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Don't Hold Your Breath for the FDA's CBD Report

By Sean Williams - Jul 19, 2019 at 7:51AM

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Despite promises of an expedited review, CBD-focused investors could be disappointed with the Food and Drug Administration's findings.

Whether you realize it or not, this is going to be a big year for the North American cannabis industry. Sure, history was made in 2018 with Canada launching recreational cannabis sales in licensed dispensaries, and the U.S. Food and Drug Administration (FDA) approving the very first cannabis-derived drug. But history is expected to be made later this year, too.

According to recent updates from Health Canada, derivative pot products are set to launch in cannabis stores by mid-December. Derivatives are non-dried-flower products, such as edibles, vapes, infused beverages, topicals, and concentrates. These are considerably higher-margin products than traditional dried cannabis flower, and they generally speak to a younger adult audience.

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

Image source: Getty Images.

The promise and peril of cannabidiol

But the launch of derivatives isn't all. Investors and consumers are also waiting on the edge of their seats for the FDA to dish on its findings for cannabidiol (CBD) as an additive to food, beverages, and dietary supplements in the United States. CBD being the nonpsychoactive cannabinoid best known for its perceived medical benefits.

If you think the marijuana industry is growing rapidly, then you haven't been paying attention to forecasts for CBD growth in the United States. A recently released report from the Brightfield Group has called for north of $23 billion in U.S. CBD sales by 2023, which would represent a compound annual growth rate of over 100% between 2018 and 2023.

Additionally, as you may already know, CBD can be extracted from both the cannabis and hemp plant. However, hemp is often much easier and less costly to grow than cannabis, making it the preferred source of CBD extraction. This is noteworthy given that President Trump signed the farm bill into law in December, paving the way for legal industrial hemp production and hemp-derived CBD products. Cannabis, meanwhile, remains wholly illegal at the federal level.

The issue as to why hemp-derived CBD can't simply be added to food, beverages, and dietary supplements, despite being legalized via the farm bill, ties into the FDA legalizing the first cannabis-derived drug in June 2018. GW Pharmaceuticals' ( GWPH ) Epidiolex is a CBD-based oral solution for the treatment of two rare forms of childhood-onset epilepsy. Since CBD is the primary compound in GW Pharmaceuticals' lead drug, any addition of CBD to food, beverages, and dietary supplements falls under the strict guidelines of the FDA. And right now, it views CBD as a treatment for Dravet syndrome and Lennox-Gastaut syndrome (the two indications that Epidiolex is approved to treat) but nothing else.

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 plans to update its progress on CBD by early fall

The big question has been: When will we know more about the FDA's plan of attack to regulate CBD products in food and beverages?

In May, the FDA listened to more than 100 experts discuss the benefits and risks of CBD as an additive, and has been taking comments and rebuttals for many weeks. But the initial timeline to establish regulatory guidelines looked as it could take years, at least according to now-former head of the FDA Scott Gottlieb. However, according to a series of tweets this past week from the FDA's acting chief information officer, Dr. Amy Abernethy, the regulatory agency will be doing what it can to expedite the review process.

Per Abernethy, the FDA will be reviewing more than 3,400 comments and rebuttals, as well as the testimony and data from experts in May, and plans to release a report on its progress toward regulating CBD by late summer/early fall (which sounds like a September or October release date). 

This obviously has major implications given that edibles are projected to be the second-best-selling form of derivative in Canada (behind only vapes), and would likely deliver similar sales strength in the U.S., if approved. Branded giants like Mondelez International have made clear their desire to break into the CBD market with infused snack and dessert products, but will need the green light from the FDA before they can do so.

A cannabis leaf lying atop carbonation in a glass, with other cannabis leaves to the right of the glass.

Image source: Getty Images.

A word to the wise: Don't hold your breath

While most investors are excited about the FDA's apparent expediting of its review of CBD, I'm not exactly holding my breath for a number of reasons.

For starters, Dr. Abernethy notes in the last of her linked tweets that the regulatory agency, while expediting its analysis, aims only to report on its progress around late summer or early fall. There's a big difference between being able to report on the agency's progress and actually laying out a definitive guidelines for CBD as a food and beverage additive. Just because the FDA lays out its progress does not mean it's necessarily close to issuing final guidelines.

Secondly, Abernethy's second tweet in the chain points to the agency's enthusiasm surrounding research into CBD's therapeutic benefits, but the need to "balance safety" as well. This is a hedging statement that reinforces the notion that the FDA views CBD as having two approved indications, but is otherwise largely an unknown to the agency. This suggests that the FDA is far from coming to a conclusion on a benefit-versus-risk assessment for CBD.

Another possibility to consider is that the FDA could lay the ground rules for additives in very low quantities while it continues to research the long-term benefits and risks of CBD consumption. Even though this scenario would still generate revenue for CBD-based product developers, it would almost certainly constrain the intermediate-term potential of U.S. CBD sales.

The fact is that the FDA is probably a long way from laying out concrete CBD guidelines, which is something investors should take into account when reviewing CBD-focused stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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