The Marijuana Industry Pulls Victory From the Jaws of a DEA Defeat

By Markets Fool.com


Image source: Getty Images.

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August began with plenty of promise for the marijuana industry, but those high hopes went up in smoke on Aug. 11, when the U.S. Drug Enforcement Agency released its long-awaited decision on whether it would reclassify marijuana.

The DEA denies the marijuana industry a victory

For months, the marijuana industry, cannabis supporters, and medical patients had hoped that the U.S. regulatory agency, with the recommendation of the Department of Health and Human Services, would reschedule marijuana from its current status of Schedule 1 -- which deems it an illicit drug with no accepted medical use -- to Schedule 2. This would have recognized that cannabis has an accepted medical benefit, and it would have allowed physicians around the country to prescribe medical marijuana to patients with very specific ailments.

However, the decision by the DEA denied the two petitions seeking to reschedule the still-illicit drug. The DEA leaned on three points in its explanation of the decision.

First, the DEA believes marijuana has a high potential for abuse. Both the evaluation from the Department of Health and Human Services and the DEA's own observations appeared to confirm that.

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Second, the DEA pointed out that cannabis has no currently accepted medical use, listing five reasons why that is. Most notably, the drug's chemistry isn't known and reproducible, and there are no well-controlled studies to back up cannabis supporters' claims that it can treat pain, epilepsy, or any other number of ailments.

Finally, the agency believes marijuana lacks an acceptable safety profile. Without any approved cannabis products, the benefits of marijuana don't appear to outweigh its risks.

For these reasons, marijuana will continue to remain a Schedule 1 drug, and approvals at the medical and recreational level will still be conducted at the state level. The ruling took the wind out of the sails of supporters.


Image source: Getty Images.

But the marijuana industry succeeds anyway

However, it's not all bad news for the cannabis industry. The DEA's decision came with one notable caveat that will allow for easier access into medical marijuana research. Currently, the only approved grow farm in the U.S. is in Mississippi. New regulations could open the door for researchers to gain easier access to cannabis for medical research. Presumably, the sooner researchers can present a series of well-controlled studies on cannabis to the Food and Drug Administration and/or the DEA, the better chance they'll have of getting the latter to reclassify marijuana in the future.

Even more recently, on Aug. 16, the Ninth Circuit Court of Appeals ruled in favor of the cannabis industry by protecting legal recreational and medical marijuana users against federal prosecution. In effect, the 3-0 verdict by the federal court prevents the federal government from providing funding for the prosecution of recreational or medical marijuana users in states where recreational or medical marijuana is legal. With nine states set to vote on whether to legalize cannabis this November, millions of Americans could soon be protected from federal prosecution, according to this ruling. It should be noted that the Appeals Court could change its mind at any time. But for the time being, federal prosecutors will have better ways to spend their money than prosecuting consumers who are using marijuana in accordance with their states' laws.

There's also a bright side to the DEA's decision. Had the DEA rescheduled cannabis, the substance could have been exposed to a laundry list of FDA regulations. For example, the FDA could have placed requirements on packaging and marketing, or it could have demanded consistent levels of THC from each crop of marijuana. Even more importantly, FDA oversight may have forced the cannabis industry to run clinical trials in order to demonstrate the efficacy of the drug for treating certain ailments. These added costs could have put smaller players out of business and essentially handed the industry over to bigger businesses. Given less competition and more regulation, legal marijuana prices would likely rise rapidly.

In other words, marijuana's DEA defeat is, in many ways, a victory.


Image source: Getty Images.

The lone loser of the DEA decision

Perhaps the biggest loser here is the individual investor looking to take advantage of the marijuana industry's incredible growth.

According to ArcView Market Research, a cannabis research firm, legal marijuana sales hit $5.4 billion in 2015, and they're slated to grow by roughly 30% per year throughout the remainder of the decade. If this trend were to continue, then legal marijuana sales would total nearly $22 billion by 2020. An investment that could grow at 30% per year for five straight years is a real rarity for stock investors, so you can imagine how closely some investors are watching the marijuana industry. Unfortunately, keeping cannabis as aSchedule 1substance will probably keep big business from gaining substantial market share within the industry. This leaves investors little to no opportunity to profit from the growing legal marijuana market.

Making matters worse for investors is the fact that the vast majority of publicly traded marijuana stocks are penny stocks that trade on over-the-counter exchanges. While reporting standards are improving on the OTC exchanges, it can still be difficult to get accurate financial information on cannabis stocks. Nonetheless, losses remain common among marijuana stocks, and that's all the more reason to watch the advancement of the industry safely from the sidelines.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

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