FDA update on CBD coming this fall, but don’t expect swift action

THE COWEN INSIGHT

FDA will issue an update this fall on the agency’s plan for developing a regulatory pathway for cannabis-derived products including CBD. However, we doubt that it will provide any regulatory certainty for CBD and that congressional intervention will likely be needed.

What Happened (Eric Assaraf – Cowen Washington Research Group)

FDA will issue an update this fall on the agency’s plan for developing a regulatory pathway for cannabis-derived products including cannabidiol (CBD), according to comments this week from FDA Principal Deputy Commissioner Amy Abernethy.

The statement from Abernethy, who also co-chairs the FDA’s CBD working group, follows an active few weeks on cannabis for the agency. The FDA received a total of 4,492 comments at the close of its comment period last week on the regulation of cannabis products.

On Tuesday, Acting FDA Commissioner Ned Sharpless also outlined a warning letterthe agency sent to CBD manufacturer Curaleaf for making unsubstantiated health claims for CBD, including treating cancer and Alzheimer’s, among other conditions, while also selling unapproved CBD products online. Of note, CVS announced that they were pulling Curaleaf’s products from its shelves today.

Several other companies were sent similar warning letters earlier this year, and in our view, the fact that FDA has taken the extra step of issuing an announcement shows that it wants to use the warning letter as a teaching moment — how far a company has to go to incite a response and letting the litany of unsupported claims carry the message. At the same time, the situation allows the agency to restate its intention of advancing the development of lawful cannabis-derived products.

This morning, Abernethy also testified before the Senate Agriculture Committee on the topic of “Hemp Production and the 2018 Farm Bill.” In her opening statement, Abernethy repeated the FDA’s message — the 2018 Farm Bill did not change FDA’s authority over CBD and since there is now an FDA-approved drug with CBD as an active ingredient (GW Pharma’s Epidiolex), CBD cannot be added to food products sold across state lines or marketed as a dietary supplement.

Further, Abernethy states that although current law allows the FDA to make certain exceptions through notice and comment rulemaking on provisions that prohibit adding active drug ingredients to foods or marketing them as dietary supplements, “it is important to note that it can take three to five years to complete even an expedited notice and comment rulemaking process…” However, Abernethy asserts that the agency is “exploring options to reach a resolution more quickly and efficiently.”
As we wrote in our Feb. 28 Bulletin, we believe the FDA is sincere in wanting to explore new pathways for hemp-derived CBD to be sold legally in the food and supplement markets, while protecting research into future pharmaceutical applications. However, those actions will have to fit under the confines of current law and further legislation will likely be needed to speed up the process.

We also doubt that the FDA’s update this fall will provide any regulatory certainty for CBD. In our view, the agency is more likely to issue a summary of the comments it received, outline the regulatory history of CBD, and provide an initial definition of key baseline terms differentiating between Hemp/CBD/ THC and what the Farm Bill said in layman terms. The agency may also make a determination on whether a new regulatory framework that addresses safety concerns is even possible. However, we believe that would likely be the start of the process and not the conclusion.

For a primer on the CBD industry see Cowen’s Feb. 25 report, “Cowen’s Collective View of CBD – Ahead of the Curve Series.”

What It Means for Companies (Vivien Azer)

We do not envision a near-term change to CBD form factor availability from cannabis-based companies. While we think that companies will continue to focus on CBD vapor, topicals, and tinctures, the product offerings are unlikely to make health-based claims in order to stay off the FDA’s radar. Further, though companies are currently selling CBD food and beverage products for interstate commerce (most notably via e-commerce), that could face incremental regulatory headwinds. In aggregate, we note that food and beverages represent only $3.5 bn of our $16 bn CBD TAM.

While interstate commerce for food products would fall under the FDA’s purview, we note that companies could still develop these products for intrastate commerce and operate within state borders that permit these products, albeit without scale benefits from interstate distribution which would likely prove expensive. As such, we think these products are more likely to originate from smaller, niche companies.

For companies under our coverage, we are not making changes to our financial estimates from today’s commentary. While TLRY, WEED and TPB have already made initial forays into U.S. CBD, none of these companies have introduced food or beverage-based CBD products, nor do we reflect this possibility in our estimates. We note that WEED has discussed the possibility of a CBD “recovery drink” down the line, and may develop said product in Canada in the interim. While CRON and ACB have yet to formalize plans for U.S. entry, we would envision that given both of their positions on novel form factors in Canada that both would be most likely to pursue CBD vapor opportunities in the U.S, particularly CRON given their development of next generation vapor technology and relationship with MO. Earlier this week, ACB announced a joint research initiative on hemp-derived CBD with the UFC. In addition, we think today’s hearing likely keeps PEP and KO on the sidelines for developing CBD and other cannabis-based products.

Read the full report and disclosures here

Any portion of this report prepared by a member of Cowen Washington Research Group is intended as commentary on political, economic or market conditions and is not intended as a research report as defined by applicable regulation.