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HIGHLIGHTS
  1. Canadian LPs begin entering the U.S. CBD market, a month after the passage of the Farm Bill.
  2. FDA rules around CBD remain unclear. 
  3. Analysts are taking a long-view on the U.S. CBD opportunity. 

A slew of announcements by Canadian producers over the past few days show how rapidly the cannabidiol landscape is shifting south of the border following the passage of the U.S. Farm Bill a month ago, which descheduled hemp-derived CBD. However, significant questions remain about how the U.S. Food and Drug Administration will regulate the increasingly popular, non-intoxicating drug.

On Monday, Canopy Growth Corp. said that it has received a license to grow and process hemp in New York, and that it plans to spend between US$100 million and US$150 million building a facility in the state. On Tuesday, Tilray Inc. announced a revenue-sharing deal with U.S. branding and retail firm Authentic Brands Group, which will focus heavily on the American CBD market. Also on Tuesday, Australis Capital Inc., Aurora Cannabis Inc.’s U.S. sister company, announced a US$3-million investment in Colorado firm Folium Biosciences, which focuses on hemp-derived CBD.

"The passing of the Farm Bill towards the end of last year, really opened up the doors for these types of announcements now to be expedited,” said Matt Bottomley, an analyst with Canaccord Genuity Corp.

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By formally descheduling hemp-derived CBD, the Farm Bill removed the legal barriers keeping Toronto Stock Exchange-listed firms from investing in U.S. hemp. That doesn’t, however, mean there’s an easy path forward in the U.S. CBD market.

Following the passage of the Farm Bill, FDA commissioner Scott Gottlieb put out a statement outlining the FDA’s intention to strictly regulate products containing hemp-derived CBD. In particular, the FDA will be watching for non-allowable health claims being made for CBD products; over the past three years, the agency has sent warning letters to U.S. companies making improper claims about the efficacy of the drug. The FDA will also be watching the use of CBD in food and nutritional supplements, Mr. Gottlieb said.

“It’s unlawful under the [Federal Food, Drug, and Cosmetic Act] to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived. This is because both CBD and THC are active ingredients in FDA-approved drugs and were the subject of substantial clinical investigations,” Mr. Gottlieb wrote.

That idea – that CBD should not be allowed in food because CBD-based drugs have been approved for medical use – has been disputed.

“This position… is unsettled and rests on questionable legal grounds. More importantly, the [FDA’s] current position is not a final determination and should not be interpreted as the law,” wrote Jonathan Miller and Rend Al-Mondhiry, lawyers for the industry lobby group the U.S. Hemp Roundtable, in a note last week.

“It is of significant import that, to date, the FDA has not prohibited the sale of hemp-derived CBD products or ordered a product recall,” Mr. Miller and Mr. Al-Mondhiry added. “Further, the primary motivation for the Warning Letters issued in 2015, 2016, and 2017 concerned the improper use of disease-remediation claims by supplement/food companies. No Warning Letter has been issued to a company that merely sold legitimate hemp-derived CBD products without making inappropriate disease-remediation claims.”

Mr. Gottlieb of the FDA did say, however, that there would be “pathways” to product approval.

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Uncertainty around FDA regulation could take months to clear up, said Mr. Bottomley of Canaccord. But that shouldn’t be an issue for Canopy or other companies, given their timeline to market.

“Even if things go well, it's going to take close to a year [for Canopy] to get this strategy up and running. So the fact that the regulations are still dotting the i's and crossing the t's, I don't think it's that much of a concern," Mr. Bottomley said.

He and other analysts are taking a longer view of the U.S. CBD market. Martin Landry, managing director of equity research for GMP Securities L.P. increased his price target on Canopy by $14 on Monday, from $56 to $70.

“Anecdotal evidence suggests that CBD extracts could find their way into sports recovery drinks, energy drinks, functional water, topical creams and food supplements. We estimate these product categories in the US amount to a combined market size of [around] US$50b. Therefore, a minor penetration into these product categories could be material for WEED,” Mr. Landry wrote.

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