The Biden administration confirmed on Thursday it is moving to reschedule marijuana as a lower-risk drug in the US and agency memos in favor of the move indicate that the drug could be reclassified before the election in November, Bank of America analysts believe.
The proposal would reclassify cannabis as a Schedule III drug from the stricter Schedule I where it currently sits alongside heroin, opening up opportunities for cannabis research and removing a significant tax burden for cannabis operators, among other benefits.
Bank of America analysts highlighted that the Biden administration’s announcement notably came with a memo from the Office of Legal Counsel (OLC) that supports the legal case for the move.
“The biggest potential hurdle to cannabis being rescheduled, in our view, is possible legal challenges. This is why the OLC memo could prove very important,” they wrote.
The 35-page memo lays out why the move should be implemented and, within this, outlines rebuttals to the main likely legal challenges it may face, the analysts pointed out.
“This, in our view, alongside the 252-page FDA/HHS review that outlined the case from a science perspective, should make it very difficult for this to be overturned in the courts,” they wrote.
“Further, we believe the fact these memos are already in place, with supported reasoning, it should make the timeline to final rule much quicker, such that we could likely see this finalized before the November election.”
The analysts also believe a major upside from rescheduling of the drug is a potential route to uplistings for US cannabis companies.
“In addition to rescheduling providing a major cashflow boost to US operators, as it will mean they pay a normal effective corporation tax rate versus the 80%-plus they pay today, the real watch, with regard to valuations at least, is if it leads to uplistings and/or greater institutional ownership,” they wrote.
They believe the major reason current multiples are depressed is a lack of institutional ownership from a combination of major exchanges not willing to list the stocks due to its current drug classification and federal illegality and/or institutions not being able to invest due to not being on a major exchange or compliance and legal concerns arising from the drug’s current classification and federal illegality.
“Whether Schedule III alone is enough for major exchanges to allow listing remains to be seen, but we think prospects are much improved if we see Schedule III and other incremental reform such as SAFE Banking, and potentially a new Cole Memo,” they wrote.
“Even if still not enough for an exchange like NASDAQ, we think it will almost certainly be for an exchange like the TSX, which is already allowing listing of US cannabis names with certain business restructuring.”