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The US Drug Enforcement Administration (DEA) is on course to reclassify marijuana from a Schedule I to a Schedule III drug under the Controlled Substances Act (CSA).
This decision, initially reported by the Associated Press and further verified through various news outlets, represents a pivotal change in US federal drug policy, aligning marijuana with substances like ketamine and codeine, which are categorised as having a moderate to low dependency potential.
Since 1970, marijuana has been grouped with drugs like heroin and LSD, which are classed as having no accepted medical use and a high abuse potential.
The reclassification sets cannabis apart from this maligned group, recognising its medicinal benefits and considerably easing restrictions on its sale and research.
The US policy shift follows Germany’s recent legalisation of cannabis and is seen as a historic reform in global cannabis regulations.
Not surprisingly it sparked a rally on the markets, with cannabis ETFs registering a spike and the change seen on the horizon for cannabis stocks, which performed strongly in recent quarters.
Australian and ASX-listed cannabis companies are also expected to benefit, such as:
Incannex Ltd, which recently completed a pre-IND meeting with the FDA for a new cannabis-based tobacco cessation treatment;
MGC Ltd, now Argent BioPharma Ltd (LSE:MXC, OTC:MGCLF, ASX:RGT), which offers a range of treatments including cannabis and non-cannabis based molecules; and
Specialist investment company Hygrovest Ltd (ASX:HGV, OTC:MMJJF), which increased its net asset value (NAV) per share before provision for deferred tax during April by around 23% to 13.55 cents following its investment in Canadian private company Weed Me Inc.
In a report on Hygrovest, HD Capital Partners said should media reports on the rescheduling of cannabis in the US be confirmed, “it would be one of the most positive developments in the cannabis industry in years and one the market has been waiting a long time for.”
“Unsurprisingly, North American listed cannabis stocks reacted very positively in the month. The reason it is significant is that it would materially improve operating conditions for US cannabis industry participants,” HD said.
“For example, the stringent 280E tax laws, which prevent businesses selling Schedule I or II substances from tax deducting normal business expenses, would be removed. In practice, this would mean that US cannabis companies would move from being taxed at the gross profit level to the net profit level.
“In addition, it paves the way for further positive policy developments and probably leads to expanded institutional investor interest in general.”
Why reschedule now?
The DEA’s decision stems from a 2023 determination by the US Food and Drug Administration (FDA) recognising marijuana’s legitimate medical use.
The move aims to resolve the longstanding conflict between US federal and state laws, particularly as 38 states – plus Washington, DC – have legalised medical cannabis, with 24 states additionally approving recreational use.
The DEA will propose a formal rule to the White House Office of Management and Budget to shift marijuana to Schedule III, followed by a public comment period expected to draw substantial feedback.
Transitioning to a Schedule III classification would mean marijuana can be legally prescribed in states where medical cannabis is legal.
This change could significantly impact patients, particularly those under the care of the Veterans Administration, which has historically restricted medical marijuana prescriptions.
Rescheduling is poised to boost the economic standing of some 12,000-15,000 state-licensed cannabis dispensaries in the US, enabling access to tax deductions previously unavailable under Schedule I restrictions.
This would alleviate the disproportionately high effective tax rates these businesses currently face.
Moreover, the reclassification will facilitate cannabis-related research, which has been hampered by stringent FDA and DEA regulations.
The potential easing of these restrictions could accelerate the development of cannabis-based medical treatments.
What’s next?
HD Capital Partners acknowledge that significant hurdles remain.
The reclassification is by no means a foregone conclusion and still requires official confirmation from the DEA, followed by an ongoing process including potential legal challenges, a lengthy review process and then final approval from the Department of Justice.
It would then need to be signed into law by the President. “A US election in November could also impact the ultimate outcome,” HD noted.
While the DEA’s move to reclassify marijuana is a huge step forward for the biotechs playing in the space, it opens the door to new legal and operational challenges that need to be addressed to fully harness the medicinal and economic potential of cannabis.
“}]] The US Drug Enforcement Administration (DEA) is on course to reclassify marijuana from a Schedule I to a Schedule III drug under the Controlled Substances… Read More