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What Marijuana Reclassification Means for the US Cannabis Industry
The Drug Enforcement Administration (DEA) is preparing to reclassify marijuana in the US as a less dangerous drug, according to new reportsand cannabis company CEOs say change has been a long time coming.
In what Curaleaf CEO Matt Darin called “a historic moment” for the industry, a DEA proposal reportedly seeks to reclassify marijuana from a Schedule III narcotic — a category that includes cocaine, fentanyl and heroin — to a narcotic Class I, which includes ketamine. , codeine and steroids.
The proposal will still have to go through a long process to be finalized and, crucially, it will not legalize the substance in the US, but the federal reclassification of marijuana has been a long-term goal for the cannabis industry.
“I think any advancement here certainly helps with the normalization of cannabis and demonstrates to lawmakers that there is broad support for it,” Darin told Yahoo Finance. “While this is certainly a different process [than cannabis banking reform and other legislative actions]… I think this absolutely sends a signal to those in D.C. that there is broad support for this, that the federal government recognizes that there is a medicinal benefit to cannabis and that ultimately this belongs in a similar regulation to other industries. ”
Trulieve CEO Kim Rivers highlighted that the DEA’s decision signifies progress on the issue after President Joe Biden and the Food and Drug Administration (FDA) requested a review of how cannabis is programmed.
“The FDA’s findings were actually that marijuana is safer in many ways than alcohol, which is interesting in terms of the record of that,” Rivers said. “It’s really a critical first step as we think about additional regulatory and policy changes for the industry.”
While cannabis stocks generally saw a rise in value following news of a possible reclassification, they continued to face volatility. The AdvisorShares Pure US Cannabis ETF (MSOS), which tracks stocks of cannabis companies, jumped more than 25% on April 30 after the news broke, but pared those gains the following week.
Shares of two of the biggest cannabis companies, Curaleaf (CURLF) and Trulieve (TCNF), had similar trajectories, reaching the highest values in the year before stabilization. Trulieve will report first-quarter earnings after the market opens on Thursday and Curaleaf will report earnings after the market closes.
What the reclassification means for the industry
A growing number of states support the legalization of marijuana. At the moment, recreational use of cannabis is legal in 24 stateswhile medical use is legal in 38 states.
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If marijuana is reclassified as a Schedule III narcotic, there will immediately be more opportunities for companies to invest in research and development.
For example, CEOs of cannabis companies hope their businesses will no longer be subject to Section 280E, a part of the IRS tax code that limits their ability to take deductions and increases their effective tax rate. Putting that money back into the business could make the industry more inviting to institutional investors and pharmaceutical companies, Curaleaf’s Darin explained, noting that Curaleaf could save the government more than $150 million in excess tax contributions.
“No other industry in America is subject to this type of punitive tax rate,” Darin said. “I believe freeing up this cash flow to reinvest in expansion, staffing and new business development is catching the attention of institutional investors and will continue to attract interest.”
A marijuana activist holds a flag during an Independence Day march on July 4, 2021, in Washington, D.C. (Alex Wong/Getty Images) (Alex Wong via Getty Images)
Trulieve’s Rivers said the reclassification could help normalize the marijuana industry’s banking practices, helping it gain access to loans and move away from operating as a cash-only business. This could help small businesses and minority-owned businesses continue to grow.
“As many who follow the industry know, we are stalled in Congress on passing the SAFER banking bill,” Rivers said, referring to a bill currently making its way through the Senate that would open up access to deposits, insurance and other financial resources. services for industry.
“It would level the playing field when it comes to banking,” Rivers continued, “and, more importantly, it would allow us to accept credit cards so we don’t have to have as much cash on hand, which makes us a target.” . , of course, by crime, as there have been some horrific reports of robberies that have occurred at dispensaries across the country.”
Darin also suggested that there could be an increase in M&A activity in the marijuana industry generally; although when asked about rumors of a possible merger between Curaleaf and Trulieve, he didn’t talk about that specific idea.
“We will continue to be opportunistic as we look at expansion opportunities and I believe rescheduling will open up markets,” Darin said.
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