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Can Charlotte’s Web Stock Survive the FDA Hammer on CBD?

The FDA recently sent 15 warning letters to privately held companies concerning violations surrounding the inclusion of CBD in human and animal drugs, as well as being marketed as dietary supplements. They had also been adding CBD to foods consumed by people and animals.

It's especially important to Charlotte's Web (CWBHF) because CBD products are primary business. In this article we'll look at the potential impact on the performance of Charlotte's Web and what it may mean for shareholders.

How to look at CBD

For some time I've stated that CBD needed to be viewed in a similar way the vitamin and supplement market is by the FDA. The latest communication from the government agency confirms this to be the case.

Because of that, I've said that the outlook for CBD sales in the future may be too optimistic. I still think that's the case, although once there is more clarity it should be a benefit to Charlotte's Web as far as more predictability of its performance.

The FDA also pointed to the need for more CBD research, citing the designation of GW Pharmaceutical's Epidiolex as an example of proven results and value to end users.

While this will slow down the growth trajectory of CBD in the U.S., over time, it has tremendous potential to generate revenue if products are considered as legitimate treatments for targeted symptoms of diseases. It also suggests the products could be covered by health insurance, which would be a huge growth catalyst for revenue.

What is most likely to happen is there will be at least two tiers of CBD products. One tier will target the general population like vitamins do today, and the other will receive FDA approval to be used as medication to treat specific diseases.

To get the most out of the potential of CBD, Charlotte's Web and other companies will need to engage in research that supports their thesis for treatments.

Concerning general usage of CBD, it appears the FDA is taking a harder stance there as well because of the lack of research and understanding in regard to long-term health effects.

For that reason, CBD sales are probably going to come under pressure because of the need for the company to take a defensive posture until there is more clarity from the FDA.

In the long run, I consider this to be very positive for the company and cannabis industry in general. Charlotte's Web should benefit from having more capital at its disposal to engage in research, while its privately traded competitors struggle to survive.

Market Consolidation

During this time of industry consolidation, it will be a solid catalyst once market sentiment once again turns positive. Having research to back up CBD benefits and guidelines will do a lot to attract more users across various demographic segments.

Also, the more regulated the market the more it will favor the larger competitors.

In 2020 I expect to see a lot of smaller competitors either acquired or going out of business. By the end of the year and into early 2021, there should be a lot less competition than there is currently across the cannabis sector, including the CBD segment. This will benefit Charlotte's Web.

Analyst Commentary 

Eight Capital analyst Jenny Wang believes it shouldn't take too long until the FDA issues more clear and friendly guidelines. In her recent note to clients, Wang wrote: "Our FY2021 forecast includes the assumption that the FDA will provide a preliminary and positive direction before 2021 on the regulation of CBD infused dietary supplements. We believe the main considerations impacting the agency's willingness to issue a preliminary update and the timing of such an update are concerns around product safety, counteracted by the massive industry and consumer demand for CBD products and pressure from Congress on providing the industry with clear guidelines on the legality of such products. If and when the FDA were to allow ingestible CBD products, we believe the uptake among F/D/M channels will be significant, and Charlotte's Web is well-positioned to be a leader in the ingestible CBD market."

As a result, Wang reiterated a Buy rating on Charlotte's Web stock along with a C$23.00 price target. If everything goes as Wang hopes, the stock could double over the next 12 months. (See Charlotte's Web's price targets and analyst ratings on TipRanks)

Conclusion

Being one of the more recognizable brands in the cannabis industry, Charlotte's Web has held up fairly well in this challenging time in the cannabis market.

It has taken its hits as have most of its peers, but lower barriers to entry for CBD sellers that has challenged its overall sales recently will probably start to disappear going forward, as the FDA raises the bar for CBD products.

Charlotte's Web has enjoyed an increase in distribution from grocery giant Kroger’s, now having a presence in 1,350 in 22 states. It also entered into a deal with Vitamin Shoppe to sell gummy products in 738 stores. The latter isn't likely to have an immediate impact on the performance of the company, but it does get its brand out to another group of consumers.

In the last reporting period there was some margin pressure, but that came primarily from the increase in operating expenses associated with a $30 million investment to build a 137,000 sq. ft. production facility. This should prove valuable in the future.

I see the current FDA focus on CBD as a positive for the company, as it'll put more pressure on numerous competitors that had been taking some share away from CWEB because of the low barriers to entry. That is about to change, and with its brand strength and CBD leadership it should turn around in the latter part of 2020 and into 2021.

How much it turns around will be determined by the guidelines offered up by the FDA.

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