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CBD: Fad or the New Normal?

Denis Storey
January 7, 2020

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It's been a busy year in the CPG business, especially for the food, beverage, and dietary supplements sectors. There have been so many breaking stories, shifting trends, and updated regulations that it can be tough to keep track of it.

United Natural Products Association (UNPA) President Loren Israelsen sat down for a CBD discussion with TraceGains CEO Gary Nowacki on his CtoC podcast series. UNPA is a TraceGains partner that helps companies cut through the clutter and figure out where to focus their resources. An international trade group representing more than 100 natural product companies, UNPA members share a commitment to providing consumers with better natural health products.

How UNPA is Focusing on the CBD Market:

  1. CBD and hemp extract products are at the top of UNPA's list of priorities. Public interest in CBD has exploded, catching trade associations like UNPA and others by surprise. As exciting as it is, it's also fraught with complexity. UNPA staff now spend roughly 30% to 40% of each day on CBD-related issues.

  2. Another issue UNPA is working vigorously on is what they call DSHEA 2.0. Due to public statements coming out of the U.S. Food and Drug Administration, the agency is interested in amendments to the existing Dietary Supplement Health Education Act, which established the regulatory framework for today's dietary supplements industry. It had a profound influence on shaping the nearly $50 billion industry. So, the fact that the FDA has signaled its intention to go to Congress to amend certain critical elements shows its a significant development.

  3. A third challenge is a continued compliance with the Food Safety Modernization Act. This act is another move by Congress to respond to tremendous food production changes, agriculture, and consumption worldwide compared to 15 or 20 years ago. Today's food supply chain is truly global in scope, with a host of attendant food safety risks and hazards that need oversite. UNPA is staffing a senior FDA investigator with extensive FSMA experience to address this issue.

  4. The fourth issue that UNPA is actively engaged in is China. China is the No. 1 supplier to the dietary supplements industry — about 80% of all raw materials originate from China. That's an exceptionally high number as a total percent. Therefore, vigilance to ensure the raw material supplies coming from China are of high quality is a part of UNPA's FSMA program and equally crucial to brand holders. China is quickly becoming the number one natural health product consumer market. UNPA will soon open an office in Beijing. In the fall, the group will open a showroom at a newly developed international trade center organized by the Chinese central government. UNPA holds high hopes for developing China as a consumer market for leading U.S. supplements and other natural health care companies.

CBD

In the most recent farm bill, lawmakers included a hemp provision that legalized the industrial growing of hemp. There's often confusion about the difference between marijuana and hemp; it's about the percent of THC in the plant at harvest.

The new provision in the farm bill defines hemp containing less than .3 percent THC by dry weight as "industrial hemp" and not a controlled substance. This provision has opened the door for the widespread use of hemp materials, including fibers, oils, powders, and other products.

But the farm bill left many questions unanswered. The law failed to resolve the legal status of CBD, or cannabidiol. So many of the CBD products on retail shelves are technically not lawful. The U.S. Food and Drug Administration has not authorized CBD as a legal dietary or food ingredient.

"Significant efforts are underway to resolve this question," Israelsen said. "UNPA officials have met with the FDA several times. Many others have to look for a path forward, so consumers continue to have access to a product that's clearly in demand."

The other issue of significance stems from the agency's approval last year of a new prescription drug that contains CBD, which treats rare forms of severe epilepsy in children. If you have a drug like CBD that's new; the drug holder receives an exclusive right to that drug.

"Therefore, the CBD products on the market today are essentially infringing on the rights of this new drug holder," Israelsen said. "We've been in discussions with the drug holder, GW Pharma, which goes under its U.S. brand name of Greenwich Pharmaceuticals, to see if we can establish three lanes. The three lanes would be pharmaceutical drug dietary supplements, foods, and cosmetics. This topic is an unresolved issue, and a great deal of investment money and market activity building in the CBD category is all predicated on the resolution of this issue."

Meanwhile, hundreds of companies are jumping into this market. Some are well-established, well-known brands, others are brand new. UNPA sees a new industry with a lot to learn.

"It's fair to say market growth has outpaced the regulatory process and the technical issues of analytical testing, reference materials, good manufacturing practices, agricultural practices — all of these things need to be better developed," Israelsen said. "It's remarkable and probably without precedent to have a category growing this fast on the consumer side with so little infrastructure in place on the commercial side. On the consumer side, big box stores are clamoring to start offering CBD products. Some have announced they intend to do so. Most of them are starting with cosmetic products that contain CBD. That's a more straightforward path than selling supplements, beverages, or food. For regulatory reasons, it's complicated for consumers to have a reliable reference source for what makes a good product. There are relatively few certified resources consumers can look at to determine product quality, integrity, and safety. So right now, consumers must make choices in the absence of references. Clearly, consumers want — and need — direction."

Is CBD Here to Stay?

Even with the market and regulatory ambiguity, CBD sales are going through the roof. But is this a fad or a long-term trend? UNPA officials, including Israelsen, believe this is a robust and long-term trend.

First, we have congressional action through the farm bill that indicates Congressional interest in creating a legal pathway for hemp extract products. Second, we have the legitimacy of an approved new drug, that includes CBD, which suggests CBD clinical research demonstrates its therapeutic benefits. And the agricultural sector is heavily investing in transitioning to hemp production. The USDA is guiding farmers on how to plant and what seeds to use.

We've also seen the FDA take significant interest in trying to develop a regulatory pathway. They've made it clear they're looking for safety information to make a judgment on how to sell CBD as a consumer product. The question then will be at what dosage levels and other considerations.

"I think we can also point to the practical matter that CBD and hemp extract are a tremendous tax revenue base for every state," Israelsen added. "And that suggests there's an incentive on the part of local governments—as well as state and municipal entities—to try and responsibly develop both the agricultural base as well as a consumer base that would generate tax revenues."

There are a lot of indicators that suggest this is a strong trend. There are also massive investments from very mature investors who are putting a lot of money into CBD and hemp extract.

UNPA Divided?

So, where does UNPA stand on CBD? "Our members are of two minds on that," Israelsen explained. "We have several brand holders, and members, who have embraced the CBD sector, and others waiting until there is greater regulatory clarity. Our membership is a reflection of the national dynamic, which includes companies jumping in despite the uncertainties, and those holding out until there is a clearer pathway, particularly on the regulatory side. We see that in the big retailers. It's my understanding Wal-Mart and Walgreens are moving. Other retailers are holding back."

Right now is a fascinating and historic time to be in the hemp industry. Many companies are jumping into the CBD pool, and others are still standing by, which is building a certain tension. Those holding back and waiting feel they're respecting the regulatory process, but they also fear losing an opportunity. Israelsen said that pressure between the friction points is growing.

"We have a clear mandate from our members to work with the FDA and others to find that path," Israelsen said. "This means having global discussions almost daily with different stakeholders, whether it's drug holders, regulators, or even other trade associations. Short of having a tent on the National Mall, we're about as active as we can be working toward a resolution."

Is There Progress?

Israelsen added that UNPA had seen movement, and two crucial indicators emerged in May 2019.

The first was an important meeting of all the principal heads of the FDA with the primary trade association heads to discuss CBD's status. Both sides had a chance to express their views, including what their expectations were.

The second and probably most crucial indicator about the FDA was a public meeting to listen to comments in response to specific questions the FDA raised that relate to safety, good manufacturing practices, and consumer education.

"It was a remarkable day," Israelsen said. "It was a 10-hour public hearing. More than 100 witnesses presented testimony. We expect the FDA to provide further insight into the evolution of the regulatory process in the near term. It could go either way."

Israelsen added that regulators could look at other countries for indicators and experience, but this remains a unique problem.

"We're in uncharted territory," he admitted. "Canada is a good working model. Parts of western Europe are all struggling with this as well, but they've allowed the production of hemp. France, for example, is one of the more advanced economies that's allowed hemp. Russia is active in the hemp industry, and China is the world's biggest hemp producer. They have a lot of experience in growing hemp, although CBD remains illegal. It's a mixed bag as to where we would look and how much we can learn from other countries."

One of the great unknowns is whether Congress will move faster than the FDA. The impression is that Congress feels they don't need to take any individual legislative action on CBD. Both have risks. The FDA has publicly said they'd like Congress to provide further direction. The difficulty, Israelsen pointed out, is finding the right legislative vehicle to do that. But with Congress in its current form, it would be tough to get a small freestanding bill of that type passed.

Advice to Newcomers

Israelsen suggested that companies — or investors — interested in breaking into the CBD business look ahead two years and imagine what this sector will look like as a maturing, regulated industry. It's essential to focus on the fundamentals, such as the quality of the seed stocks, the raw materials, the exceptional discipline, and the analytical arena's skill. There's a hard line restricting the amount of allowable THC. If companies exceed that number, they'll have a hot product that becomes illegal instantly.

"My advice is that if you're interested, be a leader, and be prepared to invest in the infrastructure as opposed to brand development," Israelsen offered. "The winners of the future will have covered the fundamentals. There will be a CBD 2.0, and that group of companies will have a second opportunity to be market leaders when they better understand what true quality means in this category. That's why I believe the big retailers that position themselves as role models will be the winners of the future."

TraceGains has been working with companies in the hemp business since day one. The stakes are too high to go it alone. Find out how TraceGains can help you stay on the right side of the law while blazing a trail in this exciting new industry on our hemp web page here.

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