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The FDA Just Showed Its Hand on CBD -- Is It Time for Investors to Fold?

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Few industries are expected to offer growth potential that's as impressive as the cannabis industry over the next decade. But contained within the pot industry is a niche trend that's growing considerably faster than the overall marijuana industry: cannabidiol (CBD).

The hottest trend in cannabis: Cannabidiol

As some of you may be aware, cannabidiol is one of the two most popular cannabinoids, with the other being tetrahydrocannabinol (THC). THC is predominantly found in the cannabis plant, and it's the cannabinoid responsible for getting users high. Meanwhile, CBD can be found in the cannabis or hemp plants (very small quantities of THC are also found in hemp plants), with hemp being a considerably easier-to-grow and less costly plant, making it the preferred choice for CBD extraction. CBD provides no psychoactive effect.

A gloved individual holding a full vial and dropper of cannabidiol oil in front of a hemp plant.
A gloved individual holding a full vial and dropper of cannabidiol oil in front of a hemp plant.

Image source: Getty Images.

The allure of CBD is threefold. First, since it's a nonpsychoactive cannabinoid, it should appeal to a greater percentage of the population than products that contain THC. This makes it ideal to attract consumers who may not otherwise try cannabis-like products.

Secondly, CBD is almost always infused in derivative products (derivative meaning some other form of consumption beyond dried cannabis flower). Derivatives, such as vapes, edibles, infused beverages, topicals, and concentrates, almost always have considerably higher margins than THC-rich dried cannabis flower, which makes these products essential to the financial well-being of marijuana companies.

Third and finally, there are those aforementioned growth prospects. A recently released report from the Brightfield Group is calling for $23.7 billion in U.S. CBD sales by 2023, representing a compound annual growth rate from 2018 of (drumroll) more than 100%! That's leaps and bounds ahead of the general growth rate of the global cannabis industry, making CBD one of the hottest investment trends.

Unfortunately, CBD may not be the sure thing that every investors believes it'll be -- at least in the United States.

A researcher in a white lab coat making notes on a clipboard in the middle of a hemp farm.
A researcher in a white lab coat making notes on a clipboard in the middle of a hemp farm.

Image source: Getty Images.

The FDA "shows its cards" on CBD, and no one should be surprised

The one thing standing between CBD and perceived greatness is the U.S. Food and Drug Administration (FDA). And this past Monday, the regulatory agency showed its hand on CBD for the entire country, and investment community, to see.

On Monday, July 22, the FDA sent a warning letter to Curaleaf Holdings (NASDAQOTH: CURLF) CEO Joseph Lusardi letting him know that his company's CBD products, including its lotions, pain-relief patches, tinctures, and vape pens, were all "misbranded drugs" that were being sold in violation of the Federal Food, Drug, and Cosmetic Act. The FDA also flagged its Bido CBD products for pets as being unapproved and unsafe.

More specifically, the FDA wrote that Curaleaf is "illegally selling unapproved products containing cannabidiol (CBD) online with unsubstantiated claims that the products treat cancer, Alzheimer's disease, opioid withdrawal, pain and pet anxiety, among other conditions or diseases."

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.

A vial of Epidiolex next to its packaging box and two droppers.
A vial of Epidiolex next to its packaging box and two droppers.

Image source: GW Pharmaceuticals.

With Curaleaf becoming the first multistate CBD provider to draw the ire of the FDA, it's crystal clear that the agency, which is currently reviewing CBD and has recently promised to expedite a report detailing its progress by either late summer or early fall, has little understanding of its benefit-versus-risk profile.

Let's remember that although the FDA approved GW Pharmaceuticals' (NASDAQ: GWPH) CBD-based oral solution known as Epidiolex in June 2018 for the treatment of two rare forms of childhood-onset epilepsy, these two indications are the only ailments the FDA views as benefiting from cannabis and its cannabinoids, period. Even with numerous positive (but correlative, not conclusive) university-level studies, the FDA does not view cannabis or CBD as being medically beneficial. That makes additives to food, beverages, and dietary supplements, as well as claims of certain medical benefit, big no-nos in the FDA's eyes.

And take note of what acting FDA chief information officer, Dr. Amy Abernethy, had to say in tweets just two weeks ago. While noting the need for the FDA to expedite its review process given the proliferation of CBD in various derivative products, she notes the "need to balance safety," and points out that the agency will merely be highlighting its progress, not necessarily making any conclusive findings or laying out CBD regulations as they pertain to food, beverages, and dietary supplements.

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

Image source: Getty Images.

What now for CBD stocks?

While the FDA's harsh stance on CBD is bound to disappoint investors, it's really no surprise given the agency's tough stance on cannabis.

As some of you may recall, the U.S. Drug Enforcement Agency had the opportunity to potentially reschedule or deschedule marijuana a few years ago, but chose not to change the federal classification on the drug. Part of this decision took into account the opinion of the FDA, which at the time noted that there were no official medical benefits of cannabis (albeit there are two now via GW Pharmaceuticals' Epidiolex), and that well-designed studies would need to be run to establish a true safety profile for marijuana. We've known for years where the FDA stood on pot, so its decision to get harsher with medical claims on CBD products shouldn't surprise anyone.

The big question that's left to be answered is: What will the FDA ultimately do following its update in a few months? One of the growing rumors is that the regulatory agency may approve limited or small quantities of CBD to be used in food, beverages, and dietary supplements while long-term studies are conducted. Such a move would allow CBD companies to get their feet in the door, so to speak, but the FDA's stringent policy would put a ceiling on near-term sales, as well as continue to limit medical claims for CBD, which could adversely impact its attractiveness to consumers not looking for a buzz.

Although I continue to view CBD stocks as an intriguing long-term investment opportunity, the FDA's governance of the ongoing rollout of product cannot be overlooked, and that's something investors need to keep in mind.

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Sean Williams owns shares of CVS Health. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.