Recent years have seen exciting developments in the research, production, and supply of psychedelics, particularly for their medicinal uses. While this industry has seen unprecedented attention and investment, numerous questions remain over its future. We asked Aird & Berlis partners Sherri Altshuler and Jeffrey Merk to detail the existing legislative regime in Canada, what the prospects are for medicinal approval of psychedelics, and the ramifications that greater acceptance of these substances could have on the medical and wellness community, investors, and Canadian health policies as a whole.
What are the prospects that the federal government legalizes the use of psychedelics in medical treatment? How will this affect the pharmaceutical, nutraceutical, and biosciences sectors?
Based on industry developments, such as academic and clinical research, and political and legal developments in Canada, the United States and internationally, we believe that it is likely that the Canadian federal government will legalize the use of certain psychedelics in medical treatment in the near- to medium-term.
In terms of legal developments in Canada, we believe that this change could arise from:
(i) successful court challenge under Section 7 of the Charter of Rights and Freedoms;
(ii) an exemption under Section 56 of the Controlled Drugs and Substances Act (Canada) (the CDSA) (as defined below) for medical or scientific purposes;
(iii) an exemption otherwise being in the public interest or on human rights grounds;
(iv) through approvals granted by Health Canada under existing regulatory processes; or,
In the summer of 2020, we saw positive movement in this direction with Health Canada granting exemptions under Section 56 of the CDSA to provide access to cancer patients for end-of-life care. Since that time, more patients have been able to gain access for medical purposes, including for non-palliative care. Therapists are also seeking Section 56 exemptions to possess psychedelics to treat patients.
We expect Canada to continue to be a leading jurisdiction in the journey to medicinal acceptance of many of these substances, with incremental steps continuing to be taken by the Canadian federal government. This has recently been exemplified by Health Canada’s consideration in revising its Special Access Programme that could permit healthcare professionals with access to psychedelic substances for psychotherapy. We also think developments in other jurisdictions will likely lead to a more uniform adoption of psychedelic substances for medicinal purposes globally. This is particularly true of the United States where the FDA has granted breakthrough therapy designation for certain psychedelic substances, such as MDMA-assisted psychotherapy to treat PTSD and psilocybin to treat depression, and a variety of states are taking steps to decriminalize possession for personal use.
From our perspective, the legalization of psychedelic substances in Canada will be extremely positive for the pharmaceutical and biosciences sector. We expect that this will result in, among other things, reducing the regulatory burden associated with academic and clinical research undertaken by psychedelics companies, encourage joint venture and other business collaborations with psychedelics companies and other pharmaceutical, academic and other types of institutions, and generally increase the profile of these substances within the medical and broader health and wellness community.
You mentioned the Controlled Drugs and Substances Act (Canada). Can you go into greater depth about it and other relevant legislation? What is the role of government regulators in enforcing these measures, and what criteria need to be satisfied in order to receive exemptions to these measures?
In addition to laws of general application, such as corporate and securities, tax and intellectual property laws, the the CDSA is a critical piece of legislation for psychedelics companies operating in Canada. The CDSA is Canada’s principal federal drug control statute, generally integrating the UN conventions related to controlled substances and prohibiting the production, possession, trafficking (includes selling, administering and transporting), importing and exporting controlled substances. Depending on the specific activities undertaken by the psychedelics company, additional pieces of Canadian legislation that are relevant for these companies including the Food and Drugs Act (Canada), with key regulators of these companies including Health Canada, the Canadian Food Inspection Agency and organizations regulating health care professionals.
One of the key exemptions associated with psychedelics is Section 56 of the CDSA. That section provides the federal Minister of Health with discretionary power to provide an exemption to enable a person to possess and administer controlled substances if, in the opinion of the Minister, the exemption is necessary for a medical or scientific purpose or is otherwise in the public interest. To obtain this type of exemption, applicants will need to meet one of these criteria and demonstrate the benefits of such an exemption to satisfaction of the federal Minister of Health as has been successfully done in certain circumstances, including for palliative care and on religious grounds.
What would greater medical and governmental accepting of these drugs mean in a cross-border context? Would it have ramifications for businesses with operations in less tolerant jurisdictions?
Greater medical and governmental acceptance of psychedelics, particularly legalization of psychedelics for medicinal purposes, would have significant impacts in a cross-border context in the event that Canada significantly outpaces other international jurisdictions. However, as mentioned in the context of the US above, and with a small, but growing number of countries undertaking decriminalization efforts or otherwise loosening their restrictions on the possession and personal use of psychedelics, it is possible that the period of time in which certain psychedelic substances may have a cross-border impact may be limited.
In our view, it is likely that psychedelics companies will continue to focus the majority of their efforts in jurisdictions with legal and regulatory regimes that are taking a more tolerant approach to psychedelic substances, such as Canada. That being said, opportunities will no doubt arise in jurisdictions with legal and regulatory regimes that are less tolerant of psychedelic substances. Companies, and investors, will need to carefully weigh the risk / reward proposition when accessing these jurisdictions for some or all of their operations.
Do you believe that federal or provincial authorities will move towards decriminalizing or legalizing psychedelics for recreational use? If so, how will this occur? Does the example of cannabis legalization provide a guide for consumers and investors?
Canada has been a world leader in drug reform. Late last year, there was a petition calling for the decriminalization of psychedelics in Canada for “therapeutic practices, as adjuncts to medical care, for healing ceremonies or solitary spiritual growth and self-development”. In their response, the government sent a message on where things stand in Canada – psychedelics remain controlled substances in Canada, meaningful legislative reforms are not imminent, and there are already mechanisms in place for people to legally gain access through exemptions.
As a result, despite decriminalization efforts, we think it’s unlikely that the Canadian federal government will move towards legalizing psychedelics for recreational use for the foreseeable future. We expect the continued focus of the Canadian federal government will relate to providing access to psychedelics for medicinal and scientific purposes. Further, we think that any possible use of psychedelics and functional mushroom products will be limited to microdose, nutraceutical, health and wellness uses for these substances, rather than a general acceptance of psychedelics as commonly used recreational substances in the near-term.
From an investor’s perspective, the example of cannabis legalization does not provide a guide for consumers and investors since we think any decriminalization or legalization of psychedelics for recreational use will be on a smaller scale (e.g. microdose) and will take some time. At present, the focus of the discussion is on medical access and the important research being done in that regard.
What factors should businesses account for when investing in the production, provision or sale of psychedelics or related services? What are the risks and potential benefits of entering this area now?
In addition to the “start-up” risks facing psychedelics companies as early-stage pre-revenue companies or as companies with modest revenues, since psychedelics are, and are likely to remain, highly regulated substances, certainty in the application and design of legal and regulatory regimes in which the business operates should be at the forefront of considerations of businesses in the psychedelics industry. This may not be true for all of the activities of a psychedelics business, but in our view should be for a majority of the operations of those businesses. For example, jurisdictions that have legal and regulatory regimes that are in constant flux or that have inequitable or unpredictable results limit the ability of psychedelics companies to, among other things, operate effectively, gain investor confidence, access capital and banking, develop products or deliver services in a timely and cost-effective manner.
In addition, one of the key risks facing many psychedelics is the risk of “getting lost in the crowd”. In the past 12 months a significant number of psychedelics companies have completed “go public” transactions and raised capital. Many more have raised substantial amounts of capital and have grown to a significant size, but remain private. Many of these existing companies have similar business plans so a company finding its niche in the market has become that much more challenging. That being said, the psychedelics industry is experiencing a renaissance in the investment community, the medical or health and wellness community and the general public, with substantial areas of opportunity for enterprising psychedelics companies that want to make a meaningful difference through the advancement of ground-breaking therapies.
How would you advise clients in this area to limit their exposure to liability and potential litigation? Do clients in the psychedelics space require protection against multiple types of liability?
In addition to ordinary course business risks, psychedelics companies face risks associated with operating in a nascent, rapidly evolving, yet highly regulated industry. In our experience, these factors, and others, require companies in the psychedelics industry to professionalize their management teams and establish sophisticated processes and views on risk at a much earlier stage that companies operating in other industries. By taking these actions at an earlier stage, psychedelics companies can formulate strategies to identify, weigh and manage risk, to make informed decisions on risk versus reward for the opportunities they consider. As the psychedelics industry continues to develop so does the insurance industry supporting these companies, with an increasing range of insurance products becoming rapidly becoming available.
Do you have any other insights on helping clients navigate the issues surrounding psychedelics or the pharmaceutical legal landscape post/during COVID?
The impact of COVID not been uniformly felt across the psychedelics industry and is dependent, in part, on the business model of the applicable psychedelics company. For example, those psychedelics companies operating a clinical or treatment centre model or a health and wellness retreat model have had to adapt the way in which they deliver their services, to the extent they are able to do so, to protect the health and safety of their clients and their service providers. Other psychedelics companies operating a pharmaceutical or nutraceutical model have had to adapt the way in which their products are being researched or formulated. In all cases, like all other industries, the psychedelics industry has worked hard to adapt and formulate strategies to maintain the health and safety of their clients and businesses to be in a position to prosper in the future.
Sherri Altshuler is co-Practice Group Leader of the firm’s Capital Markets Group, co-Chair of the Cannabis Group and a member of the Corporate/Commercial, Mining, Capital Pool Company and Startups Groups. Her practice is focused on mergers, acquisitions, corporate reorganizations, public and private financings and ongoing corporate and commercial matters. She has developed specialized expertise in capital markets transactions in the REIT, cannabis, technology, psychedelics and mining sectors, including with respect to board governance, securities and financing matters.
Jeffrey Merk is co-Practice Group Leader of the firm’s Capital Markets Group. He is also a member of the firm’s Corporate/Commercial, Mergers & Acquisitions/Private Equity and International Groups, as well as the Cannabis and Mines & Minerals Groups. He practises corporate law with an emphasis on public and private financings, mergers and acquisitions, corporate governance and ongoing general corporate and commercial activities. Jeffrey’s experience includes numerous cross-border securities offerings (public and private), acting for U.S. buyers of Canadian entities or assets; acting for U.S. financiers of acquisitions in Canada; acting for Canadian sellers to U.S. buyers, and acting as Canadian counsel in connection with large, internationally-led transactions. He frequently advises mining, private equity, industrial, cannabis and psychedelics clients.