Tenacious Report: A Roadmap to Cannabis Regulation
By our Chief Scientific Advisor
Summary
The magnitude of the opportunity within the Cannabis sector is becoming increasingly clear. However while cannabis industry stakeholders are beginning to recognise its potential, inconsistency and geographical differences in current regulation present roadblocks to unlocking it.
Some stakeholders believe the cannabis industry should follow the route of the spirits industry with its combination of ABV and alcohol ‘units’ defining product safety, pricing and taxation. The reality is not so straightforward.
However, despite the limitations of the current cannabis regulation, some stakeholder benefits are being achieved, including a new source of tax revenues for governments. In this essay, we examine such benefits in more detail. We also investigate whether a unit/dose system could work for CBD and THC (different compounds with different activities and very different effects across a myriad of applications) and fully unlock the cannabis market potential for governments, cannabis companies, consumers and investors.
Introduction
Cannabis products are becoming widely available, in particular in the discretionary spend end of the market. This has been in part driven by changes in the regulatory landscape. However, the changes made to date have been based on the existing regulatory frameworks for pharma and food products.
The market estimates for ‘legalised’ cannabis in the US and the EU are around $50bn and $39bn within the next few years, respectively (Visual Capitalist). Current sales are growing rapidly, for example the US hit $17.5bn in 2020 across the 14 states that allow adult use and 36 that allow medical sales. Indeed, California, the largest cannabis economy, saw sales of $3.5bn, growing by over half a billion from 2019 (Forbes).
At the other end of the market are prescription products, regulated very differently and requiring hundreds of millions in investment to generate sufficient data to justify licensing by national and supranational regulators. A small number of products have been approved such as Epidiolex and Sativex, containing just CBD and CBD and THC, respectively.
Why does regulation matter?
This essay will now explore why the mixed and confusing regulatory environment is an issue for stakeholders in the cannabis industry. The relevant stakeholders are governments (and their regulatory bodies), consumers, cannabis companies and investors and each one has a different perspective but centred around an interest in establishing a sustainable market for the development and supply of safe, useful cannabis products within a competitive environment with clear and transparent regulation. It is this last feature that is lacking.
Does alcohol regulation provide a roadmap for evolving cannabis regulation?
The selling of alcohol is regulated using licensing laws. For example, in the UK, an establishment can be licensed to sell alcohol, with restrictions on when, to who – over 18 years of age of course – and where a named individual must have a license to sell the alcohol in establishment.
For taxation, the alcohol industry uses the system of ABV – alcohol by volume. Using the UK as an example, tax is charged depending on the ABV with the higher the ABV, the higher the tax. For example, for beer containing ABV between 2.8 and 7.5%, 19.08p for each 1% of alcohol per litre is levied as a tax – for a pint of beer containing 5% alcohol the tax levy is calculated as 19.08p x 5 = 95.4p/litre equating to about 54p a pint. Wine has a similar approach although spirits have a flat rate of £28.74 of duty per litre of ‘pure’ alcohol. Therefore, for a 1 litre of 40% vodka, a tax levy of £11.50 is made.
The use of a unit was derived for medical reasons and enables the consumer to understand how much alcohol is contained in a drink. One unit equates to 10ml (or 8g) of pure alcohol. Using such a measure, consumers can understand their level of consumption and conform, or not, to recommended guidelines and of course legal limits for driving and related activities.
The benefit of using ABV for taxation is highlighted by UK HMG tax revenues on alcohol of £11.3bn in 2019-20. Interestingly, and perhaps driven by the unusual circumstances of lockdowns, retail spending on alcohol grew 16% in 2020 to £25.5bn (Mintel 2020). Great for tax although of course spending in pubs and associated outlets was down due to lockdown and of course the health consequences remain to be seen. From a US perspective, federal excise tax on alcohol was $10bn in 2019. There are also state taxes on alcohol.
Therefore, the use of ABV for product pricing and taxation, and units for safety are, in combination, a regulatory/guideline framework. Can such an approach be used for cannabis? As referenced at the start of this essay, the forecast ‘legalised’ cannabis US and EU markets are set to approach $100bn within a few years. Couple this to the estimated size of the illegal cannabis market (around $300bn) which if fully ‘legalised’, the potential tax revenues are huge.
It appears that cannabis regulation is beginning to mimic alcohol regulation. Where ABV is used for pricing and taxation, in cannabis regulation a default of <0.2/0.3% THC – essentially a ‘cut-off’ – is used to define ‘discretionary spend’ products. However, given that alcohol is a single compound with known, concentration-dependent effects, the alcohol regulatory framework only provides a starting point, albeit a practical one. The idea that you could increase the THC content similarly to ABV – like the beer to wine to spirits transition – will be difficult for cannabis because of the lack of high-quality data showing the risks of longer-term intake of THC. Critically, the absence of a definition of a ‘dose/unit’ is important. One unit of alcohol (10ml in the UK) can be readily translated to ABV. If 0.2% THC is acceptable in a discretionary spend product, can excessive use cause harm? Can higher amounts of THC be safe? What dose or ‘unit’ of THC is being consumed, or used, and is safe?
How do individual stakeholders stand to benefit?
Governments
The benefits to governments can be categorised in two main areas – taxes and health– and collectively have a significant impact on all areas of society.
Taxes
As an example of how quickly tax revenues can be generated, since the US state of California introduced regulation for cannabis products in 2018 (the ‘Control, Regulate, and Tax Adult Use of Marijuana Act’), over $1.8bn in taxes have been raised. The growth has been rapid as evidenced by the latest figures from the California Department of Tax and Fee Administration (CDTFA) which revealed the state pulled in a total of $306.7 million for Q3 cannabis tax revenue in 2020, coming from an excise tax of $159.8 million, a cultivation tax of $41 million and sales tax of $105.9 million. This compares to just $170.7 million for Q3 2019.
Not only does the amount of tax already levied highlight the potential for longer term revenues with improved regulation, but it is also worth noting that as the cannabis industry develops, this ratio of taxes may have to shift. For example, cultivation might be offshored to cheaper destinations lowering the amount of tax collected from this source.
One of the benefits of the revenues generated from cannabis taxation in California is the investment in a variety of state and local programmes to ensure that research is conducted on the longer-term effects of such products along with the impact on driving and other societal areas such as youth programmes. The changes in regulation mandated that certain amounts of investment have to be made e.g. $10 million per year for 11 years for public California university research.
Other states have followed, including Oregon in 2020 where receipts in the first quarter of the 2021 fiscal year, which began on July 1, were $46.9 million, 45% higher than in the first quarter of the 2020 fiscal year. New York has also now followed.
One obvious statement is that for the many COVID-debt laden governments, new sources of tax revenues are of critical importance.
One of the areas that concerns some groups is that regulation (decriminalisation) would, in the short term, support illicit supply infrastructure. This perception is that illegal supply will abuse the gradual change in regulation whereas if full regulation – alcohol industry-like permits, product regulation and taxation – were implemented quickly, such criminal components would be squeezed out.
Health
The health issues associated with cannabis are well documented and include impairing driving, affecting memory and mental health. According to some reports, long term dependency can be caused with frequent use of THC and, in the young (under 25 years old), brain development can be affected.
Given such issues, use of cannabis might be less popular. Some health agencies e.g. Canadian, provide clear guidance of how to minimise the risks including:
Avoid smoking cannabis and frequent, long term use of any product.
Use in a safe and familiar environment with people known and trusted.
Know the product especially CBD and THC levels where ideally the CBD content is equal to or higher than the THC content.
Avoid mixing products including with other substances such as alcohol.
Avoid cannabis if a person has a history of mental health or related conditions.
Although not an exhaustive list, one can see how an element of common sense is suitable, similarly to alcohol, but also that there is a current limitation on not being able to stipulate the number of cannabis ‘units’ appropriate for daily, weekly or monthly use. Moreover, being unable to stipulate safe CBD or even THC ‘units’ for driving or working is an issue for law enforcement. These are clearly areas that will have to develop to ensure that safety can be regulated with transparent framework.
Another cause of harm for cannabis product users is the presence of poor-quality products in the market through illicit and even some legal supply channels. It is obvious that a regulated product environment with clear, authorised cultivation, manufacture, distribution and commercial channels will significantly reduce the availability of such products. Furthermore, regulation will enable product innovation driving improved products with fewer, clearly understood side effects.
When considering the upside potential of cannabis products in a wellness setting, there are many areas of opportunity. The clinical need in mental health including anxiety and depression, and in insomnia and pain are huge. For example, working days lost due to back pain and mental health issues account for over a third of absences with the latter likely to grow significantly due to lockdowns. Cannabis products have clear potential in each of these areas.
Consumers
Consumer choice in the discretionary spend and wellness parts of the cannabis market is growing quickly with the appearance of products in multiple retail outlets and online channels. However, cannabis component content is often unclear or deliberately vague due to the current regulatory environment or manufacturing challenges, or simply poor-quality products.
The clear advantage of a transparent regulatory system based on actual THC or CBD content, is that consumers can choose products knowing the content, supplier, manufacturer and the tax component of the price.
Cannabis companies
The benefits of transparent regulation for cannabis companies are many. These could include having a simple system of licenses and permits for companies to undertake cultivation, manufacturing, distribution and supply both nationally and internationally. Moreover, clarity on the taxes and other charges levied on cannabis products is critical, However, constantly changing regulation and/or a ‘patchwork quilt’ approach as across US states brings uncertainty and perhaps additional cost in the short term for some companies with products that could fall outside of any new framework or with processes that do not meet any new licensing and regulation requirements.
Given the size of the market, the opportunities though are lucrative for companies with longer term vision and ambition. To have consistent regulation covering cannabis products and their components, including all routes of administration and CBD and THC content definitions, will offer multiple product development areas with lucrative profits.
Investors
The stakeholder that is most in need of a clearer regulatory landscape is investors. Without this group, few if any companies would exist. Depending on the nature of the investor, most will be thinking about the likelihood of a return on investment (RoI). Clearly, there are many considerations for this including market opportunity and size, product development cost and risk, etc. To be able to define the product profile, based mainly on acceptable regulation, will reduce the risk of development as knowing that the regulatory landscape is fixed removes much of the uncertainty for investment and thus being able to determine potential RoI. The current uncertainty and inconsistency introduces risk and ideally the evolution of regulation needs to be accelerated to ensure a clear roadmap for product development and associated investment.
Who should regulate and what are the framework considerations?
One critical question is who should regulate the cannabis industry – should it be existing regulatory bodies such as the FDA or MHRA from the pharmaceutical industry, or the FSA from the foods sector in the UK, or an equivalent body in the US (distinct from the FDA). Perhaps a new body should be created, akin to the Portman Group in the spirits industry?
The merits of pharma-like regulation are clear, with rigorous levels of proof needed for product safety and utility. However, for many cannabis containing products, this is unnecessary, and the starting points are foundational, as is happening in the US where a system of permits for manufacturers (for cultivation) has been developed. Frustratingly for new businesses, the system of permits, licenses and associated fees is a minefield, with different approaches in each state. In addition, some states are changing their approach on a regular basis. Surely, a uniform, transparent, framework would provide a better environment with oversight/governance from a body dedicated to but independent from the cannabis sector.
Would defining a cannabis ‘unit’ help evolve regulation?
Some groups are setting out the scientific arguments that specific doses of THC or CBD can be defined based on clinical effects. One such group has suggested that 5mg THC is a dose at which minimal clinical affects are observed in drug naïve individuals thus providing a maximum amount of this cannabis compound for administration (Freeman et al 2020). Is this a potential ‘unit’? Of course, this is not so simple – what if an individual took 20 x 5mg THC ‘units’ – such an intake may cause serious effects. Intake and effect can also vary by route of administration and individual.
Such difficulty in defining a unit for THC, one of the more pharmacologically active and addictive cannabis components and therefore at higher risk of overdose/side effects, suggests starting with CBD, the less active component. Here, with consideration for the route of administration – inhaled, ingested, topical – definitions of safe and effective doses of CBD can be laid out perhaps resulting in a Cannabidiol by Concentration (CbC) system. Like the ABV approach for alcohol, CbC would be a transparent framework for all stakeholders from which a Cannabidiol Unit (CU) could be derived helping define safe limits for consumption. Consideration would need to be given to the tentative (mainly due to a lack of convincing clinical data) recommendation from the FSA that CBD consumption should be limited to 70 mg/day. Could this be the definition of a unit? This could be the basis for a regulatory framework that is comprehensive and can help unlock the full market potential of cannabis.
What next?
There is clear pressure on government finances. Critically, increased tax revenues may become a key driver of government interest in a (de)regulated cannabis sector. The US is leading the way, as illustrated with the state of California’s approach to regulation albeit still with the uncertainty of federal vs state laws.
However, as can be seen from the political aspects of drug policy, within each country there are different views. The recent exchanges between the UK Prime Minister Boris Johnson and Mayor of London Sadiq Khan illustrate the difference of opinions on how to address ‘legalisation’ and, importantly, who has responsibility for such a process.
The next essay in this series will go deeper into how a regulatory framework will work based on doses/units and link this to all stakeholders and their interests including how new product development can be accelerated by better regulation.
