Cannabis has been recognized as less dangerous in the US. Why did the shares of companies related to it fall?

Shares of cannabis-related companies fell April 23 after Acting U.S. Attorney General Todd Blanch ordered that marijuana-based medical products be reclassified and categorized as less dangerous substances in the States, MarketWatch writes. The decision has caused both approval and confusion among industry participants, the publication notes.

Shares of Canadian cannabis producer Tilray Brands are down 11.8% on Thursday, April 23. At the premarket on April 24, they added 0.5%. Shares of its rival Canopy Growth were down 11.6% at the end of the April 23 session. They are up 1.6% at the April 24 premarket. The largest exchange-traded fund tracking the industry, the AdvisorShares Pure US Cannabis ETF, collapsed 17.42% on the day. At the premarket on April 24, it's a plus 0.94%.

An order from the U.S. Department of Justice and the Drug Enforcement Administration (DEA) immediately moves cannabis-based medical products into a less strict category - the so-called Schedule III in the U.S. substance control system, MarketWatch writes. The same category includes, for example, ketamine and painkillers with codeine. Previously, cannabis belonged to the most stringent category - Schedule I, which includes heroin and LSD, the publication explains.

Separate hearings on the broader reclassification of cannabis will begin June 29.

Blanche said in a publication in X that the reform will deepen research into the safety and medical use of cannabis, as well as increase patient access to treatment. The industry has long pushed for such changes, which followed U.S. President Donald Trump's December executive order to reclassify it, MarketWatch notes.

The implications of a decision that relaxes regulation for only a portion of cannabis products and applications could lead to supply chain disruptions, some industry participants said. "This approach helps [the market] overall, but without additional clarification from regulators, operational complexity increases across the supply chain," observed Mike Feldman, general counsel for cannabis distributor Nabis.

According to him, producers will not understand whether their products end up in the hands of patients for medical reasons (prescription) or customers purchasing cannabis for personal, non-medical use. Distributors, for their part, have yet to receive guidance on how to account for such differences in operations.

"Until such clarifications are in place, market participants will have to make informed decisions without a clear regulatory framework," Feldman added.

Industry representatives emphasized the significance of Todd Blanch's decision, calling it the biggest reform of cannabis regulation at the federal level in decades. At the same time, they noted that the measure does not provide for legalization of recreational use in the U.S. and does not address issues such as access to banking services for marijuana-related businesses and early convictions of people for cannabis transactions, MarketWatch reports.

FundCanna CEO Adam Stettner, whose company lends to industry participants, pointed out the details of the order. According to him, medical operators may benefit from clearer regulation at the federal level, while businesses focused on the non-medical segment are still subject to the previous strict control regime (Schedule I) with all the associated restrictions.

The wording of the current executive order to regulate the medical cannabis market and its limited scope likely increased confusion on the path to legalization and consequently led to a sell-off in cannabis companies' shares on Thursday, April 23, according to Alliance Global Partners analyst Aaron Gray.

"Given the current shift of the medical and recreational segments in the markets of states where cannabis is legalized, it will be difficult to treat them differently. In addition, classification under the Controlled Substances Act [in the U.S.] traditionally refers to the substance itself or its form, not the route of administration," Gray noted.

He added that while "the combined effect of 'selling [securities] on the news' and the uncertainty surrounding [cannabis] reclassification may be having a negative impact on the stock," Alliance Global Partners sees the current situation as "an opportunity [to buy the stock] given the companies' improved cash flows and continued potential for further reforms following the [reclassification] news."

So far, the industry still faces serious obstacles that private investors should keep in mind before investing in the shares of cannabis companies, said Gerald Pascarelli, an analyst at investment firm Needham & Company. His opinion is cited by CNBC. "It's important to realize that this industry still has enough problems. For most investors, the dynamics of the stock in the short term will largely depend on the sentiment around regulatory reforms - optimism or, conversely, pessimism, "- he said.

He said that the sector should be viewed in the long term, as it would mature over time and there would be winners and losers. In the short term, he said cannabis-related stocks will remain volatile as long as regulatory uncertainty remains. "This is an investment with a long-term horizon," he said, adding that in this area, "fundamentals are not going to change overnight." "It will take time," the expert stated.

This article was AI-translated and verified by a human editor