medical cannabis strains with a wide assortment of ways to get the medication inside patients. “We have a solution for every patient,” says Beckwith. “We have delivery methods that no one else has.”

AltMed created the brand MuV to sell its line of medical cannabis products. One of the AltMed/MuV exclusive products is a smoke-free and inhalation free patch that delivers slow-release, dosage controlled cannabis. Another one is a metered-dose cannabis inhaler, which provides a faster and more discreet dose. Other MuV products, expected to be available in the Sunshine State in 2018 through AltMed Florida, include cannabis oil, hydrating lotion, pain-relief cream and sports gel.

All MuV products, say AltMed officials, stem from research refined in the Arizona lab and includes the company's award-winning, proprietary ethanol extraction process. The company, says Beckwith, also goes beyond standard with labeling on its products.

Bank on it

The road to viable and mainstream medical cannabis has been marred by multiple roadblocks and obstacles — aside from the first voter-induced delay in Florida.

For one, the business is capital-intensive. On that end, AltMed partners with CannaRoyalty, an Ottawa, Canada-based publicly traded investment firm that specializes in cannabis and medical cannabis companies. CannaRoyalty holds an 8.2% equity stake in AltMed and a 3.5% revenue royalty agreement through 2025 on MuV products. AltMed executives declined to disclose the dollar value of CannaRoyalty's investment.

Another challenge, says Beckwith, a onetime marketing executive with pharmaceutical giant Merck, is there are regulatory limitations. That goes for each state AltMed does or seeks to do business in and on a federal basis, where medical marijuana remains illegal to move across state lines. Also, a lack of industry standardization means every state does things a little bit differently. Florida, for example, allows a high amount of dispensaries, 425, relative to some other states. “Very little of this is cookie-cutter,” says Beckwith.

One final challenge is financing, given banks have separate federal regulations to follow. AltMed has talked to officials with credit unions and smaller banks, but bigger banks, for the most part, steer clear of the industry. “You will have to jump through a lot of hoops to take on a medical cannabis client,” says Beckwith.

All of those challenges, say Beckwith and Smullen, are part of being a bold-thinking leader in a new industry. The partnership with Plants of Ruskin, announced Aug. 2, was the latest of some big wins in 2017. “Even in my wildest dreams, I never would have expected we would've been as successful as we are this fast,” says Beckwith.

The executives' biggest up-at-night worry: Will they have enough product to meet what they believe will be a surge in demand?

Smullen doesn't think that will slow down AltMed much, either. “It's been a long journey,” says Smullen, “but I'm excited about where we are now.”

Numbers Game
Medical marijuana exists in Florida because voters statewide approved Amendment 2 in November. But the wording of the law that allows it to actually happen was bogged down in a contentious Tallahassee battle.

The final law, a compromise bill passed after a special legislative session in May, allows for a total of 17 medical marijuana dispensers statewide. Those 17 entities, licensed by the Florida Department of Health, are known as treatment centers — cultivation/grow facilities and dispensaries.

A notable part of the bill is the amount of total dispensaries (425) allowed versus the 17 licensees the state will award to run them. That total is lopsided, compared with some other states that recently enacted medical marijuana legislation. The 17 licensed medical marijuana dispensers are allowed so sell some dispensary slots.

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