The FDA’s Stance on CBD Should Surprise No One – Motley Fool

When the year began, the North American cannabis industry looked to have plenty of momentum. Canada had just become the first industrialized country in the modern era to green-light adult-use cannabis, Mexico looked to be on track to legalize recreational pot later in the year, and support for legalization in the U.S. remained high (pardon the pun).

But this has all changed as the year has worn on. Canada’s weed industry has dealt with persistent supply issues, Mexico has kicked the can on recreational legalization into 2020, and the federal government in the U.S. continues to stymie any efforts to reform cannabis banking laws or the drug’s Schedule I classification.

Four vials of cannabinoid-rich liquid lined up on a counter.

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CBD has been the apple of cannabis investors’ eyes in 2019

Maybe the lone bright spot this year has been the projected uptick in cannabidiol (CBD) sales in the United States. CBD is the nonpsychoactive cannabinoid derived from cannabis and hemp that’s best known for its perceived medical benefits.

According to aggressive estimates from the Brightfield Group, CBD sales in the U.S. are on pace to grow from around $600 million in 2018 to $23.7 billion by 2023. That’s a compound annual growth rate of more than 100% over a five-year stretch. Since CBD can be added to all sorts of high-margin derivative products, it’s become something of a must-add for all pot stocks. It’s even enticed Canadian cannabis stocks to enter the U.S. marketplace.

You see, in December 2018, President Trump signed the Farm Bill into law, thereby legalizing the industrial production of hemp and hemp-derived CBD. This opened the door for high-margin CBD oils and topicals to be carried by dispensaries and general retailers across the country. The Farm Bill is the basis for Canopy Growth’s (NYSE:CGC) spending $150 million on a hemp-processing facility in New York state and Tilray’s (NASDAQ:TLRY) acquisition of hemp foods company Manitoba Harvest for up to $419 million Canadian. Manitoba Harvest has access to more than 16,000 retail doors in North America, providing the retail network Tilray needs to sell its CBD products.

A label that says edibles and a cannabis leaf lying atop an assortment of cookies and brownies.

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The FDA puts its foot down on CBD, despite its growing popularity

However, this rise of CBD has also stoked debate about using cannabidiol as an additive in food, beverages, and dietary supplements, which is an area firmly controlled by the U.S. Food and Drug Administration (FDA). This past week, after a months-long review that’s still incomplete, the FDA issued a consumer update on CBD, and most folks, especially investors, probably weren’t too happy with the agency’s findings.

In the Nov. 25 consumer update, the FDA stated the following, as taken from the press release:

  • CBD has the potential to harm you, and harm can happen even before you become aware of it.
  • CBD can cause side effects that you might notice. These side effects should improve when CBD is stopped or when the amount ingested is reduced.
  • There are many important aspects of CBD that we just don’t know.

The key takeaway here is that the FDA doesn’t view CBD as safe, despite its popularity, and it cautions that liver injury or serious side effects can arise from regularly ingesting CBD or taking it while on other medicines.

In particular, the update brings up the lone approved CBD drug, GW Pharmaceuticals(NASDAQ:GWPH) Epidiolex, as a prime example. GW Pharmaceuticals’ lead drug was approved with ease in June 2018 after it led to a statistically significant reduction in seizure frequency from baseline in patients with two rare types of childhood-onset epilepsy. Yet Epidiolex was also shown to have the potential to cause liver injury during the FDA marketing application review process. This wasn’t enough to halt the approval of GW Pharmaceuticals’ potential blockbuster, but it goes to show just how little the FDA knows about CBD at this point.

What’s more, the FDA is unclear what sort of impact long-term CBD use can have on the body — and as you might imagine, the only way to get to this answer is through long-term studies.

A researcher in a white lab coat and blue glove using a dropper to place cannabinoid-rich liquid into a test tube.

Image source: Getty Images.

The FDA has been portending this consumer update for some time

Although most investors are probably miffed with the FDA, the agency’s decision to suggest that CBD is potentially harmful should surprise absolutely no one. That’s because the FDA has been tipping its hand for months that this is the direction it was headed.

First of all, the agency never laid out a specific timeline, nor did it offer to share concrete CBD guidelines, after hearing testimony from more than 100 experts in May. In fact, the best answer consumers and investors could get out the FDA was that it would report on its progress by late summer or early fall, according to its acting chief information officer, Amy Abernethy. Reporting on its progress is a long way from hashing out concrete regulations.

Second, the FDA has been quick to put its foot down on unsubstantiated marketing claims. In a separate Nov. 25 press release, the FDA notes that it had issued 15 warning letters to companies that were illegally selling CBD in violation of the Federal Food, Drug, and Cosmetic Act. But the most high-profile of these warnings came in July, when multistate dispensary operator Curaleaf Holdings (OTC:CURLF) received a warning letter for illegally selling CBD products with unsubstantiated claims. Even with Curaleaf’s CEO, Joseph Lusardi, quickly addressing the FDA’s concerns, it wound up costing the company a recently earned distribution agreement with CVS Health. Given the FDA’s latest round of warning letters issued, there are probably many more Curaleafs still out there.

Third and finally, former FDA Commissioner Scott Gottlieb, who stepped down earlier this year, plainly stated that „CBD is not safe” in a recent tweet, and he has implied that it could take the agency years before it can establish a benefit-versus-risk profile that would allow it to craft regulations on CBD as an additive. Even though Gottlieb isn’t calling the shots at the FDA any longer, he did head the agency for almost two years, and many of the policies the FDA is implementing today are based on Gottlieb’s initiated processes.

A judge's gavel next to a handful of dried cannabis buds.

Image source: Getty Images.

It’ll be a while before we gain more clarity on CBD in the U.S.

Obviously, the bad new here for investors is that we just don’t know how long it might take for the FDA to come back with a concrete set of guidelines on CBD.

The consumer update is pretty clear that the agency knows very little about CBD, and following a vape-health scare that’s killed nearly four dozen people and affected close to 2,300 vape users in total, the agency is unlikely to take any chances or expedite its research and risk compromising the health of the public. That could make it difficult for edibles and infused beverages to really take off in the U.S., which would be a disappointment to the likes of Canopy Growth and Tilray.

On the other side of the coin, there are still a number of ways for consumers to purchase CBD-infused products, such as oils or as topicals. As long as the companies behind these products aren’t making sensationalized medical claims that draw the ire of the FDA, the CBD market can still thrive.

Think about a company like Charlotte’s Web (OTC:CWBHF), which has avoided receiving a warning letter from the FDA. Despite the CBD market’s being highly bifurcated, Charlotte’s Web has the highest market share of any company and has increased its retail door count from 3,680 to begin the year to more than 9,000 by the end of its latest quarter. With Charlotte’s Web primarily focused on oils and topicals, it should be just fine and should continue to deliver healthy growth, even with the FDA putting its foot down on CBD, for the time being.

CBD can still deliver incredible growth for investors, but this story is far from over.

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