One of the biggest pharmacy retailers in the world has jumped aboard the cannabis train. CVS Health (CVS 1.46%) announced on Wednesday that it has begun selling products that contain cannabidiol (CBD), a nonpsychoactive ingredient in cannabis.
The pharmacy retailer said in a statement that it has "partnered with CBD product manufacturers that are complying with applicable laws and that meet CVS's high standards for quality." Although CVS Health did not name the manufacturers, the CEO of Massachusetts-based cannabis producer Curaleaf Holdings (CURLF 1.22%), Joseph Lusardi, said that his company is one of them during its fourth-quarter conference call Wednesday evening.
Shares of Curaleaf soared as much as 18% in intraday trading on Thursday. Could this under-the-radar marijuana stock be the big winner from CVS Health's surprising move?
Check out the latest earnings call transcript for CVS Health.
Image source: CVS Health.
Limited products, limited states
Don't expect to grab dried cannabis flower or CBD oils from the shelves of your local CVS store just yet, though. The company is only selling a limited selection of CBD products in eight states: Alabama, California, Colorado, Illinois, Indiana, Kentucky, Maryland, and Tennessee. The CBD products that are being sold include creams, lotions, roll-ons, salves, and sprays.
Although the products being marketed by CVS Health contain CBD, the ingredient isn't coming from marijuana. Although 10 states have legalized recreational marijuana and 33 states have legalized medical marijuana, all forms of marijuana remain illegal at the federal level in the United States.
All CBD in the products available in CVS stores is instead made from hemp, another variety of cannabis plant. The key difference is that hemp plants contain very low levels of tetrahydrocannabinol (THC), the primary psychoactive ingredient found in marijuana.
Hemp became legal in the U.S. in December 2018 when President Trump signed the 2018 farm bill into law. However, the Food and Drug Administration (FDA) must still approve any CBD-infused foods, or products that include CBD and claim to have any therapeutic benefits. The agency has yet to establish rules for such approvals. In this case, though, the CBD products that CVS Health is carrying don't claim therapeutic benefits.
The big winner?
CVS Health didn't specify how many manufacturers are supplying its CBD products. But Curaleaf is the first to announce that it's among them.
Curaleaf holds cannabis licenses, or is awaiting licensing, in 13 U.S. states with a combined population of 146 million. It currently operates 42 cannabis retail stores in nine states, and expects that number to jump to 69 by the end of this year.
The company generated more than $77 million in revenue in 2018, more than tripling its prior-year sales. Most of this growth came from the medical cannabis market in Florida, where more than half of Curaleaf's retail stores are located.
In September 2018 Curaleaf launched its Curaleaf Hemp line of CBD products, which included disposable vape pens, patches, pet treats, softgel capsules, tinctures, and topical lotions. CVS Health is selling Curaleaf Hemp lotions and transdermal patches, according to Lusardi. The Curaleaf CEO also noted that the company is the first multistate operator to launch a national CBD product line.
Securing a supply deal with CVS Health for CBD products is certainly a significant achievement for Curaleaf. However, there's a bit of a disconnect between what CVS Health has publicly stated and what Curaleaf has said. Lusardi said that Curaleaf's CBD products will be available in over 800 CVS stores in 10 states this week -- but as mentioned earlier, a CVS Health spokesperson stated that CBD products are being sold in eight states. It's possible the discrepancy could be simply a matter of timing, though.
It remains to be seen just how much revenue the CVS Health relationship will contribute to Curaleaf's top line. But if the pharmacy giant expands the number of stores that carry Curaleaf's CBD products and includes the products on its website (as Lusardi said would happen soon), Curaleaf could be a big winner from CVS Health's move.
A huge opportunity
Curaleaf's primary focus continues to be on marijuana markets, and these markets -- both medical and recreational -- are most likely to drive the company's growth. If federal marijuana laws were to change, Curaleaf stock would almost certainly skyrocket.
But hemp-based CBD should also be a massive opportunity. One optimistic view is that the U.S. hemp-based CBD market could reach $22 billion by 2022. That's probably a stretch, but it seems likely that a multibillion-dollar market isn't too far away, especially if the FDA finalizes its processes for approving CBD-infused beverages, edibles, and nonprescription drugs.
For investors who are looking to buy Curaleaf shares as a way to profit from the boom in U.S. cannabis markets, a word of caution: Key shareholders hold 81% of the company's outstanding shares. If significant volumes of these shares flood the market, Curaleaf's share price would probably sink. The good news is that the major shareholders who own these shares have committed to voluntary lock-up periods, agreeing not to sell any of their shares without the company's approval prior to Oct. 20.
Over the long run, Curaleaf's prospects could be very bright. This under-the-radar marijuana stock is one for investors to keep on their radar screens.
