New Year / 2024
A Look at How the Tides are Turning in Cannabis
While 2023 was a challenging year for the cannabis industry, the KEY team believes the tides could turn for the better in 2024. There are several exciting potential federal regulatory developments in the works, most notably the rescheduling of cannabis to a Schedule III substance, which is expected to result in much needed tax relief for plant-touching cannabis companies via the abolishment of Section 280e.
If Section 280e no longer applies to the industry, we would expect to see material upwards price action for most publicly traded cannabis companies in relatively short order. Some of the largest MSOs could see $20-150mn added to their bottom line if cannabis were to be rescheduled.
Image Source: Pixabay
HHS Recommends Reclassifying Cannabis To A Schedule III Drug
The Department of Health and Human Services (HHS) has recommended reclassifying cannabis as a schedule III drug under the Controlled Substances Act (CSA) in an August 29, 2023 letter to the Drug Enforcement Administration (DEA). This recommendation is based on a Food and Drug Administration (FDA) review prompted by President Biden’s October 2022 executive order.
Rescheduling cannabis to schedule III would have significant implications for state-legal cannabis businesses, relieving them of the 280E tax burden without federally legalizing the programs. It is expected to boost research and access to cannabis-based medicines. The rescheduling process involves HHS and FDA conducting an eight-factor analysis, with the DEA having the authority to consider “all other relevant data.” The DEA would then publish a proposed rule in the Federal Register, allowing public comments and hearings. An administrative law judge would issue a decision, serving as a recommendation for the DEA Administrator’s Final Order, subject to court challenges. The DEA might expedite the process or adhere to a lengthier notice and comment period.
In summary, the suggestion from the HHS represents a significant milestone in the regulation of cannabis. However, uncertainties persist regarding the possible reclassification and its potential consequences for the future.
Analysis: HHS Recommends Reclassifying Cannabis To A Schedule III Drug
The big question this year (and into next year) has been if and when the DEA might reschedule Cannabis from Schedule I. It’s next to impossible to predict an event that is based on a process (DEA scheduling) that has so many inconsistencies (see our post last week). In spite of that, we thought handicapping a possible rescheduling would be an interesting and challenging undertaking.
According to data over the last five years from the DEA and the Federal Register, the timing of DEA scheduling events happen most often to least often in the following order: Q2, Q4, Q1 and Q3.
Combining the previous considerations, the follow probabilities were calculated:
• Scheduled to II: 0.10
• Scheduled to III: 0.90
• Scheduled to III after the 2024 election: 0.25
• Scheduled to III before the 2024 election: 0.75
Combining the above assumptions with the scheduling data from the last five years and the time of year results in the following probabilities.
• Q1 2024: 0.19
• Q2 2024: 0.41
• Q3 2024: 0.07
Overall, rescheduling alone will result in a new wave of liquidity, a surge in M&A activities, equity issuance and refinanced debts that will bail out many who may not survive otherwise.
Source: Golden Eagle Partners
The DEA Is Conducting Its Review Of Cannabis
We learned on January 4th, 2024 that The Drug Enforcement Administration (DEA) has recently informed House lawmakers that it is currently in the process of reviewing the classification of marijuana as a Schedule 1 drug, according to a letter obtained by Punchbowl News. The DEA emphasizes its “final authority” in determining the drug’s scheduling status. The agency’s review, as outlined in the recent letter, underscores its role in scheduling, rescheduling, or descheduling a drug under the Controlled Substances Act.
The agency’s acting chief of congressional affairs provided procedural comments in response to bipartisan pleas for full descheduling, offering no timeline or insight into the DEA’s position on rescheduling or descheduling. Critics argue that the DEA’s stance contradicts the evolving public opinion and Congress’s push for legalization, with a recent Gallup poll indicating that seven in 10 Americans believe marijuana use should be legal, marking the highest level of support by Americans to date.
Rep. Earl Blumenauer, co-chair of the Congressional Cannabis Caucus, labeled marijuana’s current scheduling as “arcane and out-of-touch.” In an October letter signed by 31 lawmakers, he urged the DEA to acknowledge the “merits” of legalization during their review. While the Congressional Research Service suggested the DEA would likely follow the HHS’s recommendation based on historical precedent, the agency’s opaque stance raises uncertainties about whether it will align with public sentiment or adhere to outdated drug war policies.
2024 US Cannabis Market Size
According to MJBiz Daily, the US cannabis market is projected to exceed $38bn in sales and projected to have an additional economic impact of $115bn in 2024. This would be an increase of over $4bn in sales from 2023. Only a few states in the US do not have a regulated cannabis market (medical or adult-use) to date. While both medical and adult-use sales were strong in 2023, the outlook for adult-use sales is stronger than the medical market. The adult-use market has the potential for massive markets like New York and Ohio to see meaningful growth in adult-use sales.
Combined sales of medical cannabis and adult-use cannabis are projected to exceed $56bn by 2028.
Meaningful New Adult-Use Markets In 2024
Two adult-use markets to watch in 2024 are Ohio and Florida. In late 2023, Ohio joined the ranks of states legalizing adult-use cannabis, becoming the 24th state to do so with over 57% of votes in favor. Projections indicate that Ohio’s adult-use cannabis sales could reach $2 billion in the inaugural year, with expectations of reaching up to $4 billion by the fourth year. It’s important to note, however, that Ohio law provides elected officials with significant flexibility to modify voter-approved initiatives. As legislative activities resume in Ohio in 2024, there is a likelihood of a push to initiate adult-use sales at existing medical cannabis dispensaries before the upcoming fall.
Meanwhile, in Florida, the prospect of legalizing adult-use cannabis in 2024 rests on the votes of its residents. Trulieve, the state’s largest medical cannabis company, is backing this effort and has already invested over $38 million into the campaign. With over 800,000 signatures supporting the initiative, there is a move to include adult-use cannabis on the ballot in 2024.
These two states alone could see billions of dollars of sales in their first full year of adult-use sales.
International Cannabis Market Opportunities
While KEY continues to believe that the US market presents the most attractive risk adjusted returns
and will continue to see growth from several factors, namely medical to adult-use transition, illicit sales transitioning to legal sales, and increased acceptance and use of cannabis in the US, the KEY team has begun to monitor cannabis opportunities abroad. One market that has caught the attention of the KEY team is Europe, and while Europe remains a “somewhat fragmented and heavily regulated business environment” with only a few countries advancing to the later stages of adult-use legalization, two distinct models are starting to take shape.
The first model entails the establishment of “not-for-profit private organizations” with registered memberships that oversee their cultivation and distribution. This approach, observed in Malta and anticipated in Germany’s upcoming Pillar 1, also allows citizens to cultivate cannabis for personal use at home.
The second model involves “spatially restricted and tightly controlled supply chains operating for a specified period.” This approach is currently under experimentation in Switzerland and the Netherlands, and Germany is considering it as part of its upcoming Pillar 2 proposal.
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