Companies with cannabis-based drugs eye IPOs, private funding boost after U.S. reclassification

Cannabis seedlings at the new Aurora Cannabis facility in Montreal. THE CANADIAN PRESS/Ryan Remiorz

Companies developing cannabis-based medicines say U.S. moves to loosen restrictions on the drug could unlock private funding and the public markets, providing a lifeline to the struggling cannabis industry.

The U.S. Department of Justice last week rescheduled FDA-approved medicines and state-regulated medical marijuana products, making it easier for companies to bank and receive tax credits and deductions.

Executives of three companies with cannabis medicines in development said the U.S. rescheduling would ease the stigma around marijuana and could lift restrictions among some mainstream investors and financial institutions that have shied away in the past.

Ananda Pharma, which is developing a cannabis-based treatment for endometriosis-related pain, is preparing to raise US$10 million to $20 million in private funding within six months, following the rescheduling.

“We have calls lined up already with a VC investor interested in endometriosis and with a significant U.S.-based family office,” Chief Executive Melissa Sturgess said, referring to venture capital.

The company said it hopes to use the funding to accelerate U.S. regulatory engagement and manufacturing of the CBD drug that does not have the psychoactive compound THC.

Rescheduling to get capital flowing

The government also plans to quickly reclassify marijuana broadly, a potential boon for companies that sell for recreational use and have contended with a weak consumer spending climate and competition from illegal sellers.

“We have heard directly from VCs and other investors that rescheduling will get the capital flowing again,” said Brett Schuman, the San Francisco-based co-chair of the cannabis practice at Goodwin law firm.

IGC Pharma IGC.A is in mid-stage testing of a low-dose THC liquid to treat agitation in patients with Alzheimer’s disease, a market the company has estimated at $1 billion to $10 billion.

IGC CEO Ram Mukunda said uncertainty around timing, along with limited access to banking services, has kept some institutions on the sidelines despite investors expressing interest. The company is weighing raising $50 million toward the end of the year.

Schuman said some banks have covenants in loan and credit agreements that prevent clients from investing in cannabis, with some of these constraints applying only to the drugs that are classified as Schedule I. That U.S. classification, which includes heroin and LSD, is for drugs deemed to have no accepted medical use and high potential for abuse.

The government’s rescheduling moves cannabis to Schedule III, placing it with drugs such as Tylenol with codeine, ketamine, anabolic steroids and testosterone.

Avicanna, which is developing a cannabis drug for rare seizure disorders, sees a path to IPOs on major exchanges.

Avicanna CEO Aras Azadian said the Schedule I designation of marijuana made it “quite difficult” to run U.S.-based studies, pushing the company to conduct much of its early research in Canada.

Even after rescheduling, the challenge of aligning the new federal cannabis policy with varying state regulations leaves uncertainty for companies planning large U.S. investments.

“The major gating factor here has been the fact that there was no federal pathway to enter without a substantial amount of investment or red tape,” said Azadian. Now the company can enter U.S. markets strategically and partner with local companies, he added.

Improving the reputation

BRC Therapeutics CEO George Hodgin said the reclassification has reduced reputational barriers among traditional life sciences investors.

Marijuana is illegal under the U.S. Controlled Substances Act unless used in medicines approved by the Food and Drug Administration. Jazz Pharmaceuticals JAZZ.O, with its epilepsy treatment Epidiolex, is the lone U.S. drugmaker with an approved cannabis-derived therapy.

BRC said the reclassification is already drawing attention to its work, which includes a treatment for aromatase inhibitor-induced arthralgia, a side effect of some breast cancer treatments.

Rescheduling could also lower development costs.

Under Schedule I restrictions, companies faced logistical hurdles sourcing and transporting study drugs, in some cases cultivating hemp to extract small amounts of THC, or running trials outside the United States. Easing those constraints may simplify research and trial design as well as reduce expenses.

“A room full of marijuana plants could generate enough THC for thousands of patients,” IGC’s Mukunda said. The company has had to grow “acres and acres” of the more leniently regulated hemp to achieve the same result, he said.

(Reporting by Christy Santhosh and Puyaan Singh in Bengaluru; Editing by Mrinalika Roy, Caroline Humer and Bill Berkrot)