The legal marijuana industry had itself a 2018 to remember. Having entered the year as a still somewhat taboo industry, legal cannabis ended the year as a legitimate business model that expects to be around for a long time to come.
To our north, Canada became the first industrialized country in the world to legalize recreational marijuana. This will open the floodgates to billions of dollars in potential annual sales, and it validated that the weed industry might be worthy of investment consideration.
In the United States, we saw the U.S. Food and Drug Administration (FDA) approve its very first cannabis-derived drug in June, saw a handful of new states give the green light to pot during midterm elections, and observed as President Trump legalized hemp and hemp-based cannabidiol (CBD) in December by signing the Farm Bill into law. CBD is the nonpsychoactive cannabinoid best known for its medical benefits.
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CBD edibles come under fire in New York and other select states
Everything would seem to be going very well for the cannabis industry, and especially for manufacturers of CBD products. Following passage of the Farm Bill, it would presumably become easier for hemp-based CBD products to find their way to retailers' shelves. That's one of the many reasons the Brightfield Group is calling for global CBD sales to soar by a compounded annual rate of 147% between 2018 and 2022, eventually hitting $22 billion in 2022.
But these CBD sales estimates may have hit a bit of a snag this past week. As reported by The Atlantic, the states of New York, Ohio, and Maine have begun waging war on edibles containing CBD. Even in states where recreational marijuana is legal, such as Maine, a gray area exists with regard to adding CBD to food products.
In New York City, the Department of Health announced that it had begun a crackdown on establishments (e.g., restaurants and coffee shops) that have been using CBD as a food additive. This crackdown has included seizure of CBD products, and the warning of fines to come, which could total up to $650 beginning in July for violations, according to the New York Post. According to New York City's spokesperson: "Restaurants in New York City are not permitted to add anything to food or drink that is not approved as safe to eat. Until cannabidiol... is deemed safe as a food additive, the department is ordering restaurants not to offer products containing CBD."
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Here's why CBD edible usage is far from a cut-and-dried issue
Why is this happening? The blame primarily lies with a lack of guidelines and FDA-confirmed research on CBD.
To be clear, GW Pharmaceuticals (NASDAQ: GWPH) put a decisive end to the question of whether cannabis has medical benefits this past June. GW Pharmaceuticals' lead drug, Epidiolex, an oral solution containing CBD, dazzled in multiple late-stage clinical studies for two rare types of childhood-onset epilepsy. The statistically significant reduction in seizure frequency demonstrated by study patients taking Epidiolex compared to the placebo group was the reason the FDA approved GW Pharmaceuticals' lead drug in June.
The problem here is that the FDA views this clinical indication as statistically significant for patients with Dravet syndrome and Lennox-Gastaut syndrome, and unconfirmed for every other possible ailment. Even with university-based data suggesting that CBD treatments can help with chronic pain or glaucoma, that's not been proven by an FDA-cleared study. And since the "F" in the FDA stands for "Food," adding an unproven substance to food items creates a big gray area for the time being.
The other issue relates to a lack of guidelines. CBD products don't have any labeling standards or dosage guidelines, and in many instances consumers aren't aware how much CBD they're receiving in restaurants and coffee shops that are using CBD in food and beverages. It's also become difficult for some consumers to determine what items on a menu contain CBD and which one's don't. Until there's a better way to pass along this labeling and dosing info to the consumer, it could be difficult for CBD edibles of any form to thrive.
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Not so fast, CBD producers
The news of a CBD edibles crackdown in select states might come as a bit of a surprise to cannabis enthusiasts, but it might have an even larger impact on investors. There are a few publicly traded companies leaning heavily on CBD products to drive sales and profitability.
For example, Charlotte's Web Holdings (NASDAQOTH: CWBHF), which is one of a very small handful of marijuana stocks to have generated an operating profit without the help of one-time benefits or fair-value adjustments, has its line of CBD products in more than 3,600 U.S retailers. The passage of the Farm Bill was expected to rapidly expand this retail presence, with Charlotte's Web leaning on CBD derived from hemp plants. However, demand for CBD products may prove less robust than initially thought as a result of regulatory pushback against CBD-infused edibles. This might have the potential to adversely affect Charlotte's Web's near-term growth prospects.
The hottest marijuana stock of 2018 might also take it on the chin. CV Sciences (NASDAQOTH: CVSI) has two diverse business segments, including specialty pharmaceuticals and consumer products. The consumer-products division features CBD oil used for beauty care, vaping, and specialty foods. It's possible CV Sciences could see some pushback in sales as a result of this CBD edible crackdown, although it's going to depend on whether more states begin banning CBD use in foods beyond New York, Ohio, and Maine. Coupled with the potential overhang of lawsuits concerning its specialty pharmaceutical division, CV Sciences might be a name to avoid.
I wish I could say there were an easy way for the FDA to resolve this ambiguity, but without specific labeling and dosing guidelines, and a host of unknowns from the FDA's standpoint regarding efficacy, this looks to be yet another hurdle that could stay in place for a very long time.
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