Texas is not exactly on a fast track when it comes to medical cannabis, but significant advances are afoot during the current legislative session, which ends May 30. The Texas Compassionate Use Act, which was passed into law in 2015, established a Compassionate Use Program (CUP) that restricted low-THC medical cannabis treatment to people with intractable epilepsy only. It took four years for the legislature, which meets biannually, to add qualifying conditions to the list. In 2019, CUP was expanded to include all forms of epilepsy and other seizure disorders, autism, multiple sclerosis, spasticity, Amyotrophic lateral sclerosis (ALS), terminal cancer, and other neurodegenerative disorders such as Alzheimer’s, Parkinson’s, Huntington’s disease, and Chronic traumatic encephalopathy (CTE), according to a description of CUP by Texas Original Compassionate Cultivation, the Manchaca-based vertically integrated company profiled last year by Cannabis Business Executive. Two years later, in 2021, the program was again expanded to include PTSD and all forms of cancer, and the THC cap was raised from .5 percent to 1 percent.

This year, the legislature is again considering a number of bills that address cannabis-related subjects, including decriminalization, expungement, access by people in long-term care facilities, delivery, and others, but perhaps most important for the industry is the fate of HB 1805, which was recently passed by the House and advanced to the Senate. It was a major hurdle for the bill, which expands cannabis coverage to patients with chronic pain, and changes the THC cap from a percentage-by-weight to a volumetric limit, aligning it with measurement protocols traditionally used by physicians.

CEO Nico Richardson, who took the reins of Texas Original from Morris Denton last year, spoke with CBE recently about the merits of HB 1805, but also the ongoing need for Texas to improve access to medical cannabis for its active patient population, which remains stubbornly small eight years after the launch of CUP. Richardson came to Texas Original via a somewhat unconventional route, as the co-founder and managing director of AFI Capital Partners.

“AFI is a private equity firm focused on investing in the cannabis space, and we became the largest investor in Texas Original in May of 2021,” he explained. “I joined the board, moved down to Texas from Seattle, and started spending a large amount of my time working with Morris on the company. In November of 2022, Morris was having some personal and health issues and had to reduce his exposure to operating day-to-day. I took on more responsibility, and then I ended up taking on the CEO role really on an interim basis.”

He also brought hands-on experience to the table. “Prior to starting AFI Capital Partners in 2018, I had a mix between operating and investing roles both inside this industry and other industries,” he said. “I started in cannabis in 2014 with a company called Privateer Holdings, which originally launched Tilray and got that up and running. So, there were experiences I had that were very similar to what’s happening in Texas, specifically getting Tilray up and running as one of the first 14 licenses in Canada.”

Those early days were very similar to Texas. “The system in Canada was mandated vertically integrated, with no expansive retail across the state,” he added. “The difference in Canada is that we’re allowed to ship using Purolator and Canada Post, which are like their USPS and UPS. So, it was a consumer model, but very similar in that we were regulated by Health Canada and the Royal Canadian Mounted Police. Texas is regulated by the DPS, but it’s also mandated vertically integrated in a single location within Texas.”

HB 1805

The Compassionate Use Program is getting larger, but the state is moving at a snail’s pace in terms of making it more efficient. When I talked to Denton last year, he said about 30,000 people had enrolled in the program since 2017. That number has almost doubled, but that only tells half the story.

“The total number is about 55,000 patients,” said Richardson. “But that’s cumulative [patients] that have ever been entered into the system. Some people churn out for a whole host of reasons, but we certainly don’t have 55,000 active patients in the system today, and we didn’t have 30,000 active patients in the system last July. The number we look at is active patients that have ordered in the last six months, and that’s somewhere between 10,000 and 12,000 patients.”

That disparity would seem to make any amount of churn concerning. I asked why people leave the program. “There are a lot of different reasons,” said Richardson. “We think the primary ones right now are a combination of access and product formats. Texas mandates that you have to have less than 1 percent by THC concentration, and that limits the types of products that can actually be sold into the system. At the moment, it’s primarily ingestible products like tinctures and gummies, but we really don’t have the array of products that you’d have in another medical market.”

But it is the lack of access that is the real stickler. “We talked about how this system was similar to Canada because it’s vertically integrated,” said Richardson, “but we can’t ship using USPS or UPS, so we have to set up distribution points where people can pick up their medicine across the state. We’ll partner with a doctor’s office or some other business and set a scheduled time that we drive the medicine out to that point where patients can come and pick it up.

“So, if you live in El Paso, Nacogdoches, or Lubbock, you can’t get access every single day,” he added. “But if you live near our facility in Austin, you can come and pick them up whenever you want. It really increases the difficulty by which a patient can actually access the medicine they need. We think that’s a really big issue.”

It certainly sounded like one. What is the road-block to improving access? “There’s a difference between statutory issues by law and regulatory issues that our regulator decides,” explained Richardson. “With this particular issue with access points, what we consider the ability to carry idle inventory offsite, it’s primarily a regulatory and not a legislative issue. It is part of the rules within the system, which in Texas is regulated by the DPS, the Department of Public Safety, which is the state police, and they have a specific view on keeping the system tight and safe.

“We obviously think that not only is it more efficient and gives better access to patients if we can carry inventory offsite in secure locations, but we also think it’s safer to do that than to have our drivers driving all over Texas every single year,” he added. “This is a relatively small program that’s growing very quickly, but even with a small program, our company put 880,000 miles on the road with our drivers in 2022. It’s an astronomical task to distribute cannabis across a state of this size.”

From an operational point of view, did that daily chore keep him from being able to focus on other tasks? “One hundred percent, and it’s costly,” he replied. “But the more scale we receive, and the more operational efficiencies that we drive to the company, the first thing we do is pass that value on to the patients. We’ve been consistently lowering our prices over the past six months, and we’ll continue to do that.

“This access issue is a major cost driver for the industry in Texas,” he continued, “and they talk about issuing new licenses in order to bring down the cost of cannabis, but that will do nothing if they don’t change this access issue, because those licenses will be in the same locations that the current licenses are, which are the densely populated areas in Texas. You’re not going to put a license out in Nacogdoches or Rio Grande Valley, because there are not enough patients out there to support one. So the new licenses will have the exact same problems that the old licenses had, which is that they will be centered in locations like Austin, Dallas, Fort Worth, San Antonio, or Houston, and they’ll have to ship product, because we’re required by law to provide reasonable access to all Texans, so they will have to find ways to distribute product and medicine all over the state.”

Did law enforcement as the regulator not understand that poor access only strengthens the illicit market? “Oh, I’m sure they get that,” said Richardson. “The part that’s a little bit head-scratching would be that it really increases demand for hemp-derived delta 8, which is readily accessible here in Texas, and there are no regulations around that industry.”

Is it still the wild west with the deltas? “It obviously presents an issue for the CUP in Texas,” he said, “but the reason we feel somewhat comfortable for our patients is they recognize the value in having medicine that is tested, regulated, and age-gated here in Texas, whereas hemp-derived psychoactive cannabinoids that are out there on the market right now have no testing. Most of them are synthetically derived; delta-8 is just taking CBD and washing it with acids until you knock off isomers of THC and get delta-8. That is not extracted from the plant, and Texans do need to be educated that what they’re consuming in the hemp industry is not clean medicine.”

Surviving Through Efficiency

Despite all the challenges faced by legal operators in Texas, it sounded as though Texas Original was growing and that it had more demand. Was it increasing production as well? “We have,” said Richardson. “The company has been growing very well, but it’s still a tiny program. If you look at Florida, there are 20 million people in Florida and 700,000 medical cannabis patients. In Texas, there are 30 million people, and we have 10,000 to 12,000 that are actively ordering. That’s not a big enough system to support the three licenses that we have, so we have a long way to grow.”

With such a small market, and barriers to expansion and growth, how do you expand production, keep costs in line, and manage for the future? For many people these days, it’s about surviving until the better times come, whatever that looks like.

“I bring that experience here from a lot of different states,” said Richardson. “The solution is you become as efficient as you can be to pass value on to your patients and bring down price and cost that way. And so really everything we focus on here is about how do we set up our system to be as efficient as possible so that we can serve the entire state of Texas. So, it’s one hundred percent operational efficiency.”

That was also Denton’s focus a year ago, so how do you find new efficiencies? Is it finding new places to cut? “It’s not about cutting,” insisted Richardson. “Because there’s so much growth to go here in Texas, it’s about setting up a system that is ultimately scalable and very efficient, and there are a lot of ways to find that, and we’ve been working towards it. Obviously, there are some that are regulatory in nature and are out of our control, like our inability to carry inventory offsite, which adds huge regulatory costs for this industry. But outside of that it’s really about utilizing technology currently at our disposal to drive efficiency throughout, and the technology is getting better and better every single day.”

Richardson added that they have made investments in technology “throughout the value chain here at Texas Original. Our cultivation team is tiny but mighty on that side, and we’ve been running R&D programs with Fluence out of Austin for years now, and tweaking LED lighting. So, the yields we get here are fantastic, and that’s where it starts. We utilize technology to the point where we’re using LLM (large language models) to help us with customer experience. Everything we look at today is about what happens when volume in this industry goes 2x and 3x. It’s not about cutting; it’s about how do we service that volume without increasing our headcount by 2x.”

And yes, artificial intelligence is being utilized as well. “We’re exploring using a generative AI model to help on the chat side,” said Richardson. “Obviously, our customer experience phone conversations are all in person, but wherever that first level of patient access can be handled at a scalable nature, it benefits our patients more than anything else in order to cut down on time working through the system.”

The company is also adding new products. “We continue to add new SKUs,” said Richardson. “In fact, we have some SKUs coming out with a gummy format and a tincture format probably in the next month or so. We continue to iterate to make sure our patients are provided with an array of different products, but our primary constraint on that side is really the 1 percent by THC limitation. Obviously, we want to provide patients with a bigger array of medicine that may have greater efficacy for their condition, and we’re waiting for legislation to change around that.”

Assuming the continuation of regulatory reform, I noted that there must be many retailers throughout Texas that would love to carry Texas Original products. “I’m sure there are,” said Richardson, “but that’s not what we would be looking for. With the DPS, there needs to be a controlled chain of custody throughout to the end patient, and rightfully so. All we need to service this state is the ability to have a secure offsite location where we can have patients come and pick up their medicine, or that we could use as a depot in order to make deliveries in specific areas throughout the state. Right now, having to use one location in Austin to service everything from El Paso to Texarkana is just not feasible at scale. That one change would make a massive difference to the system.”

What a strange industry where in some states retailers are having to close up shop and cultivators are giving up their licenses while Texas is on the other side of the spectrum in so many ways. “You can face constraints and the negative implication of those constraints on both sides of the spectrum in cannabis,” said Richardson in reply. “You can allocate too many licenses into a system and have a supply-demand imbalance that ends up collapsing the system, and you see that in a number of states, including Oklahoma and Oregon. They’re crumbling under the weight of their own supply.

“Texas is a completely different situation,” he added, “where supply and demand are actually more balanced, which is great. It’s a very small system on the demand side, and a relatively small system on the supply side. Our problem here is simply regulation around access. That creates constraints that make it incredibly costly to operate within this system. If we were a state the size of Connecticut and there were only three licenses across the state, that would be okay, but three licenses across Texas? It’s too populous and simply too large geographically to cover and expect patients to either come to those licenses or have those licenses hire drivers to go to patients.”

Was Texas Original looking for partners, capital, or anything else worth mentioning? “My focus has been on making ourselves sustainable,” said Richardson. “We want to be masters of our own destiny, and the way you do that is to become operationally efficient. So, we’re not looking for capital, and we’re not really looking for any partnerships. We want to make sure that we can provide access to as many patients as we can in Texas, and that’s our North Star right now. Everything we have been focused on, from regulatory to legislative to operational, is about expanding access.”

Was he a political animal like his predecessor seemed to be? “I like to be apolitical, but I would say taking this job you have got to make that one of your primary focuses, if not your primary focus when you’re in legislative session,” he said. “HB 1805 coming into play is changing our current law, and regulatory changes will make the most difference for patients across Texas, more than anything else we can do operationally right now.”

Was he optimistic about the bill? “I think it’s a great piece of legislation, and I think there’s a lot of support for it from the community and from patients across Texas,” he said. “So, I’m hopeful that it will go through the Senate. But this is Texas, and you never know, so we’re just continuing to do the work here.”

I asked Richardson his thoughts on the current state of the industry as an investor in it, and if he is happy to be where he is at this point in time. “We have our own challenges here in Texas,” he replied, “but one of the big benefits is that the state and its current regulators went really slow on developing this system and were really careful about how it’s been rolled out. It has things that we need to change, but there hasn’t been a race to over-license, and as a result there is a really great opportunity to serve the patients here in a really well-regulated fashion. But that’s not what’s happened in other states, and so am I happy I’m here? Yes, very much so. I think there’s a lot of good work to be done in Texas, and I’m excited to be on the ground floor as it opens up.”

From that perspective, it sounds like it was a good thing that Texas took a slow and methodical approach. “We’ve seen this in other states that have gone relatively slowly through the medical process,” agreed Richardson. “The path forward is educating the citizens of Texas on all ends of the spectrum, and you do that by opening the system up slowly over time. We see this when we look at our patient base, and there is not any specific demographic or political orientation. It mirrors the population of Texas, and what happens when you do that is your neighbors in a ruby red district see that one of their community is benefiting greatly from this medicine in lieu of taking opioids or something else, and their perception of what cannabis is changes dramatically. It’s interesting to watch this happening, because it did take some time to get the program off the ground, but once that experience has been had broadly by Texans, perceptions will change.”

Does that mean there will come a day when the Texas industry is truly unleashed, and then watch out world? “I think the interesting part is that it was sort of unleashed with the 2020 Hemp bill that went through here in Texas, where you had this explosion of what they call CBD shops, but they’re really selling hemp-derived delta-9 and delta-8,” said Richardson. “So, we’ve seen this happen in Texas, and now we need to regulate that side and open up regulations on the medical side where it’s actually properly regulated.”