Cannabis’s move to Schedule III of the federal Controlled Substances Act marks a turning point for pharmaceutical companies’ investment in cannabis drug development by removing most of the barriers to entry that deterred them from cannabis under Schedule I and unlocking a lucrative new federal market for cannabis-based prescription drugs.
The Drug Enforcement Administration’s proposal to move cannabis to Schedule III should be finalized in early 2025, assuming there are no election-related setbacks in November. After it’s rescheduled, the Food and Drug Administration (FDA) can start approving cannabis-based drugs for sale at regular pharmacies, which unlocks a $2 trillion market for prescription drugs and a critical financial incentive for pharmaceutical companies that were absent under Schedule I.
The legal cannabis industry that currently operates at the state level, which will still be federally illegal under Schedule III, won’t enjoy the same new freedoms as national pharmaceutical companies that are already federally compliant. They lack the capital, clinical trial experience, and ability to comply with the federal laws required for FDA approval. This new regulatory landscape leaves pharmaceutical companies to dominate the new federally regulated market without competition from the $44 billion legal cannabis industry currently regulated by the states.
Pharma’s awareness of this opportunity and growing interest in cannabis drug development are supported by a sharp uptick in patents issued for cannabis-related drugs since 2016, with about 70% of all patents having been published in the last five years alone. After rescheduling is finalized, holders of these patents for cannabis-based medical preparations (represented by International Patent Classification (IPC) code A61K) can start developing the drugs for sale in the federally regulated market.
Better yet for pharmaceutical companies, most of the legal and financial obstacles to developing these patented cannabis drugs that exist under Schedule I will be eliminated under Schedule III. The biggest challenge left for drug developers to overcome will be the “whole-plant” problem—the fact that even Schedule III regulations are too strict for the cannabis plant to qualify for FDA approval.
Schedule III’s Strictness Is Pharma’s Advantage
Schedule III regulations require strict standardization and uniformity in prescription drug dosing to receive FDA approval for medical use. The cannabis plant, which has thousands of strains that vary in potency and effects, is unable to meet that criterion, according to cannabis law experts who would prefer that cannabis be removed from the CSA altogether—outside of the FDA’s purview.
While this is bad news for state-level cannabis companies that aren’t equipped to overcome the FDA’s “whole-plant” restrictions, it gives the pharmaceutical industry a significant edge in the federally regulated market under Schedule III. Unlike state-legal cannabis companies, pharma companies have the resources needed to extract, isolate, and purify individual cannabinoids from the cannabis plant.
This type of cannabis drug formulation enabled Jazz Pharmaceuticals to secure the first and only FDA approval for Epidiolex, the only cannabis-based drug to receive FDA approval under far stricter Schedule I regulations.
The FDA approved Epidiolex to treat rare types of seizures in 2018 without having to approve the whole cannabis plant because its manufacturers extracted and purified CBD from hemp, a low-THC cannabis variety legalized in the U.S. that same year. Restricting their use of the cannabis plant to one isolated cannabinoid allowed Jazz Pharmaceuticals to work around the “whole-plant” problem, requiring approval only for the isolated cannabinoid included in their formulation.
Sativex, a similarly formulated drug, is currently undergoing at least nine industry-sponsored clinical trials in the U.S. but cannot receive FDA approval due to its THC content, which remains a Schedule I substance. After cannabis is rescheduled and THC is legalized in FDA-approved prescription drugs, manufacturers can use Jazz Pharmaceuticals’ extract-and-isolate method to replicate their success with THC and the 80 to 100 other cannabinoids that have unique medicinal benefits.
Patented Solutions to the ‘Whole-Plant’ Problem
Pharmaceutical companies’ intention to circumvent the “whole-plant” problem with cannabinoid synthesis and extraction is evident by their patented solutions to the “whole-plant” problem, which make up two of the seven most commonly issued cannabis-related patent codes in the U.S. since 2004, according to a Bloomberg Law search of global patent records.
Two of the top seven IPCs for cannabis-related patents, C07D and B01D, cover different methods of extracting cannabinoids from the plant or synthesizing them in a lab. Patent holders can use these techniques to achieve FDA approval for cannabis-related medical preparations, which are included in almost the largest amount of patents issued since 2004.
Cannabis Industry Braces for Big Pharma
The strictness of Schedule III drug regulations, paired with pharmaceutical companies’ ability to overcome the “whole-plant” problem, is raising legitimate concerns within the state-legal cannabis industry that they could be priced out of the federal medical cannabis market.
For the cannabis industry, the most significant benefit of moving cannabis to Schedule III is relief from Section 280E of the Internal Revenue Code, which prohibits federal tax deductions for expenses related to Schedule I substances. However, even without having to comply with Section 280E, most cannabis companies still can’t afford the estimated $800 million-plus cost of obtaining FDA approval for a new prescription drug. In contrast, pharmaceutical companies, freed from the financial burden of Section 280E, can sponsor clinical trials with far less financial risk than they would under Schedule I.
Most importantly, state-legal cannabis companies generally lack the scientific expertise and clinical trial experience to meet the FDA’s strict standards for Schedule III prescription drugs—whereas, for pharmaceutical companies that are used to working in a Schedule III environment, these regulations are familiar territory.
Under Schedule III regulations, pharmaceutical companies can draw from their financial resources, leverage their clinical trial experience, and follow Jazz Pharmaceuticals’ extract-and-isolate strategy to overcome the “whole-plant” challenge with relative ease. Once rescheduling is finalized, they will be well-positioned to dominate the federally regulated market for cannabis-based prescription drugs, and with little competition from those operating at the state level.
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To contact the reporter on this story: Meghan Thompson at mthompson@bloombergindustry.com
To contact the editor responsible for this story: Robert Combs at rcombs@bloomberglaw.com
To contact the reporter on this story: Meghan Thompson at mthompson@bloombergindustry.com
To contact the editor responsible for this story: Robert Combs at rcombs@bloomberglaw.com