HHS Recommends Cannabis Move From Schedule 1 to Schedule 3, the Result Will Impact Opportunities for Drug Research

Pharmacy Times interviewed Kris Krane, the director of cannabis development for KCSA Strategic Communications, and former President of 4Front Ventures, discusses the recent HHS letter to the DEA making a formal recommendation that cannabis be moved from Schedule 1 of the Controlled Substances Act into Schedule 3. Krane discusses the likelihood of the DEA making this update and the potential roadblocks that may be ahead.

Pharmacy Times: What have been the recent updates around rescheduling cannabis to a lower-risk category, and what is that lower-risk category expected to be at this time?

Kris Krane: At this stage, the HHS has made a formal recommendation that cannabis be moved from Schedule 1 of the Controlled Substances Act into Schedule 3 of the Controlled Substances Act, so that is a less restrictive class. The main difference there is that Schedule 1 substances are recognized as substances that have a high potential for abuse and no recognized medicinal value. Schedule 3 recognizes the medicinal value of the substances, recognizes that it has a low potential for abuse, and would allow it to be more easily—in theory—prescribed, or at least more easily researched, for the creation of prescription medications. It is also going to have a real-world impact on existing state legal cannabis businesses, both medical and adult use businesses. In particular, it would eliminate the 280E provision of the IRS tax code in terms of no longer applying to state-licensed cannabis businesses, which is right now the biggest drain on the bottom line for these businesses.

Pharmacy Times: What are other substances currently scheduled for Schedule 3—would ketamine be an example?

Krane: Ketamine, codeine, and vicodin, I believe, is Schedule 3. A lot of the weaker opiates, for example, have fallen to Schedule 3. It's quite a robust category, a lot of drugs fall into Schedule 3.

Pharmacy Times: Will there be 1 government agency leading this rescheduling process, or would it be a multi-agency endeavor?

Krane: This will be a multi-agency endeavor. So, it'll involve primarily the HHS, the FDA, and the Department of Justice, particularly the Drug Enforcement Agency (DEA).

Pharmacy Times: What will rescheduling cannabis mean for small business owners and larger businesses working in the cannabis industry across the country?

Krane: Some of this is still to be determined. The interesting part of this is right now, all these state licensed businesses are illegal under federal law. Changing this from Schedule 1 to Schedule 3 doesn't change that, these businesses will continue to be illegal under federal law. None of these businesses will be distributing Schedule 3 substances with a DEA license, and essentially dispensing prescribed medication which is typically what happens with the Schedule 3. However, 1 of the biggest problems in the cannabis industry and cannabis businesses right now is the 280 E provision of the IRS tax code, which says that if you're deriving your income from the sale of an illegal product, that you are not allowed to claim any standard business deductions—other than your cost of goods sold—that any other business owner is allowed to claim. That bumps the tax rate for these cannabis businesses up to a much higher tax rate to the point where it essentially makes it nearly impossible for cannabis businesses to turn a profit. 280E only applies to Schedule 1 and 2 substances, so moving it to Schedule 3 eliminates that 280E tax provision from applying to state-licensed cannabis businesses, which is a really big deal. That will allow these businesses to have higher margins, it'll allow them to actually turn profits, it will likely allow them to take on lending that's currently unavailable to them, in part because lenders are hesitant to lend to cannabis businesses because they don't have the free cash flow to service the debt and pay back the loan because of 280E. So this will free up new cash flow for the businesses, allow them to take on loans—likely lower interest loans that are currently available to the cannabis industry—as more and more open up, and allow businesses to reinvest that new free cash flow into expanding their businesses, into making their businesses better, to put money back into the businesses that's currently not available to them because it's all eaten up by this 280E tax provision.

Pharmacy Times: How might rescheduling impact pharmacy’s ability to potentially dispense cannabis by prescription from a provider?

Krane: As far as the cannabis side of it goes, I think in the short term, it shouldn't really have any impact. In the longer term, there may be a bit of an impact. I think it's extremely unlikely—if not impossible—that cannabis itself, or cannabis flour, or even most cannabis edibles or concentrates…The products that are currently sold in dispensaries, those products are not going to go through a 3-phase clinical trial with the FDA which would allow them to be prescribed by a doctor and then dispensed out of a pharmacy. Pharmacists don't dispense whole plant medicine for basically anything. It's impossible to meet the production standards and the standardization standards that are required to pass 3-phase clinical trials for botanical medicine like cannabis. So, it actually prescribed cannabis buds, but I don't think that's ever going to happen, even though it's moved into Schedule 3. So, in the near-term, I don't expect pharmacies to all of a sudden start dispensing cannabis, or edibles, or concentrates, or all of the products that are sold out of dispensaries today.

Where it may impact pharmacists—and most likely will—is a few years down the road. Moving this to Schedule 3 makes cannabis much easier to research, and so, what this will likely lead to is over the course of the next few years, the research and creation of new cannabinoid-based pharmaceuticals. So actual pharmaceutical drugs, pills, topicals, sublinguals, any number of forms that are cannabis-derived, they're created from cannabinoids extracted from or derived from the cannabis plant, or even potentially synthetics. Right now, as a Schedule 1, that research is very difficult for pharmaceutical companies or researchers to gain access to. As a Schedule 3, that's going to become a lot easier, and so, I think it will lead to the creation of essentially a new category of cannabinoid-derived pharmaceutical drugs. That's likely where you would see an impact on the pharmacies, but that's probably a few years away because it takes years to go through phase 3 trials and get approval from the FDA. But that process is likely going to start pretty quickly after this has moved from Schedule 1 to Schedule 3.

As a Schedule 3, that's going to become a lot easier, and so, I think it will lead to the creation of essentially a new category of cannabinoid-derived pharmaceutical drugs. Image Credit: Adobe Stock - Tsareva.pro

Pharmacy Times: With expected FDA approval of MDMA likely to come in 2024 or 2025, is this rescheduling somewhat preparatory around the likely rescheduling that will occur for other medicines within the psychedelic medicine space, as they come onto the PFD docket for review—likely MDMA first, and then psilocybin following?

Krane: I think one doesn't really have anything to do with the other. This is a different substance that's being moved into Schedule 3. Psilocybin and MDMA—which is probably a year to 2 years away—they've already been going through their clinical trials. I know MDMA is on the back end of their phase 3 trials, so that's a process that's happening on its own track. I don't think 1 really has anything to do with the other.

Pharmacy Times: What have been some of the concerns around rescheduling cannabis outside of concerns around its medicinal value?

Krane: I don't see a whole lot of concern. I think there are some folks that are concerned that it'll make it more widely available, I think those concerns are unfounded. Schedule 3 drugs are still controlled substances, so I don't see any issue there. I think the biggest concern from the cannabis industry's perspective is that this may get the FDA more involved in their day-to-day business, that you might start seeing businesses fined by the FDA for distributing a Schedule 3 substance without a DEA license. I don't think that there's a whole lot to actually be concerned about there, the FDA has that enforcement power currently against these businesses that are that are distributing a Schedule 1 substance without a license to do. I don't think moving into Schedule 3 really changes that. You may see some impact where businesses may be making medical claims about the cannabis and cannabinoids that they're selling, you may see the FDA start coming down on them. But again, they have the ability to do that currently, and they have done that in some cases where companies are making actual medical claims without medical approval from the FDA. But I don't think that we're looking at a situation where the FDA is going to basically fine the industry out of existence because they're now all of a sudden distributing Schedule 3 substances without a DEA license when they haven't done so for them distributing a far more restrictive Schedule 1 substance without a DEA license. But that is the 1 major concern that I've seen out of folks in the industry, that this is going to bring the FDA into their businesses and put more hoops in front of them and potentially enforce these rules and sort of fining them out of existence, but it's not something that—being in the cannabis industry myself—would keep me up at night.

Pharmacy Times: What could block or hinder this rescheduling, and do you see that happening?

Krane: The DEA, that's the concern right now. HHS has made their recommendation, the DEA has to approve it, and start the rescheduling process. The DEA has traditionally not been very friendly to cannabis and to its reform. It's possible that they say no, it's possible that they say, “We looked at the evidence ourselves and we'd rather go to Schedule 2,” which does nothing to help the cannabis industry, 280E stays in place if it goes from [Schedule] 1 to 2. I think there is likely a lot of political pressure on the DEA to accept HHS recommendation. This is something that was called for by the President of the United States. It seems quite likely that the President and his political staff—and probably campaign staff—wants this to happen in advance of the 2024 election. I think they see this as something that could potentially motivate or energize young voters who aren't particularly riled up to vote for an 81-year-old candidate for president. And so, I think there's likely a lot of political pressure on the DEA to accept the HHS’s recommendation, but they don't have to do so. I think if there is 1 roadblock to this happening, that's the most likely.

If the DEA comes out and approves it and says that they will move towards Schedule 3, at that point, I don't see very much that could stop it because at that point, it's an administrative process. It does not need approval of Congress, so you couldn't have a Republican-controlled House kill it, unless they were to pass a bill but even then, it would have to pass through the Democratic-controlled Senate and that would be DOA in the Senate. As long as the DEA says yes, then that's the next step in this process. I don't know if it's in a week, or in a month, or in 4 months…but once the DEA has given the thumbs up if they do, then I think it's really a matter of time and making sure that the administration is able to get through the rescheduling process before the end of next year. I think the only other potential roadblock would be if the DEA drags their feet, they approve it sometime [during] Q2 of next year, and they're not able to get through the full administrative process, because there's the public hearing process, there's a whole process that has to happen before rescheduling happens. If they're not able to get that finished by the end of next year and there's a new presidential administration, if the current president loses and you're at a new Trump administration, or a DeSantis administration, or whatever, they could stop the process and kill it if it hasn't been finalized by that point.

So, I think those are the 2 potential roadblocks or potential areas that it could die. It would be the DEA choosing to ignore HHS’s recommendation, or the process not being finished in time for a new administration who may be more hostile to take over in 2025.

Pharmacy Times: Any closing thoughts?

Krane: Sort of reiterating something I mentioned before, moving cannabis’s classification on the Schedule 3, it really does make it easier for pharmaceutical companies and researchers to create a new classification of cannabinoid-based pharmaceuticals, and I think that's really important. I think there are a number of treatments that that are currently prescribed that may well be replaced over the course of the next 5 to 10 years by cannabinoid-based medication. Potentially, some fairly profound ones, there's some early research that [shows] highly concentrated cannabinoid therapy could wind up being a replacement for something like chemotherapy. For traumatic brain injuries, if administered immediately after an accident, it could be more efficacious than our current treatments for traumatic brain injuries. Right on the spot type of things. There's a whole number of areas that cannabinoids in very early phase trials have shown tremendous potential and that it's been really hard for companies to get the approvals that they need at the federal level, to go through the full clinical trials. Now those roadblocks should largely open up, and I think we are potentially looking at an environment where if we look 10 years down the road, there may be a whole classification of cannabinoid-based pharmaceuticals, some of which can have a really profound impact on patients and effectively replace some of the medications that pharmacists and pharmacies are accustomed to dispensing today.