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Cutting through the CBD hype

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CBD Industry Hamstrung by FDA’s Continued Lack of Direction

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Recent articles at Axios and the Wall Street Journal lay out the current state of play in the CBD industry. Basically, the CBD industry is at a standstill because the Food and Drug Administration (FDA) still hasn’t come out with rules and, worse than that, the little that they have said is to warn consumers about the potential drawbacks of CBD-infused foods and drinks.

This is beneficial to CBD startups in that the FDA’s warnings will prevent larger companies, such as Coca Cola and Pepsi, from entering the market at the moment but it’s not all positive for startups. The problem for startups will not be in having large food companies entering the marketplace, which is good, but rather the fact that it may become more difficult for startups to find large distribution partners.

Over the holidays, I did see CBD-infused products at Kohl’s while I was returning something from Amazon, so there are at least some retailers that are willing to take a chance on CBD products. Their thinking probably goes something along the lines of “CBD will be a big market and we want to get out in front of that” but if the FDA comes out with something more than notes of caution then you can expect those retailers to at the very least curtail their CBD-infused stock.

Is the CBD Industry Overheating?

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We have talked at length about the upside in the CBD industry since our inception a few months ago. A lot of people agree and a lot of money is flowing into this industry… but is that a smart move?

Here’s a clear picture of the current CBD investment psychology:

“Leading cannabis researchers BDS Analytics and Arcview Market Research, project that the collective market for CBD sales in the U.S. will surpass $20 billion by 2024.

“The convention-goers were more keyed on this figure, and less worried about potential push back from anyone looking to enforce state law or agencies like the Food and Drug Administration.”

Depending on your appetite for risk, this sentiment either makes perfect sense or is a clear sign that the CBD industry is going through something of a mania. What do I think?

I think there will be some pure startup winners all along the vertical but that most of the pure startups will end up failing (this is normal for startups in every industry but I think that the failure rate here will be higher than most industries. Those that are able to survive can realize huge returns on investment, more so than in many other industries.). I still think that the industry will go through an aggressive consolidation phase over the next few years, as can be seen from our story earlier about HeavenlyRx.

Going back to the point of this post, the reported sentiment at that convention does give me pause for concern. There are a lot of people who have no consumer product, much less CBD industry, experience getting into the industry. That’s a risk from an investment standpoint. Some of these CBD companies started by neophytes will work but I think the vast majority of them will fail.

The lack of clarity on regulations is also a risk. Sure, everyone, including us, thinks that the writing is on the wall and that CBD products will be legalized across the board… eventually. In the meantime, we’re not sure what the FDA will do and who knows what each state will do when it comes to regulating CBD products.

A few days ago, the FDA sent a shot across the bow to CBD company Curaleaf telling them that they have 15 days to get in line with FDA requests, including changing their medical claims, or else.

“As a result of this warning letter, which will require Lusardi’s response to correct these deficiencies within 15 days, Curaleaf lost its topical partnership with pharmacy giant CVS Health (NYSE: CVS). As a reminder, CVS Health announced in March that it would carry Curaleaf’s topical products in roughly 800 of its stores in eight states, with CBD expected to be a means for low-margin pharmacy chains to drum up foot traffic to their stores. It’s unclear if CVS will look elsewhere for its CBD supplies, especially with Walgreens Boots Alliance and Rite Aid following suit with cannabis products in their own stores shortly after CVS.”

Scott Gottlieb, a former commissioner at the FDA, has suggested a pathway forward for the FDA regulating the CBD industry:

“The FDA could put the onus on manufacturers to bring forward petitions to demonstrate that CBD can be safely added to products such as food. These submissions can take the form of new dietary ingredient notifications or food additive petitions, which would include toxicity studies to evaluate the safety of CBD. These are the same standards any new food ingredients are held to. Congress can help by passing language saying that the FDA doesn’t need to issue a broad regulation on CBD and can instead rely on petitions filed by individual, prospective producers.”

It’s entirely possible, maybe even likely, that the FDA will do something along those lines. They could punt this issue, allowing limited ways to sell, and wait for clinical studies. Remember, the FDA has no incentive to act quickly here, they only look bad if they approve something that turns out to be unsafe.

Taking all this into consideration, I think you can make a good argument that entrepreneurs and investors are getting a little overly optimistic. I still think that there is tremendous upside in this industry but if the FDA throws a wrench in the machinery then you can kiss those projections goodbye.

Illinois Becomes 11th State to Legalize Recreational Cannabis

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Illinois Governor J.B. Pritzger, who campaigned on the promise of legalization, will soon put his signature on a bipartisan bill passed by the Illinois House on May 31, making his state the 11th to fully legalize cannabis.

What does legalization mean for Illinois?

This bill will make Illinois the first state to create a “commercial recreational marijuana industry” through the legislature rather than by voter initiative. In Illinois, medical and recreational marijuana use will be fully legal once the bill becomes law.

The bill will allow residents over the age of 21 to “legally possess 30 grams of cannabis, 5 grams of cannabis concentrate or 500 milligrams of THC contained in a cannabis-infused product. Nonresidents could possess 15 grams of cannabis.”

In addition to creating a licensed dispensary system, the bill will direct Pritzger to pardon Illinois residents with past convictions for low-level marijuana possession, adding a progressive and restorative element to the new law.

What Cannabis Analysts are Saying

Analyst Aaron Grey of Alliance Global Partners writes that Illinois “is the first to achieve legalization involving retail stores through the legislative process and may serve as a template for other states seeking to do the same,” and claims that sales in the state may reach just under $3 billion in five years. This new bill may also encourage other states tabling similar bills to follow suit.

Analyst Rob Fagan of Canada’s GMP Securities points out that this bill will double the number of stores each sales license allows from five to 10, with current holders of medical dispensary licenses first in line. This will give established businesses a 6 to 12 month head start over new applicants.

So if you are on the fence about starting a CBD or cannabis related business, you may want to get moving as any states that follow in Illinois’ legislative footsteps will likely give established businesses this incumbent bonus. Once legalization and regulation set in, the flood gates will open.

Where is Recreational Marijuana Legal?

Recreational marijuana is currently legal in Washington, Oregon, California, Nevada, Colorado, Vermont, Michigan, Maine, Massachusetts, Alaska and Washington D.C. Illinois will be the 11th state will a fully legalized marijuana market.

Overview of CBD Article by Whole Foods Magazine

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Whole Foods Magazine has been around for decades and they have published a great post about CBD. Specifically, they are looking into where the CBD industry stands. Definitely worth a read. Here’s an excerpt:

“The market for CBD is expanding faster than almost anyone can fathom. Forbes recently reported the expected size of the CBD market in the United States to be $16B by 2025. A search for Hemp Oil on Amazon in the Health and Household Department identified 1,209 brands representing 5,520 SKUs.

“The typically nimble Amazon has now been eclipsed on this subject of CBD named products by long standing traditional retailers such as CVS, Walgreen’s, Rite-Aid and Vitamin Shoppe. All have publicly stated they will start carrying CBD-infused products. The retailers are taking a state by state approach. The large pharmacy chains have verified they will maintain their CBD offerings to topical products. Vitamin Shoppe has gone a step further and has announced plans to provide Irwin Naturals soft gel capsules, Garden of Life CBD Extract soft gels and liquid drops. Vitamin Shoppe will initially launch this product line in 14 States plus the District of Columbia and Puerto Rico.”

It’s a brave new world out there.