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Cannabis Industry News 11/09/2019

FTC Again Warns Over Unproven Claims

The FTC again warned CBD companies that advertise unsubstantiated health claims and like FDA, it remains focused on the most egregious claims.

Meanwhile, FDA is expected to issue an update on CBD in the coming weeks, though we still think it would be just the start of any new regulatory process.

Please see our FDA decision tree on page 2 and contact your Cowen sales rep for a mini-poster version.

What Happened (Eric Assaraf – Cowen Washington Research Group)

The Federal Trade Commission (FTC) today sent warning letters to three unnamed companies that sell oils, tinctures, capsules, gummies, and creams containing cannabidiol (CBD), a chemical compound derived from the cannabis plant.

According to the FTC, the companies have 15 days to address illegal advertising of CBD products to “prevent, treat, or cure human disease without competent and reliable scientific evidence to support such claims.”

The companies allegedly advertised CBD products to treat or cure serious diseases like cancer and Alzheimer’s without substantiation, which could “violate the FTC Act and may result in legal action that could result in an injunction and an order to return money to consumers.”

The FTC and the FDA issued similar warnings to other companies earlier this year and both agencies remain focused on the most egregious claims, regardless of form factor or mode of administration.

More recently, CBD manufacturer Curaleaf was sent a warning letter from FDA for making unsubstantiated health claims for CBD, while also selling unapproved CBD products online (such products were later pulled from store shelves at CVS).

FDA Update on CBD Coming Soon (Eric Assaraf – Cowen Washington Research Group)

The FDA is expected to issue a regulatory update on CBD in the coming weeks. As we wrote in our August 2 Bulletin, the agency could take a middle-ground approach to speed the availability of lawful, hemp-derived CBD in food and dietary supplements as described in a July 30 op-ed in the Washington Post by former FDA Commissioner Scott Gottlieb.

Gottlieb’s framework would involve a period of enforcement discretion that would immediately allow low-dose CBD in foods/supplements so long as products meet certain conditions (good manufacturing requirements, traceability, safe levels for purity and potency).

However, we continue to believe such a proposal would likely be the start of the process and not the conclusion. Each of the variables in Gottlieb’s outline would need to be defined in the context of CBD, which would likely still take a long time (at least another six months to a year).

Recall that 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’sEpidiolex), the FDA determined that CBD cannot be added to food products sold across state lines or marketed as a dietary supplement.

The attached chart includes Cowen’s FDA Cannabis Framework, which describes FDA’s enforcement partners, jurisdictional centers, and potential regulatory pathways for CBD with or without congressional intervention (please contact your Cowen sales rep for a mini-poster version).

Source: Cowen and Company and Prevision Policy

As noted in the chart, we believe FDA’s fall update on CBD will at least include 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.

As we wrote in our July 25 Bulletin, we believe 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.

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. Recently, ACB announced a joint research initiative on hemp-derived CBD with the UFC. In addition, we think FDA’s current stance likely keeps PEP and KO on the sidelines for developing CBD and other cannabis-based products.

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