Cannabis rescheduling in the US, a landmark legislative move that has held the attention of the global cannabis industry since it was first proposed in August last year, was officially backed by the Biden administration last week for the first time.
With the full weight of the US government now seemingly behind what it views as a vote winning initiative, the prospect of cannabis being reclassified as a Schedule III alongside codeine and testosterone now seems more likely than ever.
While the move has been hailed as a major win for the country’s leading cannabis operators thanks to the tax breaks it is set to offer, the change could have far wider reaching consequences for an industry starved of institutional capital.
Tim Seymour, Portfolio Manager of the actively managed Amplify Seymour Cannabis ETF (CNBS) and the founder and Chief Investment Officer of Seymour Asset Management, believes rescheduling could finally shift the dial for big pharma, consumer goods brands and major exchanges to open up to the industry.
He told Business of Cannabis: “It’s obviously been an incredibly volatile five years, but rescheduling is by far the most significant and historic piece of reform in the space to date.
“Institutions are still somewhat sceptical. But rescheduling, assuming it happens, will be transformative and transcendent. As a guy that follows institutional capital flows and knows what it’s like to see new capital come into an emerging market, it hasn’t happened yet in cannabis, and that’s why this is so exciting.”
The rescheduling process
Last week (May 16), President Joe Biden officially confirmed that the process of moving cannabis from a Schedule I substance to Schedule III was being pushed through.
The announcement had been widely expected since April 30, when reports from the Associated Press suggested that sources within the Drug Enforcement Administration (DEA) confirmed they would support the move, with later confirmation coming from the Justice Department.
The ‘formal rulemaking process’ is now underway, and both the proposed new rules and an official legal opinion from the Office of Legal Council (OCL) have now been submitted to the Federal Register, kicking off a 60-day public comment period.
Despite Biden’s interjection, numerous sources have cautioned against premature celebration, warning that apparent fissures between the DEA and DOJ, along with time constraints in the shadow of the upcoming presidential election, could yet derail the project.
Mr Seymour was less concerned with these potential hurdles, suggesting, based on previous comparable procedures, that the entire process could take ‘200 days post comment period’, pointing to a timeline that would complete in ‘late January or early February 2025’.
Regarding suggestions that, due to the unconventional procedure with which this decision has been made, the DEA could challenge the decision in court, he similarly remained ‘less concerned’ given that ‘they’re appointed by Biden’.
Furthermore, he said that the Food and Drug Administration’s (FDA) initial report into cannabis rescheduling, which had a ‘mea culpa tone’ and made the argument ‘not only for the science but for the medical efficacy’ of the drug, is a ‘powerful document’.
Adding that there was ‘some concern’ the process could run into a new administration, he highlighted the fact that a Trump administration would not necessarily seek to derail the initiative.
“Trump’s not necessarily married to any particular policy, other than the one that gets him elected and keeps him in power.
“So he can be all over the map here, but in the past, the Trump administration had plenty of opportunity to blow up the Cole Memo and didn’t do that.”
The period between 2016 and 2020 when Trump was in office, he points out, was ‘arguably one of the most momentous periods in cannabis’, conversely, there have been years of inaction from Biden, even when the Democrats had the most power to push through reform.
Institutional investment
The lack of institutional investment has long been cited as the millstone around the neck of the cannabis industry, with major stock exchanges, banks, big pharma and other adjacent industries like tobacco and alcohol only daring to dip their toes in the market to date.
Rescheduling, for Mr Seymour, holds the promise of transforming this landscape in more ways than one.
Firstly, not only does rescheduling officially recognise the medical benefits of cannabis, but it will significantly reduce the burden on those hoping to study the drug in a clinical setting.
“I think truly pharmaceutical research is very important for the sector. I think pharma channels of distribution are going to be available after I’s are dotted and T’s are crossed; that’s a big deal as well… Research processes can begin in earnest because cannabis is Schedule III.
“Pharma research does take time to flow through, but you can’t tell me that pharma companies don’t run to market with something as fast as possible if they believe in it, and they believe there’s money behind it. And that’s what we’re going to see in cannabis
Pot stocks ripping higher as the Justice Department officially moves to reclassify cannabis! @timseymour dissects what it means for investors in the budding marijuana market. pic.twitter.com/PbEILl9X8j
— CNBC’s Fast Money (@CNBCFastMoney) May 16, 2024
“It goes back to the same three or four things that have made cannabis consumption grow and grow over the years, which is that cannabis can solve 80% of the issues most people walk into Walgreens or Boots to solve for them. And that means that it’s a massive opportunity for big pharma.”
However, outside of the pharma industry, the schedule change could also encourage new investment from ‘global consumer product brands, banks and exchanges’, who have been waiting for a ‘technical reconciliation’ in the cannabis space.
“It’s a decision about being comfortable attaching their brand to the sector, and I think that is easier now.
“There are also technical elements of moving schedule that changes the investability for companies, there’s no question.
“It allows institutional analysts to really begin to get their arms around free cash flow and what it means… It brings greater clarity, greater insight and greater confidence.”
A ‘re-rating’ of the sector
On this thread, Mr Seymour suggested that the market as a whole has now been through a ‘three year bottoming process’ which has effectively ‘tested the downside’ of the industry without any new capital coming into the sector.
The operational profile of the market’s biggest cannabis operators, as demonstrated by the string of financial results published over the last few weeks, has also changed ‘dramtically in the last three to five quarters’.
“Its at a point now where it adds up to a pretty interesting place for new institutional investors, as you’ve seen at least some semblance of what a margin profile could look like for the industry.
“One of the things about cannabis that’s made it really difficult for even institutions that have an appetite for higher risk and volatility and are obviously looking for higher growth industries is that with cannabis, no one’s ever really been able to understand what the margin profile of the industry should be.”
While those who invested in cannabis during the initial green rush may believe their fingers have been burned, the fact that a ‘decent amount of strategic interest outside of the sector’ flooded into the market during that period ‘should be encouraging for the industry now’, he continued.
With all this in mind, Mr Seymour says this could effectively act as a ‘re-rating of the sector’, with investors now able to glean a much clearer and more grounded picture of the opportunities presented by cannabis.
Crucially, he states, ‘the winners of the next phase of institutional cashflow are not necessarily going to be the ones from the last five years for sure’.
