This FDA Approval Creates a Cannabis Conundrum in the U.S.

The legal marijuana landscape is changing at a rapid pace in North America. Back in 1995, Canada, Mexico, and all U.S. states had completely banned the use of medical and recreational pot. Some 23 years later, Mexico has legalized medical cannabis, 30 U.S. states have passed broad-based medical marijuana laws (including nine that also allow adult-use consumption), and Canada has set a date of Oct. 17, 2018 for when recreational pot will be officially legal. To say that times are changing would be an understatement.

Most are rightly focused on Canada's adult-use legalization, which is the first for any developed country around the globe. With pot being given the green light there, an estimated $5 billion in annual sales could find its way into legal Canadian marijuana channels. This is why Canadian cannabis stock valuations have soared since the beginning of 2016.

While Canada legalizes pot, the U.S. twiddles its thumbs

However, the outlook for the cannabis industry is very different in the United States. Despite 30 states and Washington, D.C., passing medical marijuana legislation, the federal government has stood firm on its classification of cannabis as a Schedule I drug. This classification means that pot is wholly illegal, considered to be prone to abuse, and has no recognized medical benefits.

U.S.-based companies operating in the medical or recreational marijuana space have faced an uphill battle as a result of this classification. Since cannabis is illegal federally, banks have been unwilling to offer basic banking services to marijuana-based businesses. And yes, this includes something as simple as a checking account or line of credit. Without access to banking services, a number of pot businesses are forced to rely on cash, and a few even dabble in volatile cryptocurrencies as an intermediary currency in order to process sales.

Additionally, a three-decade-old tax section known as 280E ensures that profitable pot-based companies get to keep far less of their net income than traditional businesses. Companies that sell a federally illicit substance are disallowed under 280E from taking normal corporate income tax deductions, relegating them to an effective tax rate that can occasionally be as high as 90%!

Of course, keeping cannabis as a Schedule I drug isn't what the American public prefers. In five national polls over the trailing year, support for legalization ranged from 59% to 64%, depending on the survey.

This approval creates quite the cannabis conundrum

Truth be told, there are no shortage of reasons behind Congress' decision to leave marijuana as an illicit drug. Concerns over increased adolescent access if it were legalized, worries about how legalization might impact driving under the influence laws, and mixed clinical data are all commonly cited factors that keep the cannabis industry's ceiling low in the United States.

However, recent actions taken by the U.S. Food and Drug Administration (FDA) could create an interesting problem for lawmakers on Capitol Hill.

On Monday, June 25, the FDA announced the approval of GW Pharmaceuticals' (NASDAQ: GWPH) Epidiolex for the treatment of two rare forms of childhood-onset epilepsy, Dravet syndrome and Lennox-Gastaut syndrome. It's the first FDA-approved drug to treat Dravet syndrome, and the first drug the FDA has approved for Lennox-Gastaut syndrome in quite some time. Though peak sales estimates for GW Pharmaceuticals' lead drug vary, some on Wall Street could see it surpassing $1 billion and entering blockbuster territory if its label is expanded down the road.

But it isn't the sales figures for Epidiolex that are likely to turn heads, even if GW Pharmaceuticals' share price has benefited from the extra attention. It's the fact that Epidiolex is the first cannabinoid-derived drug to be approved by the FDA. Put in a different context, there's now a cannabis-based drug that the FDA has confirmed has medical benefits. That puts the FDA's finding in direct conflict with the definition of a Schedule I drug, which is recognized as having no medical benefits.

Mind you, there are certainly differences between the various cannabinoids being discovered and tested in the cannabis plant. Cannabidiol (CBD), which is the non-psychoactive component of the cannabis plant most often associated with medical benefits, is the cannabinoid used in Epidiolex. Since patients taking the oral CBD-based medicine won't be getting high, there's the real possibility that lawmakers in Washington may consider some type of reform or rescheduling for CBD or cannabis as a whole. Of course, it could be difficult to reform marijuana as a whole since it would also include tetrahydrocannabinol (THC), the cannabinoid responsible for the psychoactive effects.

CBD reform is a growing possibility

So what's next following GW Pharmaceuticals' historic approval? For marijuana, in general, probably not a whole lot. As long as Republicans are firmly in control of the legislative branch, there's only a very slim chance of rescheduling or descheduling cannabis. An April 2018 poll from Quinnipiac University found that just 41% of self-identified Republicans favor the idea of legalization, compared to 55% who oppose it. Even with President Trump backing the idea of states' rights with regard to regulating the marijuana industry, there doesn't seem to be any expediency by the current administration to address the issue.

As for CBD, I believe there's a real opportunity for reform in the months that lie ahead. What most folks probably don't realize is that 46 out of 50 states currently allow CBD oils to be used to treat select ailments. This means there are 17 states without broad-based medical marijuana laws on their books that do allow the use of CBD oil for medical purposes. Adjusting how CBD is treated at the federal level shouldn't be difficult given that there are only four dissenting states.

Furthermore, even though the GOP has mixed feelings about marijuana, as a party they're predominantly behind the idea of using medical marijuana as a means to treat patients. That same Quinnipiac University poll from April found that 86% of Republicans were in favor of allowing adults to legally use marijuana for medical purposes, compared to just 12% who opposed the idea. Rescheduling or descheduling CBD would certainly align with Republican views on medical pot.

How will this cannabis conundrum be dealt with in Washington? That's a question that I, and likely millions of Americans, are eager to find out the answer to in the months that lie ahead.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.