HHS’s New Cannabis Proposal: What Rescheduling Means for the Industry

NOTE: I use the term ‘marijuana’ to align with its current legal definition in the US, but I acknowledge and recognize its historical racial implications and the ways it has been used to perpetuate harmful social constructs.

On August 29th, 2023, the US Department of Health and Human Services (HHS) marked a pivotal turn in the war on drugs (this book provides historical context) by recommending the
transition of marijuana from Schedule I to Schedule III. This determination by HHS, a department that oversees products that account for 20 cents of every dollar spent by the
average consumer, means they finally acknowledge that marijuana has scientific and medical uses.

While this development is encouraging (and yes, it is cause for celebration), it’s essential to understand its implications and recognize our work is not done yet. Does this signal the end of the cannabis industry as we know it? Will big pharma come in and dominate the market? Does this mean there is no hope for descheduling in the future? What about decriminalization, social equity, and reparative justice?

What This Recommendation Does Not Mean

HHS’s recommendation doesn’t automatically change marijuana’s schedule classification. It’s a proposition to the DEA, following a protocol defined in 21 U.S.C. 811. For a detailed analysis of this administrative process, I recommend reading Part 2 of Shane Pennington’s overview of Biden’s scheduling directive.

The DEA is bound to use HHS’s evaluation and recommendation on scientific and medical issues. But will the non-scientific and non-medical aspects of the 8-factor evaluation influence the DEA’s decision in a way that they decide against the HHS’s recommendation to move marijuana to a Schedule III classification?

  • Even if marijuana achieves Schedule III status, several challenges remain:
    It won’t address regulation of the adult-use cannabis sector in 23 states and the District
    of Columbia.
  • Interstate commerce of state marijuana products won’t be enabled.
  • While the IRS 280E tax provision would no longer apply, banking and capital access for
    state-licensed operators won’t change.
  • Those in prison for marijuana-related charges will not be released, criminal records will
    not be expunged, and the draconian penalties for possession and distribution will not
    magically disappear.

Big Pharma’s Entry

Concerns about big pharmaceutical companies taking control over the cannabis industry are
valid but may underestimate the current industry’s resilience. Big pharma entering the
marketplace, as it did when Epidiolex was approved in 2018, and other industries also joining in doesn’t necessarily mean all cannabis players will soon be sidelined.

Major pharmaceutical companies, and more broadly, entities in the consumer goods, tobacco, and alcohol sectors, are not newcomers to the cannabis industry. Given their nature as successful for-profit enterprises, these major players are already tuned into the potential $3B shift in their revenue due to the rise of the cannabis sector, and they’ve been strategizing in anticipation.

  • Pfizer acquired Arena Pharmaceuticals in 2021, the developer of a cannabinoid-based
    bowel disease treatment drug in a $6.7B all-cash deal.
  • Philip Morris announced the acquisition of two cannabis-forward companies, Vectura in
    2021 for $1.4B, and Israeli device manufacturer Syque this year for up to $1B.
  • Wine and Spirits Wholesalers of America has come out publicly in support of federal cannabis regulation.
  • Brands that were once exclusively cannabis like Tilray have divested into the beer
    industry, establishing a solid presence in marketplaces they hadn’t ventured into before.
  • Constellation Brands, an American producer and marketer of beer, wine, and spirits,
    invested over $3B in Canopy Growth in 2018, and now has Canopy USA with assets like Wana Brands, Jetty, and other premier cannabinoid product brands.

These business deals have caused small and medium-sized cannabis businesses struggling to survive to worry in an everchanging regulatory landscape. However, instead of asking how we can prevent more big businesses from dominating the cannabis industry, producers of cannabinoid-containing products should be strategizing on how to align with consumer demands and federal regulatory quality and safety frameworks. If marijuana becomes a Schedule III substance, state-legal cannabis companies will no longer have to pay an effective 70% tax rate, double that of businesses in other industries, due to the IRS 280E tax provision. With that extra cash flow, investing in higher quality and safety standards doesn’t seem as far out of reach.

Schedule III: A Prescription Drug Model?

The DEA classifies Schedule III substances as those with a low to moderate risk of physical and psychological dependence. Key requirements for these substances include:

  • Only DEA-registered healthcare providers can prescribe them.
  • Prescriptions must not exceed a 30-day supply.
  • They can be refilled a maximum of five times in six months before needing a new

Historically, Schedule III drugs also undergo strict pharmaceutical manufacturing guidelines.
They must follow current Good Manufacturing Practices (cGMP) outlined in 21 CFR 210 and 211. These regulations mandate stringent specifications for their identity, purity, strength, and composition, typically detailed in monographs.

If marijuana is rescheduled to Schedule III, some might worry about a rigid pharmaceutical
model that is unattainable for the current industry. In fact, some studies estimate that it costs roughly $161 million to $2 billion to bring an approved drug to market.

However, this concern overlooks the fact that Schedule I substances are not exempt from the Federal Food, Drug and Cosmetic Act (FDC&A). Shane Pennington said in his article about Biden’s announcement, “the FDC&A “applies to non-controlled substances just as surely as it applies to controlled substances. The real question is whether and to what extent federal enforcement would increase as a result of [this rescheduling recommendation].”

So, even though the FDC&A currently applies to marijuana as it is controlled in the most restrictive schedule, the FDA has not been involved in regulating state-legalized marijuana
markets. They also haven’t hinted in the slightest that marijuana possibly being moved to Schedule III would mean clinical trials and pre-market product approvals. Rather, they have shown flexibility, expressing willingness to adapt regulations and guidelines that better suit the marketplace realities, benefits, and risks of cannabinoid-containing products. This suggests that the cannabis industry wouldn’t suddenly enter a pharmaceutical model and there is still time for stakeholders to have an opportunity to shape the future of better regulatory framework.

A Call to Innovate and Collaborate

Consider the transformative potential this recommendation offers the industry. Can we modify traditional clinical trials to better investigate and represent the multifaceted nature of cannabis products? Might we reshape cGMP standards to maintain quality and safety without placing undue financial burden on smaller producers? Can elements of the FDA’s Botanical Drug Development Guidance, alongside their new document on employing voluntary consensus standards, be used to provide clearer guidance and stability?

As the Vice-Chair of ASTM International’s Committee on Cannabis, I can attest that answering these questions is not just possible, but necessary for our collective future. By studying frameworks from places like Canada (“Good Production Practices” regulations), and involving regulators, stakeholders and standardization bodies (see the work of the Cannabis Regulators Association, known as CANN-RA), a balance between industry growth and public health can be achieved.

The HHS’s recommendation presents a golden opportunity to shape the future of the cannabis industry together. It’s an invitation for stakeholders to find common ground and
advise on a framework that recognizes the plant’s potential while ensuring consumer health and safety and mitigating risks. To take a deeper dive read more here.