Cannabinoids – Some Thoughts From This Year’s Expo West

Mar 28, 2018

As I typically do, I attended this year’s Natural Products Expo West tradeshow in Anaheim, California. It was a great opportunity to see my clients and taste their many wonderful product offerings. This year, however, it was also an opportunity for me to hear from industry business leaders and consultants about the state of cannabinoids, and CBD in particular, regarding food and dietary supplements. It is no understatement to say that this topic was high on everyone’s minds this year.

As I previously wrote, the Federal Food and Drug Administration (FDA) has taken a dim view of cannabis, THC and CBD products. To date, the FDA has not approved a marketing application for marijuana for any indication. The FDA also has concluded that THC and CBD products are excluded from the dietary supplement definition set forth in sections 201(ff)(3)(B)(i) and (ii) of the Federal Food, Drug & Cosmetic Act (Act). Summarized briefly, if a substance is an active ingredient in a drug product that has been approved under 21 U.S.C. § 355 (section 505 of the Act), or has been  authorized for investigation as a new drug for which substantial clinical investigations have been instituted and for which the existence of such investigations has been made public, then products containing that substance are outside the definition of a dietary supplement. THC, for instance, is the active ingredient in two approved drug products, and there are clinical investigation regarding CBD that have been made public. Thus, products containing THC or CBD  cannot be marketed as dietary supplements.

So, for now, many companies are sitting on the fence, cognizant of the market demand for cannabis, THC and CBD products, but wary of the regulatory pitfalls that remain, despite the enactment of medical marijuana and, to a more limited extent, recreational cannabis laws in many states. That is not to say, however, that businesses are burying their heads in the sand.

Sean Murphy, the editor of the Hemp Business Journal, noted a few disruptions to watch, but there were two that really stood out as harbingers of what may come:

  1. Canada’s legislation will legitimize its cannabis industry.  The proposed Canadian Cannabis Act will create rules for producing, possessing and selling cannabis across Canada.  Additionally, Neptune Wellness Solutions CEO Jim Hamilton noted that the Canadian government is encouraging banks to work with the cannabis industry.  Apparently, the Canadian government believes that it is in Canada’s best interest to have banking standards for the industry and to weed out criminal elements from legitimate business.  (This “novel” concept is something that I previously wrote about in my money laundering blog post.) More importantly, Mr. Hamilton noted that Canada is a great “test market.”  Major brands are doing their research for when the U.S. market matures.  As reported by Time Magazine, Canada’s entry into legalized cannabis allows for the creation of a functional market, which allows the United States to study an efficient market and how to effectively nurture an industry where rules may vary among provinces.  Such factors are of particular interest to any thoughtful business interested in participating in what is sometimes termed the “Green Rush.”
  2. Big Tobacco, Big Alcohol, and Big Pharma are all investing in cannabis-based business.  It was widely reported earlier this year, for example, that Constellation Brands (Corona and Modelo Beer, Svedka Vodka, Black Velvet whiskey, etc.) acquired a minority-stake in Canada’s Canopy Growth Corporation.  The goal is to develop a non-alcoholic cannabis beverage in Canada.  According to its website, Constellation Brands made this investment to “[stay] ahead of consumer trends and to exchange knowledge and expertise.”

For the time being, though, the United States’ patchwork approach to cannabis legalization has allowed small companies to grow without competition from corporate giants. However, if/when federal policy changes, larger players will enter the space. There is too much money to be potentially made to ignore.

While these disruptors are exciting to hear about, remember that all industries have a similar life cycle: introduction, growth, maturity, and decline. For many sectors of the cannabis industry, the industry is still in the introduction phase, albeit a few have entered the growth stage. These two “early” phases will require a significant amount of capital. Thus, it is also important to heed certain caveats.

First, while the Justice Department is sending mixed signals, one must still remember that the FDA has the power to shut the CBD-infused product market down. To date, the FDA has only shown interest in shutting down CBD companies that are making aggressive claims regarding the health benefits of their products. The FDA has been issuing warning letters indicating that CBD is not an approved dietary supplement, and there is no recognition of CBD as a generally regarded as safe (GRAS) ingredient. Thus, companies must carefully evaluate the FDA’s currently published guidance on CBD, THC and cannabis as they formulate and develop their products to better understand the regulatory challenges that they may face in successfully bringing those products to market.