Cannabis stocks rose sharply to start the week, after the nation's leading health agency recommended sweeping changes to federal marijuana laws. However, it remains unclear whether the proposed changes will ultimately help cannabis companies and investors anytime soon — if at all.
Below, I'll share the pros and cons of major investors in the major reform proposal put forward by the Department of Health and Human Services (HHS) on January 12.
Stock traders should note that a huge, tradable catalyst is on the way soon. But first, given the culturally and politically polarizing nature of cannabis, we must acknowledge the fascinating nature of HHS's 252-page proposal, especially for anyone familiar with the United States' “war on drugs.”
The Department of Health and Human Services has asked the Drug Enforcement Agency (DEA) to soften its stance on cannabis by downgrading it to Schedule III from Schedule I under the Nixon-era Controlled Substances Act. This change would help cannabis companies by significantly boosting cash flow.
To make a credible recommendation, the Department of Health and Human Services had to find that cannabis has acceptable medical uses and a relatively low potential for abuse and dependence. The Department of Health and Human Services has built its case by citing extensive research and widespread physician-recommended use across the country. This new policy proposal would represent a radical change for the federal government.
“It really comes back and covers up a lot of the misinformation that has been out there about the effects of cannabis over the last 20 years,” said Boris Jordan, founder and CEO of Curaleaf CURLF.
treatment,
“It's easy to forget everything that was said about cannabis during the War on Drugs. Now there has been almost a 180-degree turn on the benefits and side effects of cannabis.
Investment takeaways
Here are the top five takeaways for investors from the proposed overhaul of federal cannabis law.
1. Rescheduling would rain money for cannabis companies: The reform would boost the sector's cash flow by exempting companies from an Internal Revenue Service rule called 280E, which bars the deduction of operating expenses from Schedule I drug revenue. “This will release a lot of investable capital into the sector,” Jordan said.
For example, Coralif can expect a $200 million raise, according to Jordan. For context, the company reported operating cash flow of $47 million and $92.3 million in net losses in the third quarter of 2023. Jordan noted that if the rescheduling occurs in late 2024, the 280E repeal would apply to the entire year. However, any eventual exemption from 280E would only apply to revenue from medical use sales, which could dilute the benefit.
2. There is a big short-term catalyst on the horizon: In the near term, the next step will come in the form of a proposed rescheduling rule from the DEA. Timing is crucial: It has to happen soon for the Biden administration to reap election-year bragging rights, which is clearly part of the plan here. To remove all obstacles to implementing a full rescheduling before the potential change of administration in January 2025, DEA would have to publish the proposed rule by March or April at the latest.
3. The main risk is that HHS invented an entirely new standard to support rescheduling: Change is happening slowly in the law, so it is surprising to see that the Department of Health and Human Services has created a new test to evaluate the currently accepted medical use of cannabis. It's a “newly drafted standard,” said Shane Pennington, a controlled substances regulatory expert and partner at law firm Porter Wright Morris & Arthur.
The new test weighs the level of state-approved medical use. It also takes into account whether healthcare associations recognize medical use, and “credible” evidence of therapeutic effect. The Department of Health and Human Services found that 30,000 doctors recommend cannabis for 6 million patients, and that there is an accepted medical use for treating anorexia, pain, nausea and vomiting associated with chemotherapy.
Because this is a new standard, it opens the Department of Health and Human Services' rescheduling process to legal challenges by cannabis opponents who may question the validity of the new standard. If the DEA ultimately agrees to reschedule, cannabis opponents will likely launch more challenges in court. Uncertainty may persist for investors.
4. Another risk is the Department of Health and Human Services' low standards for scientific evidence: This also opens reform efforts to potential attacks. To check the box for scientific support, HHS said it only needs to see “some credible scientific support” for at least one medical use. Compared to the biopharmaceutical gold standard of double-blind randomized controlled trials, this is a low hurdle.
Some of the Department of Health and Human Services' reasoning also seems questionable. The administration concluded that there was a low likelihood of abuse, but then pointed to evidence suggesting that nearly a third of non-medical cannabis users consume almost every day. This seems like a large number for a substance that is supposed to have a low potential for abuse.
But cannabis law experts are pushing back. “Both in terms of the rigor of the analysis and the tone of the analysis, this is a very substantive document,” said Arnold & Porter partner Howard Schlamberg, another regulatory expert on controlled substances. “It would be very difficult to challenge the part of the analysis that covers science and medicine. You had to prove that the agency was acting in an abusive manner.” He doubts that will happen. “It would be difficult for any judge to say, 'I'm going to invalidate the flag of the Department of Health and Human Services.' “Sklamberg is worth hearing because he chairs the FDA's Marijuana Working Group, which sets FDA policy on cannabis.
5. The suspension period may be prolonged: After the DEA abandons its proposed rule, there will be a 60-day comment period. But the review process may take longer. “I expect there will be a lot of public engagement,” Pennington said. He described the Department of Health and Human Services' proposal as a “goal-rich” environment. “There's a lot to argue about, and people are really excited to get involved.” If a vigorous debate arises and many experts are invited to hold hearings, the approval process could be prolonged.
Timing of repair
Sklamberg expects the full rescheduling process to be completed by summer. He argued that this should be the goal of the Biden administration if it wants to keep cannabis reform off the usually crowded legislative agenda at the end of the year. But Pennington is skeptical, noting that the rescheduling process has historically stretched out for up to nine years.
But these are politically unusual times, so something closer to Schlamberg's timeline might make sense. This depends partly on how much the administration wants it. US President Joe Biden is falling in opinion polls even among young people, which provides motivation. Also consider the following: “This whole process started with an executive order, which is abnormal,” Schlamberg said. “The fact that the White House has begun this process through executive order shows that it is a top priority.”
Stocks and exchange-traded funds (ETFs)
For better quality names, Morgan Baccia, cannabis investor at Poseidon Asset Management, prefers Green Thumb Industries GTBIF,
and TerrAscend TSNDF,
Green Thumb has a strong balance sheet and is present in growth markets such as Ohio, Maryland, Pennsylvania, Florida and New Jersey. TerrAscend is improving its balance sheet strength and expanding into Pennsylvania and New Jersey.
I'll suggest Curaleaf, in part because it's the company taking a more aggressive stance on European growth as countries there liberalize cannabis rules. For ETFs, I own the more liquid AdvisorShares Pure US Cannabis MSOS and the leveraged version, AdvisorShares MSOS 2X Daily MSOX.
Michael Brash is a MarketWatch columnist. At the time of publication, he owned MSOS and MSOX. Brush suggested GTBIF, CRLBF, MSOS, and MSOX at Cabot Cannabis Investor. He suggested MSOS and MSOX in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks.
more: Shares of Green Thumb, Trulieve and other cannabis stocks rose as much as 21% as details emerged about the Department of Health and Human Services' recommendation to downgrade drug classification.
Read also: Study identifies one source of “snacks” associated with cannabis use
