How the DEA could introduce big pharma to marijuana

By Kathleen Burke

The U.S. could soon be one step closer to allowing marijuana sales at your local drugstore. But while that might mean good news for patients, it could also overturn 20 years of development in the medical marijuana industry.

A long-awaited decision by the Drug Enforcement Administration that could reclassify the drug’s status as a tightly regulated substance is expected this summer. That could signal a green light for the pharmaceutical industry to enter a market expected to be worth $6.7 billion in 2016, potentially leading to the development of new treatments to well-known illnesses.

But it could also shake up states where medicinal marijuana is already legal, which saw an estimated $2.4 billion in sales last year, as the standard prescription and pharmacy process replaces doctor’s recommendations and dispensaries. In short, experts say, the DEA’s decision could simultaneously legitimize medical cannabis across the U.S. and throw a still-developing market into chaos.

A change could lift a cloud over the burgeoning cannabis industry because “there’s no longer this question of…how to handle it,” said Rob Hunt, a general partner at cannabis-focused private-equity firm Tuatara Capital.

 

Tuatara Capital

Rob Hunt.

But the risks to current business are substantial, experts say. “The entire medical market as we know it today could go away very quickly,” said Hunt.

The DEA treats marijuana as a Schedule I substance, marking it as unsuitable for legal medical use and having a high potential for abuse. Heroin and LSD have the same designation. But the Justice Department has essentially left states to manage marijuana enforcement, and 25 have legalized it for medical use. (Four, plus the District of Columbia, have approved it for recreational use.)

Market watchers have eagerly awaited the DEA’s decision. In April, the DEA said in a letter to Congress that it would decide whether to reclassify cannabis — to Schedule II, which concedes pharmaceutical uses, to even less restrictive categories — in the first half of 2016. (They could also remove it from the list of controlled substances entirely, or do nothing.) While that has passed, an agency spokesman told MarketWatch a decision could happen soon.

Most in the legal cannabis industry think a move to Schedule II is possible. A range of organizations and political figures have called for a change: The American Academy of Pediatrics, for example, advocates for a move to Schedule II to aid research into its use in treating children, according to Seth Ammerman, a member of the AAP Committee on Substance Abuse and a clinical professor of pediatrics at Stanford University.

The issue has also been raised during the presidential campaign. Democratic presidential candidate Hillary Clinton said in November that she supported moving it to Schedule II, and presumptive Republican nominee Donald Trump said in a February interview that while he was in favor of using cannabis for medical purposes he did not have a specific policy stance on legalization.

A move to Schedule I to would likely encourage pharmaceutical companies to invest in the cannabis industry, experts say, which could lead to products being available at neighborhood pharmacies rather than the dispensaries that generally distribute them today in states where they are legal.

“Schedule II substances are typically handled through pharma,” says Brett Roper, chief operating officer at Denver-based dispensary Medicine Man. “If they deploy a strict Schedule II element, typically Walgreens WBA, -0.26%  and CVS CVS, -0.89%  or another pharmacy…are going to be the places you have to buy your cannabis.”

Some worry that doing so could dismantle an industry that has been functioning since California legalized medical cannabis in 1996.

“You’d wipe out how many dollars worth of infrastructure, how many tens of thousands, hundreds of thousands of jobs, and you’d put it squarely in the hands of big pharma,” Roper says.

But others expect that if cannabis is rescheduled, businesses in states where it is already legal will be allowed to continue operations without rerouting them through pharmacies.

Either way, the pharmaceutical industry would likely have significant opportunities to develop new treatments — and to profit. Larger companies with locations in multiple states could begin clinical trials on drugs based on cannabinoids, the chemical components that make up the marijuana plant.

THC produces psychoactive effects, which some contend is useful for appetite control and as a sleep aid, while cannabidiol is typically used to treat pain and other symptoms.

Pharmaceutical companies could start developing cannabinoid-based drugs for multiple sclerosis, Parkinson’s, and “ailments that actually cause real issues that are identifiable to people,” Hunt says. “That will only happen in the pharmaceutical industry.”

The pharmaceutical industry group Pharmaceutical Research and Manufacturers of America did not respond to a request for comment in time for publication. Several large drug manufacturers also did not respond to requests for comment.

Some companies, meanwhile, have been legally developing cannabis-based drugs through careful coordination with federal authorities. Those companies are watching the DEA to see if a change in the designation for cannabis might mean larger firms would seek to partner with or even acquire them.

 

AFP/Getty Images

The seal of the Drug Enforcement Administration.

Doylestown, Penn.-based pharmaceutical company KannaLife Sciences is developing cannabis-based products by licensing a patent, held by the National Institutes of Health, that allows the development of drugs that use cannabinoids as antioxidants and in the treatment of neurodegenerative diseases.

It is working on a treatment for hepatic encephalopathy (HE), a neurological syndrome associated with liver disease, and chronic traumatic encephalopathy, which results from repetitive brain trauma and causes memory loss, confusion, aggression, depression and dementia.

Other companies have developed cannabis-based treatments by working directly with the DEA, which requires intensive — and expensive — oversight of the testing and development process. Marinol, a drug developed by AbbVie Inc. ABBV, +1.76% using that process, is already available.

A treatment for weight loss and nausea in AIDS and chemotherapy patients, it contains synthetic THC.

And London-based GW Pharmaceuticals GWPH, +1.88% has come close to completing the FDA approval process for a CBD-derived drug after reporting positive results for a Phase 3 trial on Monday. Its drug, Epidiolex, was developed to treat Lennox Gastaut syndrome, a rare form of childhood epilepsy.

“We’ve been able to navigate very well around challenging restrictions in terms of evaluating a Schedule I product,” says Stephen Schulz, vice president of investor relations at GW. “But it’s onerous and it’s cumbersome.”

Schulz declined to say whether he thought an ease in research restrictions would attract larger pharmaceutical companies to the business. But “It’s a very attractive space,” he said.