Anyone familiar with the cannabis industry knows how difficult it is to make money. Things are going to be even worse for people in the state-legal psychedelics industry – much worse. There are a few key reasons for this. I should note that this post is focused on the state-legal psychedelics industry (i.e., service centers) and not the healthcare-focused industry that we see with ketamine and will probably see with psilocybin and MDMA soon. With that in mind, let’s jump in.

First, there are not many places where psychedelics are legal. As of now, only Oregon has a regulated psychedelics industry (psilocybin only), with Colorado‘s program a ways away. That means the market is small. By the time Colorado and other states come online, there very well may be FDA-approved psilocybin and MDMA therapies prescribed for off-label uses– like with ketamine currently. (As an aside, watch our recent blog post on healthcare and the psychedelics industry here.)

Psychedelics will be a very different setup than cannabis. State legal cannabis businesses don’t have to compete with physicians or telehealth companies that can prescribe high-quality cannabis products. While the cannabis market is strained enough from intrastate competition, imagine trying to run a service center when you have to compete not only with other service centers, but also with licensed physicians.

Second, and along the same lines, it doesn’t take a lot of imagination to see that physicians and drug companies may lobby the feds to actually interfere with psychedelics much more than they interfere with cannabis. Since we don’t have any kind of psychedelics Cole Memo, and since there will be vested interests that oppose state-legal programs, it seems more likely that the federal government will take a harder stance.

Third, the only state-sanctioned model for psychedelics to date is the service center model. (Yes, I know Colorado may allow take-home use, but that’s farther out.) In the service center model, people come to a facility for various preparation, administration, and integration sessions. This takes a lot of time and supervision! It is much more costly than simply selling cannabis that someone can use at home or elsewhere. This means that it is incredibly expensive and will lock out huge swaths of the population. Maybe this is why we’re seeing much less interest in psilocybin licensing than many had expected.

Fourth, the fact that service centers will be so labor-intensive means that they will have very little that is deductible under section 280E of the Internal Revenue Code, which only allows traffickers of schedule I drugs to deduct costs of goods sold. As my colleague, Vince Sliwoski, explained: “Psilocybin manufacturers and service centers will both feel the bite of § 280E. Of the two, service centers will have it worse because they won’t be able to categorize much as “cost of goods sold” (COGS)– aside from direct wholesale inventory costs.” This means that what margins service centers have will be even more razor thin than cannabis businesses.

Fifth, another outcome of the high cost of the service center model is that people will inevitably turn to the illicit market or to other “gray” legal areas. The illegal market has long been a plague for cannabis (most recently in New York). There are also many businesses selling spore kits, themselves in a legal gray area in many states, but that would be illegal if used to cultivate psilocybin. Illegal cannabis tends to cost less than legal cannabis, but illegal psychedelics will likely be thousands of dollars less than service center sessions. This virtually guarantees a massive illegal market.

Sixth, there is a massive spike in religious use of psychedelics. While I don’t have hard data to back this up, it seems very clear that religious use of psychedelics far outpaces religious use of cannabis. Even in contexts where people may use cannabis for religious purposes, there are easy ways to legally acquire or grow it under the laws of most states, which just isn’t true for psychedelics. So service centers will also need to be limited in scope due to people consuming psychedelics as part of a religious practice or sacrament.

The psychedelics industry has a lot more to worry about than folks in the cannabis industry. There will be massive competition from an unregulated and illegal market that’s likely to be even more pervasive than with cannabis. There are (ketamine) and will probably be (psilocybin, MDMA) federally approved alternatives, and those industries will probably lobby the feds to crack down on service centers. And there will be religious practices that detract from service centers’ business. The little that is left for service centers will likely be taxed even more aggressively from a federal point of view.

None of this makes the budding psychedelics industry seem like it will take off to nearly the same degree that cannabis has. Stay tuned to the Psychedelics Law Blog for more updates on the psychedelics industry.

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