Cannabis And Psychedelics Industries: Summer's Over, Where Are We?

As summer fades, many of us reflect on its swift passage. For me, the season was a mix of joy and ongoing tasks after a lengthy construction project at our beach house. Similarly, the cannabis and psychedelics industries are grappling with their own extended “construction” phases. They are working to establish themselves as respected sectors within the financial and regulatory landscapes, yet both face significant challenges as autumn approaches. Let’s delve into the current state of these industries.

Cannabis: Rescheduling And Regulatory Challenges

The cannabis industry has long been influenced by the fluctuating tides of legalization. It is frustrating to see that the fortunes of public cannabis companies often hinge on the latest legalization news or rumors. For example, at the end of 2022, there were high expectations that the SAFE Banking Act—which would protect banks working with cannabis companies—would pass. Despite these predictions, the legislation did not materialize.

In October 2022, President Biden directed his administration to consider rescheduling cannabis from a Schedule 1 to a Schedule 3 controlled substance. Such a change could remove tax penalties under Internal Revenue Code Section 280E, allowing for more research into cannabis’ medical benefits and potentially leading to a federally regulated medical cannabis market. While this move was welcomed by many, some argue that only full legalization would address the industry’s needs.

As of September 2023, the Department of Health and Human Services (HHS) recommended rescheduling cannabis to Schedule 3. This recommendation was based on scientific evidence showing that cannabis does have medical benefits, contrary to the Schedule 1 classification that asserts no such benefits exist. The next step is the Drug Enforcement Administration (DEA), which must review HHS’s findings, as well as the tens of thousands of public comments submitted on the matter, and ultimately issue its final decision.

Despite the fact that the majority of public comments on the proposed rule are in favor of rescheduling, recent DEA statements have sparked concerns. Some suggest that the DEA might resist rescheduling, influenced by lingering opposition from certain political figures and public skepticism.

In the meantime, the cannabis industry is seeing limited financial activity. Investments are primarily in the form of debt refinancings with secured collateral, and mergers and acquisitions are focused on streamlining operations rather than expanding. The DEA just announced a hearing on the rescheduling matter in early December, which means no decision will be made before the election, but many still believe it will be finalized before President Biden’s term ends in January. Should rescheduling occur, it could positively impact cannabis stocks and company profitability, potentially leading to increased financing and M&A activity. The industry’s future will depend on whether rescheduling happens and what steps will follow.

Psychedelics: Recent Setbacks And Future Outlook

The psychedelics industry, particularly in the realm of MDMA research for PTSD, has faced a significant setback. Lykos Therapeutics, in association with the Multidisciplinary Association for Psychedelic Studies (MAPS) and its renowned leader Dr. Rick Doblin, completed an FDA-approved study aimed at using MDMA in conjunction with psychotherapy to treat PTSD. Initially, there was optimism about FDA approval, but a non-binding advisory board vote of 9-1 against approval shocked many. Subsequently, the FDA withheld its approval of the drug, requesting a redo of its phase 3 study.

This outcome has led to disillusionment within the industry. Both MAPS and Lykos have downsized their operations, and Dr. Doblin has stepped down from Lykos. The industry, which had seen a surge in valuations and fundraising up to 2021, is now grappling with a significant downturn. The hope that FDA approval would unlock further investment in psychedelics research has dimmed, impacting both federally legal ketamine clinics and state-legal centers in Oregon.

As we approach Labor Day 2024, the industry faces uncertainty. The recent setback raises questions about the approval process for other ongoing and upcoming studies. It is likely that some studies will eventually succeed, but in the interim, we may see consolidation within the sector. Companies with strong financial positions might acquire those struggling due to cash flow issues.

This period could also prompt some companies to consider selling to larger pharmaceutical firms to better position themselves with regulators. Ensuring robust research protocols and responding to FDA concerns will be crucial for the industry’s future.

Looking Ahead

As summer ends and we head towards 2025, both the cannabis and psychedelics industries face pivotal moments. Cannabis is awaiting a potentially transformative decision on its scheduling, which could affect its financial and regulatory landscape. Meanwhile, the psychedelics sector is navigating the aftermath of a significant regulatory setback, with potential consolidation and strategic shifts on the horizon.

The coming months will be crucial for these industries as they seek to solidify their positions and overcome existing hurdles. The outcomes of these regulatory and financial challenges will likely shape their trajectories for years to come.

David Feldman is a prominent legal expert and business advisor specializing in the cannabis and psychedelics industries. You can reach him at DFeldman@feldmanlegaladvisors.com.