Despite suffering from a bout of growing pains, the cannabis industry is expected to be one heck of a long-term growth story. After more than tripling revenue between 2014 and 2018, Wall Street's expectation is that the pot industry will deliver total sales growth of between 400% and 1,800% by 2030. In nominal dollar terms, we're talking about $50 billion to $200 billion in annual sales by 2030.
However, there's expected to be an even faster-growing niche within the cannabis movement that's drawn a lot of attention from investors. I'm talking about cannabidiol (CBD).
Cannabidiol was expected to be the next hot investment
Cannabidiol is the nonpsychoactive cannabinoid derived from hemp and cannabis that's best known for its perceived medical benefits. According to the Brightfield Group, CBD sales in the U.S. are expected to grow by more than 100% on an annual basis between 2018 and 2023, ultimately surpassing $23 billion in yearly sales.
This extremely aggressive growth estimate from Brightfield comes on the heels of two main catalysts. First, as noted, CBD isn't a compound that gets users high. This means CBD-infused products are more likely to appeal to a broader audience than products that contain tetrahydrocannabinol (THC), the substance that gets consumers high. And, don't forget, derivatives, such as edibles, topicals, and infused beverages almost always boast significantly juicier margins for cannabis companies than traditional dried flower.
The other catalyst here is that President Trump signed the Farm Bill into law in December 2018. The Farm Bill legalized the industrial production of hemp, as well as CBD products derived from hemp. As a refresher, hemp usually has very low levels of THC and is considerably easier to grow than cannabis, making it the perfect crop for CBD extraction.
Everything appeared primed for CBD to become the next big investment on Wall Street... only it hasn't.
The FDA has dug in its heels on CBD
Even though Congress had passed and the president had signed the Farm Bill into law, there was still a gray cloud overhanging the CBD industry: the U.S. Food and Drug Administration (FDA).
Although we often think of the FDA in terms of reviewing clinical trial data and approving or denying game-changing pharmaceuticals, it's also responsible for ensuring that substances within the food and beverage chain remain safe. Last year, it was expected that the FDA would provide a set of guidelines for companies to follow with regard to adding CBD to food, beverages, and dietary supplements. However, a Nov. 25 consumer update changed that thesis.
In a press release, the FDA issued a number of critical statements concerning CBD (taken verbatim from the release):
- CBD has the potential to harm you, and harm can happen even before you become aware of it.
- CBD can cause side effects that you might notice. These side effects should improve when CBD is stopped or when the amount ingested is reduced.
- There are many important aspects of CBD that we just don't know.
In short, the FDA put its foot down on CBD by clearly questioning its safety and denying companies the right to add CBD to food, beverages, and dietary supplements. This doesn't mean the FDA is done reviewing CBD, but it's certainly put into doubt the future of the industry in the United States. Not to mention, former FDA Commissioner Scott Gottlieb, who stepped down from his post last year, has cautioned that it can take years for a new substance to be properly reviewed and guidelines established.
This quote from the head of the FDA should calm some nerves
With the FDA taking an exceptionally cautious stance on CBD, cannabis stocks that aimed to incorporate cannabidiol products in the U.S. have taken it on the chin.
For instance, Charlotte's Web (CWBHF 5.45%) was expected to be a monster in the CBD space. Although CBD market share is highly fragmented, no company boasts higher share than Charlotte's Web. But with Wall Street's consensus revenue estimate for 2020 once easily topping $300 million, Charlotte's Web is now expected to generate just $148 million in full-year sales. This more than halving in the company's sales forecast has occurred in less than a year, and it's the direct result of concerns surrounding the FDA's statements on CBD.
However, fresh commentary from the relatively new FDA Commissioner should go a long way to easing investor fears. While giving a speech Wednesday, Feb. 26, Commissioner Stephen Hahn said the following:
People are using these products [CBD products]. We're not going to be able to say you can't use these products. It's a fool's game to try to even approach that.
In other words, the FDA head announced that the agency has no intention of clamping down any further on CBD than it already has. That's very good news considering that topicals and oils have more or less remained off the agency's radar. Most of the products that Charlotte's Web has put on retail shelves is of the oil or topical variety, meaning it still has plenty of sales growth momentum, even without the immediate ability to put edibles on retail shelves.
The one potential issue that CBD companies will continue to navigate is ensuring that they properly advertise their products and don't make any unsubstantiated claims. In July, Curaleaf (CURLF -2.72%) fell victim to an FDA warning letter that it had "misbranded drugs," including a line of lotions, pain-relief patches, tinctures, and vape pens. Curaleaf's Bido CBD products were also flagged by the FDA for being noncompliant. Curaleaf was quick to address claims that CBD could treat ailments such as cancer and Alzheimer's disease, resolving the FDA's complaint, but it ultimately wound up costing Curaleaf its retail space with CVS Health.
In short, things aren't as dire for the CBD industry as you might think, but don't expect the FDA to issue concrete guidelines anytime soon.