Why Recreational Marijuana May Not Benefit Cannabis Businesses Until DEA Rescheduling
Will passage of Proposition 64 help marijuana businesses, or will they still be roadblocked by the federal government?
Timothy Norris/L.A. Weekly
This November, California voters are expected to pass Proposition 64, the Adult Use of Marijuana Act, which will effectively make recreational pot use legal in the state. The policy shift could spawn a large and emergent market for marijuana tourism — a prospect that looks attractive to many, particularly given the state’s ongoing budgetary crises. While visions of sativa wine tasting and THC surf lessons may float through entrepreneurs' heads, some cannabis businesses in the Los Angeles area say they will be largely unaffected by the legalization of recreational marijuana. According to these business owners, economic growth and meaningful development will be largely inhibited so long as the federal Drug Enforcement Administration continues to categorize cannabis as Schedule I.
Heroin, LSD and ecstasy are the drugs with which a cannabis shares its Schedule I classification. Drugs in this category have been deemed to be “highly addictive” and of “no currently accepted medical use.” Recently, there were rumors within the cannabis community that the DEA may be poised to reschedule cannabis to a less severe status this summer. These rumors were effectively squashed yesterday, when DEA chief Chuck Rosenberg officially announced that the agency would indeed keep cannabis at its current classification, citing as the reason for his decision the fact that the FDA had not deemed marijuana as "safe and effective medicine."
Seth Yakatan is a Manhattan Beach–based pharmaceutical biotechnologist whose academic work in proving the medical benefit of cannabis is being hampered by roadblocks set forth by the DEA. Yakatan is CEO of Kalytera Therapeutics, a biotech company that's developing synthetic versions of the CBD molecule to be used as treatment for bone issues like osteoporosis. “The plant is a really mysterious and wonderful thing,” Yakatan says. “What we’re seeing is kind of an incredible amount of general medicinal value.” Unlike existing osteoporosis drugs, the CBD-based molecules that Kalytera is developing do not only stop bone loss; they also appear to promote new bone growth, without being toxic to the body, regardless of dose. Because Kalytera’s molecule is a synthetic version of CBD, there is nothing federally illegal about it. The company is in the process of obtaining FDA approval and likely will begin trials on humans in the middle of 2017.
While the drugs Kalytera is developing are not subject to federal bans on cannabis, Yakatan believes that Schedule I categorization is severely inhibiting the growth of cannabis within the pharmaceutical sector because the academic community has almost no ability to research what he believes is a potentially highly beneficial and largely misunderstood plant. “It’s impacting the whole industry,” says Yakatan, “the fact that you do not have the financial resources of the leading academic research institutions in the world — many of which are in the United States.”
According to Yakatan, however, the medical field’s current understanding of the plant is something akin to the industry’s grasp on cancer in the 1950s. “We’re really in the Dark Ages in terms of our knowledge of the plant,” he says. “If cannabis becomes legalized and rescheduled, what you’ll see is a lot of academic research dollars flow into a scientifically controlled study and analysis of (cannabis).”
Cannabis-based pharmaceuticals differ from the products currently sold in dispensaries because they have been developed and refined in a specific way. Yakatan likened this distinction to taking a capsule of Bayer aspirin versus licking the bark of a willow tree. There appears to be both promise and tremendous room for financial growth around the pharmacology of cannabis. In March, the British biotech company GW Pharmaceuticals, which is developing cannabinoid-based products for the treatment of multiple sclerosis, saw its stock more than double.
In addition to impairing the development of possible pharmacological uses of cannabis, Schedule I classification is greatly impeding the potential for business and tax revenue within California, says Aaron Herzberg, a partner at CalCann, a firm that invests in municipally licensed cannabis properties. This is primarily because per federal tax code 280 E, as long as cannabis is a Schedule I drug, business owners cannot write off any of their operating expenses except for the cost of the actual marijuana. “If you were to follow 280 E religiously, ostensibly the tax burden is as high as 70 to 75 percent,” says Herzberg.
According to Herzberg, steep tax burdens are one reason many cannabis businesses within California operate unlicensed as cash-only establishments, a situation that has created a “gray market” within the state. Billions of revenue, then, says Herzberg, which could fulfill cannabis’ promise of helping to aid the state’s faltering economy, are instead being funneled into this illicit market. Legalization of recreational cannabis is unlikely to have any real effect on legitimate small business owners’ ability to turn a profit, says Herzberg, until the plant is scheduled at III or higher, at which point purveyors would no longer be subject to code 280 E.
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“I’m not optimistic that marijuana is going to save the state’s economy or anything like that,” says Herzberg. Nor does he think “anyone in their right mind” would assume the DEA will be rescheduling cannabis to III or higher anytime soon. “When I tell people I’m in marijuana, they say, ‘That must be lucrative.’ I say, ‘Maybe it will be someday, but it’s kind of a challenge right now, we’re at a crossroads.’ I think we’re one of the fastest-growing industries in the country right now, but there’s also a lot of risk.”
Still, the potential passage of AUMA has led to a boon in investment interest, says Herzberg, “Before, people perceived California marijuana as being very unregulated, a very Wild West situation. Now that regulations are being passed, and there’s a ballot initiative in November, there’s starting to be a frenzy.”
Herzberg warns his investors, though, who buy in at the multimillion-dollar level, and who also often sink funds into fields like tech, that cannabis is not for those looking to turn a quick profit. “You have to be very cautious. It’s not for every mom and pop to invest in. … You have to be prepared to make a long-term investment,” he says.
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