On Oct. 6, President Joe Biden rolled out a three-part plan to bring cannabis reform into his administration.

The news of the day led with Biden’s plan to pardon all individuals previously convicted by the federal government of simple possession of cannabis. The second part of Biden’s announcement urged all state governors to pardon state-level offenses of simple cannabis possession, as well.

It’s the third part of Biden’s plan that could have the most substantive effects on licensed cannabis operators: a request for the secretary of Health and Human Services and the U.S. attorney general to review the status of cannabis under the Controlled Substances Act.

Of course, cannabis is presently classified under Schedule I: the most prohibitive of the five classifications, each of which relates to the addictive nature and medical value of certain substances.

The Biden administration’s review of cannabis’s status could ultimately result in rescheduling the plant to another classification, descheduling the plant entirely—or nothing. Rescheduling cannabis would send it down a regulatory pathway much different than the current state-by-state structure; the U.S. Food and Drug Administration would inevitably be involved. Descheduling the plant would likely defer all regulations to the states, maintaining the current framework in a way.

 

Heise

We asked Leah Heise, senior adviser at Kearney, what to make of Biden’s forward-looking plan. There is much that remains unknown, but the entrance of the federal government’s executive branch signals a potentially dramatic shift in how the cannabis industry operates.

Eric Sandy: I was hoping to get your reaction to President Biden’s announcement. What do you make of him breaking the silence on cannabis?

Leah Heise: Certainly I was pleased to see that he was finally coming around and making a statement and working toward some of the campaign promises that he had made to the cannabis industry, in terms of expungement and something that needs to be done. I was happy to see some statement in regard to that. I am not leaning as positively toward this statement as perhaps others. I don’t feel that it necessarily went far enough to free the industry from the issues that it has. And I’m concerned that it’s going to prevent or delay passage of other acts—like the SAFE Banking Act, which has the potential to dramatically help the industry. I’m concerned that if we go the rescheduling route, that it doesn’t provide any benefit to the industry whatsoever.

In fact, what it does is still make us a highly federally regulated industry, or a highly federally scrutinized industry with great risk. We would still have to be under the provisions of IRS Code 280E, which is a very harsh tax policy that the federal government has, where, essentially, cannabis businesses pay around 72 cents on every dollar to the federal government just to be in existence. That’s on top of paying on average $2,000 a month to be able to have a banking account, which would not go away with this announcement. I don’t feel like it went far enough, unfortunately. Too little, too late.

ES: It is interesting, especially when you think about the timing. There’s an election coming up, and that’s one thing that we could talk about, but you raised the point of banking, and, not to sound naive, it does seem like the SAFE Banking Act is on the doorstep of passage. You’re saying that you think that this latest push on the executive side of the government could maybe muddy the waters on SAFE Banking’s chances?

LH: Yes, I think it will muddy the waters, and I think it will also deprioritize both that and the amendment of the Farm Bill. The Farm Bill created some fairly substantial loopholes in terms of CBD and the ability to sell THC-based CBD in the United States. I’m sure you’re familiar with this, where you can walk into any convenience store in the United States pretty much and see delta-8 or delta-9 THC that is derived 100% from hemp. But we, in the cannabis industry, test our products. They are heavily regulated. The packaging is very restricted, but those restrictions are not passed on to those that are doing CBD under the Farm Bill. And it is perfectly legal, the way that the Farm Bill limits are set up, for them to produce high levels of THC inside of their CBD components. And they are directly competing with the cannabis industry that’s already struggling under the weight of overregulation.

ES: The last couple of years, there have been a number of almost parallel regulatory tracks that have emerged for some of these different compounds, and that that certainly even includes the pharmaceutical track when Epidiolex was approved and then set on Schedule V. Maybe this opens up that conversation of rescheduling vs. descheduling. It’s not like President Biden used those terms specifically; he just mentioned reviewing the status of cannabis. But could you define rescheduling and descheduling in terms of what Biden was getting at?

LH: In terms of the FDA schedule and the Controlled Substances Act, there are a series of classes, so to speak—called schedules—of certain drugs. It’s all based upon whether or not they’re addictive. So, class one is fentanyl, heroin, cocaine, and cannabis, even though it has been shown in anecdotal studies and in studies overseas where they’re actually allowed to do research that it does not have the addictive qualities of a fentanyl. Really, it is a lower addictive level than even sugar or caffeine, which are not regulated by the Controlled Substances Act.

Essentially what we have in the industry is a conundrum of whether or not the industry should be rescheduled and be at a lower-level tier of the Controlled Substances Act.

If it is rescheduled, it would still go under the provisions of FDA oversight. FDA oversight would then further delay the ability of cannabis companies to bring their products to market, because then we would go under a regulatory approval path. Now, I never have thought it was a bad idea for any company to prepare to go along that path by having Good Manufacturing Practices (GMP), having quality assurances, just in case the industry ends up going that rescheduling route—as opposed to descheduling, which then would allow us to sell the product just like any other product that’s sold in the world.

ES: Meaning the status quo?

LH: Right. [Regulation] would go to the state, and I suppose the federal government could decide to oversee it on some level, to create maybe an agency or something, but they certainly wouldn’t be mandated to do it. The states that are currently operating have created incredibly robust regulatory schemes under which we all act. We are used to acting under those schemes. The only benefit we don’t have right now, apart 280E and banking, is we lack the ability to export internationally and we lack the ability to cross state lines with our products, which makes creating a brand in this industry incredibly difficult, because you have no ability to ensure quality control from state to state.

ES: I know descheduling is baked into at least some of the existing cannabis reform legislation that’s been introduced in Congress. But rescheduling seems like a whole different can of worms. You mentioned some of the schedule structure. Does it seem likely that cannabis would be slotted down into Schedule II or something lower?

LH: I would love to see it lower. If it’s based on the ability to be addicted to the substance, and they actually analyze the studies that have been existing outside of the U.S., because we can’t study in the U.S., to prove that it is not addicting, then I think it has to go even lower. I think it would have to go down to III or IV, maybe into Tylenol range, instead of being up at that highly addictive substance level.

There are companies that never want to see this product be descheduled or rescheduled. They’re perfectly happy living inside of this patchwork-quilt world and taking advantage of their ability to move from state to state inside of state regulatory frameworks—even with the taxes.

ES: When I think of rescheduling, I think of the, the process of getting Epidiolex to market and just knowing the amount of capital investments that went into not only that drug, but also just the company behind it, which is now Jazz Pharmaceuticals. It seems to me that it would take a quite a lot of money to comply with what rescheduling might mean down the line. We’re already concerned about the mom-and-pop shops in cannabis. This seems like it would raise a lot more issues.

LH: It raises a lot of red flags. The cannabis industry is an incredibly capital-intensive industry, It takes an incredible amount of money to start up a processor or a grow or even a dispensary. But then the carry and how long it takes you to become cash-flow positive with the amount of fees that are put onto you from local municipalities, cities, states, the federal government—it becomes a very heavy burden of cost on these operators. The multistate operators do a little bit better because they have the capacity to have access to larger capital sources. They can create larger carries, they can support higher levels of financial advice. It really disadvantages the smaller single-state operators or someone who wants to run a single dispensary in a particular state. You just don’t have the capital to be able to do that.

For a processor or a cultivator to have to go through an FDA process to get approval for their product, there just isn’t enough money for that. They’d have to do government grants. There’d have to be some process that would free up cash flow so these companies would be able to get to market and survive. If you look at the P&Ls of these companies, the multistate operators and the publicly traded companies, across the board, a lot of them are on three to six months of cash flow right now. That’s it. They have a three- to six-month runway of cash flow. And if we don’t do something, if these companies aren’t reorganized, if the federal government doesn’t take some action to limit the weight that’s on top of this industry, I think we are going to be looking at a much different world of cannabis in a year from now. We will have lost multiple companies.

ES: In the event of rescheduling or—?

LH: Even with no action.

ES: It certainly seems that way even within some states. We’ve looked very closely at how in the California market most operators are suffering under all the conditions you just mentioned. And we haven’t even gotten to a nationwide market at this point. The whole industry just seems like a kite that we’re trying to get off the ground, and as we keep running it’s not really getting off the ground just yet for a lot of legitimate reasons.

LH: It’s feels like we’re adding bricks to the tail of the kite at every turn. And everybody’s trying to take their piece of scissors to the kite too, right? Like the host community agreements in Massachusetts. It’s insane what people have to do to be able to get licensed. It is an absolute struggle.

ES: Massachusetts is a really good example. Not to get too far afield here, but even in the city of Boston, the mayor is trying to get the zoning board out of the licensing process and make it just ever so slightly easier for operators to get up and running. It takes those little incremental steps to make any headway.  

LH: It really does. I was very pleased that Biden at least raised the issue, especially ahead of midterms, given that we have five states on the ballot that potentially will flip over to adult use. The more states that we have become adult-use, the more likely it is that we will see this prohibition finally come to an end in some form or another. I would have liked a more measured, thought-out statement from him with a little bit more of a plan other than an amorphous [announcement].

ES: There’s the cynic in me that does look to the midterms and the timing of this and also looks to the 2024 election. No one has a crystal ball, so who knows how long this review is going to take, but it would be very interesting if it took approximately a year and a half and some action happened in the summer of 2024.

LH: I would love that. That would be great. I find the international markets fascinating right now because they’re just blossoming, but the U.S., which has had all of these years of creating products and really putting strong regulations in place, we don’t have the opportunity to compete internationally, and it’s very frustrating.

ES: As a country we’re not involved in that right now. We’re missing out on a lot of rapidly evolving research and of course rapidly evolving international markets too. It would be super interesting to hear a president really engage those topics on a serious level.

LH: I’d love it—or even work hand in hand with Germany, who’s trying to figure out how to do it right now, or the EU. If we in the U.S. could provide the benefit of our knowledge and mistakes so that other countries don’t do some of the things that we did and create a better foundation globally, we could continue to be world leaders in this space. And I don’t think that’s what’s going to happen. I think we’re going to lose.

ES: Throughout this whole year, I feel like in a lot of our articles, we haven’t been able to deliver the most optimistic news to operators. But before anyone panics or celebrates, what should smaller operators—who may not have access to tremendous amounts of capital—what might they benefit from doing over the next six to 12 months in preparation of potential rescheduling?

LH: They should definitely be looking at GMP compliance and ensuring that they have a path to getting approved by an FDA process—like hiring an FDA attorney, though that’s expensive. To stay alive in these times, all companies need to look at, “What do you do?” If you are a vertically integrated company and you stink at transporting your product, hire a transporter. Why would you have four verticals inside of one company? That makes no sense. You can’t be the best at everything. If you’re really good at making edibles, make edibles and sell off all the other stuff—I bet you’re not making much money off of it. Pull some levers to save yourself. There’s a lot of work to be done, but on a hopeful note, the fact that Biden, even at a midterm and even in a potentially political-puffing manner, made this statement [tells us] at least he’s looking at it. At least it is an announcement that’s raising awareness nationwide to the rest of the country that cannabis is here to stay. It’s not going anywhere. We’re already at 34 states, and we’re going to be at more states. It still is a good, valid, strong industry, and I think it’s too late to turn back. I do not think that even the federal government would be able to pull it back.

ES: Not to point to yet another pathway toward legalization, but I believe it’s the States Reform Act, introduced by Rep. Nancy Mace, which was just going to leave things mostly as-is while applying a flat federal tax rate, which seems about the extent to which the federal government could really step in. Maybe that’s a middle ground.

LH: It’s a possibility. If I could have anything, there are a couple of things I’d like.

One, I don’t think the pardoning [announcement] went far enough. I think having possession-only charges did not do enough to eradicate the stigma and racism upon which the war on drugs was built.

I’d like to see an exploration and analysis of the people who are currently imprisoned, who maybe had an intent to distribute and some who even had weapons charges and suffered under the egregious U.S. sentencing guidelines that were created based on racial disparities have been applied in a racially disparate manner. I’d like to see those reevaluated and those cases be reevaluated. That Biden announcement didn’t go far enough on that.

I’d also like to see the elimination of 280E for the entire industry. I don’t care what way they do it. I don’t care if they just cancel it administratively. There has to be real tax benefits applied and allowed for in an industry that’s making hundreds of thousands of jobs. It’s just insane that we don’t have that benefit. I’d like to see access to capital markets, and I’d like to see access to banking. Those are my big asks.

 

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