US reclassification could drive fresh research funding into pot sector

[May 14, 2024]  By Mrinalika Roy

(Reuters) - The U.S. pot sector could see an influx of medical research funding from healthcare investors amid renewed interest from pharmaceutical firms, should a proposal to reclassify cannabis as a lower-risk substance be approved, industry experts said.

The current classification as a Schedule I substance has limited research into cannabis due to restricted access to cannabis products, regulatory hurdles and funding limitations.

Federal research grants are essentially off the table, while potential legal complexities put off many private foundations.

But that may change with the U.S. Justice Department's proposal to reclassify cannabis.

"For years, pharma and biotech companies have viewed cannabis as a market with enormous potential," said Michael Johnson, CEO of Metrc, which makes software to track the cannabis supply chain.

"With rescheduling, investment firms that previously had clauses precluding them from investing may reconsider their stance."

Currently, research with Schedule 1 substances requires a more rigorous registration process, oversight from several agencies and special storage arrangements.

Rescheduling would ease requirements such as the need to store cannabis in a steel safe with video coverage and alarms and lead to lower expenses, said Mark Bolton, head of global public policy at Jazz Pharma, which makes the only U.S. FDA-approved medicine derived from the marijuana plant.

Maridose LLC — one of eight companies on the Drug Enforcement Administration's approved list to manufacture and supply marijuana for research — said it has been receiving more enquiries from both non-profits and commercial entities, including state-licensed cannabis firms.

Marijuana plants for the adult recreational market are seen inside a greenhouse at Hepworth Farms in Milton, New York, U.S., July 15, 2022. REUTERS/Shannon Stapleton/File Photo

Reclassification will also free pot firms from the 280E tax provision, allowing listing on major U.S. exchanges.

"We expect to see healthcare venture capitalists move quickly to invest in cannabis-related research that can lead to new cannabis startups," Metrc's Johnson said.

There has been increased interest especially from small family offices and small hedge funds, AdvisorShares CEO Noah Hamman said. AdvisorShares offers several exchange traded funds, including Pure US Cannabis, the biggest U.S.-listed pot ETF.

Experts, however, said a financial overhaul of the sector is needed to attract bigger investors and banks.

"Rescheduling will spur more investment ... (but) will you now see JPMorgan and some of the traditional blue-chip investment firms willing to lend? That's probably going to take a little bit more time," Zack Kobrin, partner at law firm Saul Ewing, said.

(Reporting by Mrinalika Roy, Manas Mishra and Pratik Jain in Bengaluru; Editing by Arpan Varghese and Shounak Dasgupta)

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