Figure 81 Face Serums Are The Most Expensive On A Price/MG Basis
$3.75
$3.00
$2.25
$1.50
$0.75
$0.00
$3.00 $2.80
$0.71
$0.36 $0.25 $0.25 $0.20
Sopris bella Dragonfly
Botanicals
Value
( < $0.82)
Myaderm
American
Shaman
Face serums look to be even more expensive across all segments, with price points from
mainstream through super-premium ranging from over $1 to $3 per mg of CBD.
CBD Face Serum by Price Segment
$1.90 $1.67 $1.33 $1.13 $0.78 $0.67 $0.59 $0.36 $0.34 $0.25 $0.22 $0.21
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Super Premium
( > $2.30)
Premium
($1.61-$2.30)
Main
($0.91-$1.60)
Value
( < $0.91)
Source: Company Websites and Cowen and Company
Note: Reflects price per mg of CBD; For companies with multiple SKUs, we used a straight line average
COWEN.COM 45
Mary's Nutritionals
Lord Jones
Blue Ridge Hemp
bella
Vertly
Cannuka
Canna Hemp
imbue botanicals
Sopris
RX CannaCare
cbdMD
CWHemp
COWEN
COLLABORATIVE INSIGHTS February 25, 2019
Figure 82 Body Lotions More Moderately Priced Relative To Facial Beauty Products
$0.90
$0.75
$0.60
$0.45
$0.30
$0.15
$0.00
$0.75
$0.60
Super Premium
( > $0.58)
$0.40 $0.38
Source: Company Websites and Cowen and Company
Body lotions offer more value per mg of CBD, relative to facial beauty products, with
Mary’s and Lord Jones positioned at the high-end of the competitive set. To segment
from the broad topicals market, we would note that we classified beauty creams as
products offering soothing and moisturizing characteristics (as opposed to targeted pain
relief).
CBD Body Lotion by Price Segment
Main
($0.24-$0.41)
Note: Reflects price per mg of CBD; For companies with multiple SKUs, we used a straight line average
Figure 83 Bath Bombs Are A Niche Segment
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$0.00
$0.52
$0.48
$0.32 $0.28 $0.23 $0.18 $0.14 $0.14
Value
( < $0.24)
$0.08 $0.07
Bath products are not surprisingly the most reasonably priced within beauty. We would
note that cosmetics are still a niche category within CBD, which is reflected in the lower
number of products and SKUs currently offered. That said, we believe the multiple subcategories
offering CBD products will appeal to a broad range of consumer
demographics.
CBD Bath Bombs by Price Segment
$0.26 $0.25 $0.24
$0.11 $0.10
Kush Queen bella Pure Kana Blue Ridge Hemp Mary's Nutritionals lovebud cbdMD
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Super Premium
( > $0.41)
Main
($0.20-$0.31)
Value
( < $0.20)
Source: Company Websites and Cowen and Company
Note: Reflects price per mg of CBD; For companies with multiple SKUs, we used a straight line average
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COLLABORATIVE INSIGHTS February 25, 2019
Figure 84 Mary’s Offers Multiple Beauty Products
Source: Company Reports
Figure 85 Through its Recently Announced JV With Dixie Brands, Khiron Will Eventually Roll Out Its Kuida Line In The U.S.
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Source: Company Website
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COLLABORATIVE INSIGHTS February 25, 2019
Figure 86 Lord Jones Packaging Reflects Premium Nature Of The Brand
Source: Company Reports
Figure 88 CWEB Offers Creams…
Figure 87 In Addition To A Lotion, They Also Offer A Body Oil
Source: Company Reports
Figure 89 …And Balms
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Source: Company Website
Source: Company Website
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COLLABORATIVE INSIGHTS February 25, 2019
Food (Confections)
Figure 90 Confectionary CBD Sales Can Surpass 400 MM By 2020
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
$60
Source: Cowen and Company
U.S. CBD Confectionary Sales ($ in mm)
$200
The food category, which we classify as confections, including gum drops, chocolates,
baked goods, and bars, is expected to be one of the smaller revenue opportunities
relative to nutraceuticals, topicals and beverages. That said by 2020, we believe the
sales can surpass $400 mm, should the category increase its share of overall CBD to 7%
by 2020. In the U.S., we estimate that the confection category (chocolate, non-chocolate
and gum) grew to $25.5 bn in 2018, reflecting a 5.5% YoY growth rate. If we
extrapolate that growth out over the next 2 years, the total implied confection market
would surpass $28 bn. A $420 mm CBD food category would reflect just a 1.5% share of
the total confectionary industry.
$420
2018 2019E 2020E
Figure 91 Extrapolating 5.5% Growth Results In Category Revenues
Surpassing $28 BN In 2 Years
$29.0
$28.0
$27.0
$26.0
$25.0
$24.0
$23.0
$22.0
$24.1
Source: IRI and Cowen and Company
U.S. Confectionary Sales ($ in bn)
$25.5
$26.9
$28.3
2017 2018 2019E 2020E
Note: 2018 sales reflect latest 52 weeks ended 3/25/18
The below sensitivity contemplates the overall revenue opportunity based on CBD
confections share of the overall category. While we believe a 1.5% share is reasonable
and achievable, the revenue outcomes range from ~$100 mm to $700 mm based on the
level of market share gains achieved over the next two years.
Figure 92 We Believe Sales Can Range From Over $100 MM To ~$700 MM Based On Level Of Share
Capture
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2020 Market Share Scenario Analysis
Market Share 0.5% 1.0% 1.5% 2.0% 2.5%
Absolute Sales ($ in mm) $137 $278 $420 $562 $703
Source: Cowen and Company
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COLLABORATIVE INSIGHTS February 25, 2019
Figure 93 Confections Are Broad Based
Source: Company Websites/Reports and Cowen and Company
Note: Reflects price per mg of CBD; For companies with multiple SKUs, we used a straight line average
Figure 94 CBD Bars Broadly Comprised Of Protein, Power, Energy And Granola Offerings
Confection products are diverse, which we classify as essentially any edible food falling
outside of gummy vitamins. Of the brands analyzed, super-premium brand, beceae
offered by far the most SKUs (15), which largely consist of chocolates and other baked
goods. We would caveat that although Lord Jones products fall into the premium
segment as part of this analysis, if we were to benchmark them against the broad
gummies category, they would’ve been at the top of the super-premium range.
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$0.80
$0.60
$0.40
$0.20
$0.70
$0.60
$0.53
$0.48
$0.40
CBD Bars by Price Segment
$0.34 $0.32 $0.32
$0.25 $0.25
$0.20 $0.19 $0.16
$0.00
Veggimins
Green
Monkey
Snaac
CBD
baceae Casa Luna Wise Bar Wayward Everhemp VeloBar
CBD
ShrediblesPure Vida
Mary
Gains Bar
Betty
Khronic
Super Premium
( > $0.57)
Premium
($0.44-$0.57)
Main
($0.30-$0.43)
Value
( < $0.30)
Source: Company Websites and Cowen and Company
Note: Reflects price per mg of CBD; For companies with multiple SKUs, we used a straight line average
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COLLABORATIVE INSIGHTS February 25, 2019
Vapor
While vapor remains the major market share gainer across adult use cannabis, CBD only
offerings are much smaller, but represent a solid growth segment. Over the next two
years, we believe the category can generate over $350 mm in revenues, with upside if
consumer adoption of this particular form factor resembles the adult use market for
THC, or the growing popularity of nicotine vapor. We benchmark the market
opportunity against the U.S. e-cigarette category, which we are forecasting to grow
~32% in 2019 and ~27% in 2020, resulting in revenues surpassing $11 bn in 2020. In
addition to e-commerce, we believe there will be distribution channel overlap with e-
cigs, with a focus on vape shops and convenience stores (as opposed to just
dispensaries). If vapor generates $360 mm in revenues in 2020, that would result in an
implied market share of 3.2%, roughly 10% of JUUL’s current U.S. market share.
Figure 95 Vapor Will Be Smaller, But Can Grow To Almost $400 MM Figure 96 Our E-Cig Model Assumes Revenues Of ~$11 BN By 2020
$400
$350
$300
$250
$200
$150
$100
$50
$0
$40
Source: Cowen and Company
U.S. CBD Vape Sales ($ in mm)
$160
$360
2018 2019E 2020E
$12.0
$10.0
$8.0
$6.0
$4.0
$2.0
$0.0
$3.6
Source: Cowen and Company
U.S. E-Cigarette Sales ($ in bn)
$6.6
$8.7
$11.1
2017 2018 2019E 2020E
The below scenario analysis shows that every 50 bps of market share capture is worth
~$56 mm in revenues. While we are forecasting CBD vape to be ~3% of the market, we
believe there is upside to these numbers and that strong consumer adoption can result
in revenues surpassing $500 mm.
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Figure 97 $360 MM In Revenue Implies A ~3% Share Of The Category
2020 Market Share Scenario Analysis
Market Share 1.7% 2.2% 2.7% 3.2% 3.7% 4.2% 4.7%
Absolute Sales ($ in mm) $193 $249 $304 $360 $416 $471 $527
Source: Cowen and Company
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COLLABORATIVE INSIGHTS February 25, 2019
Figure 98 Competition Expected to Heat Up Across Vapor
The below figure reflects the notable competition seen within vape as more companies
continue to enter the space. In addition to CBD only-focused companies, we are starting
to see crossover from adult-use / medical focused companies including Green Thumb
Industries and Curaleaf Hemp. Indeed, GTI recently announced the acquisition of Beboe,
which will offer a CBD vape pen with a focus on gaining distribution in high-end retail
stores. Curaleaf will offer their pen through its e-commerce platform and dispensaries.
Notably, crossover does not pertain solely to cannabis companies, as Turning Point
Brands recently announced a minority stake in CASH, a privately held CBD extraction
and production company. With a rapidly growing vapor infrastructure in place already
(from Vapor Beast, Vapor Shark and Vapor Supply), TPB has a number of avenues and
distribution points, both B2B and B2C, to introduce CBD vapor products to complement
its portfolio. As such, we look for new CBD product introductions from TPB over the
next year, with vapor as a logical entry point and key focus area.
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Source: Company Websites and Cowen and Company
Note: Reflects price per mg of CBD; For companies with multiple SKUs, we used a straight line average
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COLLABORATIVE INSIGHTS February 25, 2019
Figure 99 Condensed Pricing Heat Matrix By Company And Category
The below chart provides a condensed visual snapshot on company pricing in the
preceding category discussions. We would highlight the broad number of categories
that multiple emerging private companies are actively competing in, which is expected
to increase as the category continues to gain momentum.
Below we provide company descriptions on some of the more notable public and private
companies currently competing within the space.
Tinctures Capsules Gummies Confections Balm Bath Bombs Topicals Vape Beverages
baceae $0.17 $0.47
Beboe $0.15
Canna Hemp $0.08 $0.10 $0.33 $0.12 $0.25
Casa Luna
cbdMD $0.08 $0.07 $0.10 $0.10 $0.08 $0.09
Charlotte's Web $0.08
CV Sciences $0.16 $0.12 $0.24 $0.62
Diamond CBD $0.22 $0.08 $0.20 $0.42
Elixinol $0.11 $0.09 $0.24
Green Roads $0.20 $0.12 $0.18 $0.25
Hemp Bombs $0.11 $0.14 $0.12 $0.17 $0.25 $0.17 $0.20
Highline $0.23
Lazarus $0.04 $0.05 $0.05 $0.05
Lord Jones $0.24 $0.11 $0.29
Mary's Medicinals $0.16 $0.60 $0.50 $0.24 $0.26
Mr. Moxey's $0.13
Papa & Barkley $0.13
Premium Jane $0.17 $0.12 $0.09 $0.11
Pure Kana $0.16 $0.12 $0.08 $0.26 $0.14 $0.30
Recess $0.50
Reliva $0.08 $0.20 $0.07 $0.12
Sprig $0.21
Sunday Scaries $0.15 $0.20
Veggimins $0.11
Willie's $0.34
Note: Blue highlight denotes higher price point, gray denotes lower price point. Balms and Bath Bombs for Mary’s Medicinals represent Mary’s Nutritionals.
Source: Company Websites and Cowen and Company
CBD Price/MG Summary Matrix
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COLLABORATIVE INSIGHTS February 25, 2019
The CBD Competitive Landscape – Public/Private Company Discussions
(Azer)
Publicly Traded Companies
1933 Industries. Publicly-traded 1933 Industries (CSE: TGIF; OTCQX: TGIFF) is a
vertically integrated cannabis company with operations in both the U.S and Canada.
1933 operates through three subsidiary companies which includes Alternative Medicine
Association (AMA), Infused MFG and Spire Global Strategy. AMA (91% ownership), is a
licensed medical and adult use cannabis cultivation facility. Infused MFG (91%
ownership) produces hemp-based CBD products and Spire Global Strategy (100%
Ownership) is an advisory firm offering due diligence, security and intelligence services.
The company was an early competitor having launched its first CBD brand in June 2017.
The two main brands are Canna Hemp and Canna Fuze, which are distributed across 600
retail locations across the U.S. (largely focused on dispensaries), with 15% of sales
coming from e-commerce. In 2018, 1933 delivered ~$12.6 mm in overall revenues, with
a gross margin of 49%. Infused MFG specifically contributed 34% to revenues (~$4.3
mm), while achieving a gross margin of 71%.
Canopy Growth (Outperform, C$82 PT). Canopy Growth is a leader in global cannabis,
with exposure to over a dozen countries spanning five continents. As the market share
leader in the nascent adult use market in Canada, WEED generated sales of $83 mm in
its most recent quarter. In addition, WEED was the first Canadian licensed producer to
partner with a major consumer packaged goods company. In October 2017, they
announced the initial relationship with Constellation Brands, which was meaningfully
expanded with a $4 bn investment announced in August 2018. The company has
announced its intention to invest $100-$150 mm in New York State (where STZ is
headquartered), to construct a hemp industrial park focused on extraction and product
manufacturing. More recently, management has noted a willingness to invest as much
as $500 mm against U.S. CBD with the expectation that this infrastructure could
ultimately be converted to capitalize on a U.S. adult use opportunity, when it
materializes.
Charlotte’s Web. Founded in 2013 and based in Boulder Colorado, Charlotte’s Web is a
publicly-traded, market leader within hemp-derived CBD (CSE: CWEB; OTCQX: CWBHF).
The company has a vertically integrated business model, consisting of cultivation,
manufacturing and distribution. Charlotte’s Web products are sold in 3,680 retail
locations, with an expanding channel footprint that includes national grocery, drug,
mass market, pet, and natural / specialty retailers. Despite being well distributed, 55%
of 9M18 revenue has been derived from the company’s direct to consumer e-commerce
model. Going forward, Charlotte’s Web will continue to drive innovation and will look to
improve their liquid delivery system to enhance efficacy, convenience and frequency of
use. What is more, they will offer botanical blends to target consumer need states (sleep
and cognitive function), upgrade bioavailability technology and focus on additional
isolated cannabinoid products. To drive sustained growth, the company will look to build
brand awareness through media events and social platforms, among others and
introduce new, differentiated botanical products in the form of tinctures, capsules,
powders, sports performance, topicals, cosmetics, beverages and pet products.
Charlotte’s Web will selectively pursue M&A to complement their current strengths and
will also look to expand internationally, with a near term focus on the EU, South America
and Asia. Through FY 9M18, Charlotte’s Web has delivered revenues of $48 mm (+75%),
with a gross margin of 77%.
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COLLABORATIVE INSIGHTS February 25, 2019
Curaleaf Hemp. Curaleaf (CSE: CURA; OTC: CURLF) is a vertically integrated U.S. multistate
operator (MSO), based in Massachusetts that focuses on selling Curaleaf branded
products in its company-owned dispensaries. In September, the company launched a
separate CBD focused line called Curaleaf Hemp, which is currently sold in 47 states.
Form factors currently offered include tinctures, capsules, topicals, patches, vape pens,
and pet treats. With both ingestible and topical CBD products currently offered in select
Wegman’s stores, Curaleaf Hemp is focused on expanding into more channels and
becoming a national CBD brand by the end of the year. Curaleaf Hemp products are midtier
priced, coming in above value offerings, but below what would be considered superpremium.
This allows them to competitively target pharmacy chains and grocery stores.
Curaleaf believes women represent an outsized opportunity within CBD and will focus
their efforts on positioning their products towards that specific cohort. This makes good
sense to us as our proprietary survey indicated that women slightly over-index to CBD
relative to men. Through FY9M18, Curaleaf has generated ~$45 mm in revenues
(including adult use and medical) reflecting a 247% YoY growth rate, while delivering a
gross margin of 57%.
CV Sciences. Headquartered in San Diego, CA, publicly traded CV Sciences (OTCQB: CVSI)
has two distinct operating divisions, consisting of consumer products and specialty
pharmaceuticals. Within consumer products, the company is engaged in the
development, manufacturing, marketing, and distribution of hemp-derived CBD
products, which are refined into its own PlusCBD Oil™ brand. Form factors are broad
based and include oils, capsules, sprays, balms, beauty products, and gummies, and are
distributed nationally in health food stores and health care provider offices through
select distributors and online. CV Sciences currently distributed to over 2,000 retail
locations. CV Sciences has generated ~$34 mm in revenues though the first nine months
of FY18, which reflects a 153% YoY growth rate. Over the comparable timeframe, the
company reported gross margin of 72%, reflecting over 300 bps of expansion.
Elixnol. Elixinol (ASX: EXL; OTCQX: ELLXF) has a global presence in the cannabis
industry, including hemp-derived CBD dietary supplements, food and wellness products,
as well as the cultivation and manufacturing of medicinal cannabis products. Business
segments include:
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Elixinol USA. Founded in 2014, Elixinol USA is a manufacturer and global
distributor of industrial hemp-based dietary supplements and skincare
products, with operations based out of Colorado.
Hemp Foods Australia. Founded in 1999, is a leading hemp foods wholesaler,
retailer, manufacturer and exporter of bulk ad branded raw materials and
finished products.
Elixinol Australia. Founded in 2014, to participate in the emerging Australian
medical cannabis market.
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In 2018, Elixinol revenues grew 121% YoY to ~$AUD 37mm (~$27 mm). The company’s
North America business contributes over 80% to total company revenues.
Green Thumb Industries (Beboe). As one of the more well-known U.S. multi-state
operators (MSOs), Green Thumb Industries (CSE: GTII; OTCQX: GTBIF) recently
announced the acquisition of Beboe, a premium cannabis brand, headquartered in
California. Beboe products are sold in over 125 California and Colorado retail locations,
and notably, the acquisition will give GTI access to the CBD market through Beboe’s
recently launched, direct-to-consumer line of hemp derived CBD products. Current CBD
products offered from Beboe include a vape pen, called Calming, which contains 500
mgs cannabis oil, as well as a beverage called Dirty Lemon. In order to maintain the
premium nature of the Beboe brand equity, GTI plans to ship the product into high-end
luxury stores (which currently includes Barney’s). In the first nine months of fiscal 2018,
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COLLABORATIVE INSIGHTS February 25, 2019
GTI has reported revenues of ~$41.7 mm (which includes adult use and medical),
reflecting a YoY growth rate of over 300% and gross margin of 45%. We would note
that on a pro-forma basis including the acquisition of Essence, in the most recent
quarter, GTI would have generated revenues of over $35 mm (vs. $17.1 mm reported).
Khiron Life Sciences Corp. Khiron is a publicly-traded (TSXV: KHRN; OTCQB: KHRNF),
vertically integrated cannabis company currently focused on Latin America. Priority
markets in the region include Colombia, Peru, Chile, Brazil, and Mexico. Earlier this year,
they announced a 50/50 JV with U.S.-based Dixie Brands, which will result in the
introduction of a full line of cannabis infused products to the Latin American market.
Importantly, as part of the agreement, Dixie will manufacture and distribute Khiron’s
Kuida brand of CBD-based cosmetics in the U.S., where they will target the growing
Hispanic population. Khiron will operate the JV from Bogota, Colombia, with a focus on
regulation, cultivation, manufacturing, and distribution. Dixie will contribute IP, including
its extensive brand portfolio, which includes over 100 SKUs spanning 15 different
categories. Khiron recently recognized first sales in October 2018.
Level Brands. Originally founded as a consumer products company in 2015, Level
Brands (NYSE American: LEVB) subsequently expanded into licensing and brand
management prior to initiating an IPO in 2017. Most recently in 2018, the company
completed the acquisition of cbdMD, a CBD consumer products brand with products
available online and in over 1,000 retail outlets across the U.S. cbdMD offers 60 skus, 24
of which come in the form of oils, while 12 SKUs come in the form of topicals.
Additionally, other cbdMD form factors offered include capsules, gummies, bath bombs,
and pet products. In its first year, cbdMD delivered $7.5 mm in sales, while achieving a
gross margin in excess of 70%. From a route to market perspective, 80% of revenues
come from e-commerce, though the company started to build out a sales team to drive
brick and mortar penetration.
Tilray (Outperform, $150 PT). Canadian-based Tilray (NASD: TLRY), is a licensed
producer and distributor of cannabis across Canada, as well as internationally. Through
the company’s strategic partnership with Privateer, TLRY licenses established U.S.
based cannabis brands including Marley Natural, Irisa, Goodship, Grail, and Dutchy. TLRY
has been active on the M&A front, with previously announced acquisitions /
partnerships with Novartis, Authentic Brands and AB-Inbev, among others. Most
recently, the company announced a C$419 mm acquisition of Manitoba Harvest, the
global leader in hemp-derived food products. The cash and stock deal gives TLRY access
to Manitoba Harvest’s broad range of food products that are currently distributed in
16,000 stores across North America.
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Turning Point Brands (Outperform, $45 PT). Based in Louisville, KY, Turning Point
Brands (NYSE: TPB) operates in the Other Tobacco Products (OTP) category and sells
and distributes a wide range of products. These products include MST, loose leaf
chewing tobacco, cigarette papers, cigar wraps, e-cigs, vaporizers, and herbal wraps.
TPB recently announced a minority stake in CASH, a privately held CBD extraction and
production company, which should complement its current infrastructure, which
includes Vapor Beast, Vapor Shark and Vapor Supply. Additionally, we would note that
TPB currently sits on the U.S. Hemp Roundtable Board of Directors. Through the first
nine months of fiscal 2018, TPB has reported $238.4 mm in revenues, which reflects a
YoY growth rate of over 12%. The company has achieved a run rate gross margin of
~44% over the comparable timeframe.
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COLLABORATIVE INSIGHTS February 25, 2019
Canadian LP Commentary on CBD
In addition to the public companies already actively involved in the hemp / CBD market,
we would note that all of the major Canadian public cannabis companies have been
vocal in terms of expressing their interest in the space, as reflected in the below
commentary.
Aphria (APH)
“Depending on the country, there is a lot of movement in Europe…with a CBD light. That
CBD, that source from hemp, and what we are contemplating in certain countries,
Portugal being one, Italy being one.” Chairman, CEO & President Victor Neufeld (1Q19
Earnings Call)
Aurora (ACB)
“I think the hemp industry, I tell a lot of the people here that I think it's going to be as
big or bigger than the cannabis industry.” Founder, CEO and Director Terry Booth (4Q18
Earnings Call)
“We've got -- obviously, we're first mover in the hemp space out of any other of our
competitors. And we'll enter when it's proper to enter and when it's legal to enter into
the United States market.” Founder, CEO and Director Terry Booth (2Q19 Earnings Call)
Canopy Growth (WEED, Outperform, C$82 PT)
“But CBD every day is moving through a progression where it's going to become part of
the normal course available ingredient set…and I think we're doing a very good job of
getting in front of that.” CEO Bruce Linton (1Q19 Earnings Call)
“[CBD is] going to come down to who gets the data to get the branded product that
actually works. And I think we're doing a very good job on that and I believe we have a
leadership position on that.” CEO Bruce Linton (2Q19 Earnings Call)
Cronos (CRON)
“At Cronos, we seek to build the world's most innovative cannabinoid company, where
we develop and research efficient processes to effectively produce and formulate the
full spectrum of cannabinoids, not just THC and CBD.” Chairman, President & CEO
Michael Gorenstein (3Q18 Earnings Call)
Emblem Corp (EMC)
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On 8/1/18, Emblem and GreenSpace announced a strategic partnership to develop and
commercialize CBD infused health and beauty products for the expected adult-use
cannabis market. (Press Release)
"Emblem's partnership with GreenSpace Brands is an industry first and represents an
incredible opportunity to capitalize on the growing CBD market in Canada.” CEO Nick
Dean (Press Release)
Emerald Health Therapeutics (EMH)
Emerald secured over 500 acres of hemp harvest in 2018 and has contracted for
approximately 1000 acres in 2019 to 2022, with the objective of extracting low-cost
cannabidiol (CBD). (Press Release)
On September 26, 2018 the Company entered into a long-term supply agreement to
obtain harvested hemp chaff, plant material consisting of mainly flower and leaf. The
supply agreement was signed with Emerald Health Hemp Inc. to purchase CBD
containing hemp biomass for extraction into CBD oil. (Press Release)
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COLLABORATIVE INSIGHTS February 25, 2019
The Green Organic Dutchman (TGOD)
“We are focused on becoming the Whole Foods of the cannabis industry and recognized
as pioneers in the THC/CBD infused beverage industry.” CEO Brian Athaide (Shareholder
Letter)
HEXO Corp (Hexo)
“With respect to the United States, we are in the process of assessing adequate supplies
for hemp-derived cannabinoids. Using our intellectual property, we believe we can offer
a large range of CBD-based experiences.” HEXO Prospectus (1/25/19)
Neptune Wellness Solutions (NEPT)
“CBD in the United States-and think about this for a moment where it was federally illegal
in the DEA perspective as well as not permitted from an FDA perspective, it is today larger
than the vitamin E sector, and it is on track to surpass the omega-3 supplement category
very soon.” President, CEO & Director James Hamilton (3Q19 Earnings Call)
Organigram (OGI)
On 1/21/19, OGI entered an agreement with 1812 Hemp, a New Brunswick base
industrial hemp research company to secure supply and support research and
development on the genetic improvement of hemp through breeding methods.
Benchmarking
Below we provide a distribution benchmarking analysis on some of the notable publicly
traded CBD companies, including Tilray’s recently announced acquisition of Manitoba
Harvest, which food products are distributed in 16,000 stores across the U.S. and
Canada. Among core CBD companies, Charlotte’s Web’s retail store count of 3,680
stores is almost double that of CV Sciences’ 2,000+ retail locations. Level Brands CBD
products are in over 1,000 retail locations, while 1933 has a retail footprint spanning
600 stores and counting.
Figure 100 Companies Will Focus on Building our Distribution Footprint
20,000
15,000
16,000
Retail Store Count
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10,000
5,000
3,680
2,000+
1,000+ 600
0
Tilray Charlotte's Web CV Sciences Level Brands 1933 Industries
Source: Company Reports and Cowen and Company; Note: TLRY reflects acquisition of Manitoba Harvest
From a revenue perspective, Charlotte’s Web is generating the most sales out of what
we would classify as core CBD-focused companies. Indeed, in the most recent quarter,
the company generated almost $18 mm, which was ~30% higher than number 2
positioned CV Sciences, while Elixinol delivered over $7 mm. We would highlight that for
the cross-over brands, Turning Point Brands is currently delivering the highest revenues
(consisting of OTP only), while reported revenues factor in adult use and medical sales
of THC-infused products, which clearly favor Curaleaf and GTI as two of the more wellknown
MSOs in the U.S. Tilray revenues of $10 mm are expected to ramp over the
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Charlotte's Web
(CWEB)
CV Sciences (CVSI)
Elixinol
Turning Point Brands
(TPB)
Curaleaf (CURA)
Green Thumb
Industries (GTI)
Tilray (TLRY)
1933 Industries
Level Brands (LEVB)
COWEN
COLLABORATIVE INSIGHTS February 25, 2019
Figure 102 Finished Goods CBD Producers…
$40.0
$36.0
$32.0
$28.0
$24.0
$20.0
$16.0
$12.0
$8.0
$4.0
$0.0
$13.8
MRQ Gross Profits (in $ mm)
$9.9
$36.2
$13.8
$8.5
coming quarters, driven by adult use legalization in Canada. 1933 and Level Brands are
smaller in scale but continue to post solid growth.
Figure 101 CWeb Leads Core CBD Companies; CBD Crossover Touches Multiple Industries
$90.0
$75.0
$60.0
$45.0
$30.0
$15.0
$0.0
$17.7 $13.6 $7.4
Most Recent Quarterly Revenues (in $ mm)
$78.7
CBD
$21.4 $17.2
CBD-Crossover/Other
$10.0 $4.6 $1.5
Note: 1933 = 1Q19 (ended 10/18), Level Brands = 4Q18 (ended 12/18), All others are 3Q18 (ended 9/18). AUD/USD =
0.72
Source: Company Reports and Cowen and Company
Nuances around different business models become increasingly apparent when
benchmarking gross margins. Charlotte’s Web and CV Sciences, which we would classify
as finished goods producers, command the highest margins, while Turning Point Brands’
unique positioning within OTP products generates margins lower than the level that
would be seen for traditional cigarette companies. Core cannabis companies have to
contend with being both vertically integrated and in many instances, servicing retail
stores, which are lower margin.
$3.1 $1.9 $0.8
CWEB CVSI TPB CURA GTI TLRY 1933 LEVB
Figure 103 …Command the Highest Gross Margin
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
MRQ Gross Profit Margin
78.0% 73.1%
64.5%
60.7%
49.6%
43.4%
41.9%
30.5%
CWEB CVSI TPB CURA GTI TLRY 1933 LEVB
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CBD
CBD-Crossover/Other
CBD
CBD-Crossover/Other
Note: 1933 = 1Q19 (ended 10/18), Level Brands = 4Q18 (ended 12/18), All others
are 3Q18 (ended 9/18). AUD/USD = 0.72
Source: Company Reports and Cowen and Company
Note: 1933 = 1Q19 (ended 10/18), Level Brands = 4Q18 (ended 12/18), All others
are 3Q18 (ended 9/18). AUD/USD = 0.72
Source: Company Reports and Cowen and Company
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COLLABORATIVE INSIGHTS February 25, 2019
As evidenced by the above chart, in addition to offering very strong revenue growth
prospects, CBD finished products are highly profitable. While it is still early days, both
Charlotte’s Web and CV Sciences are EBITDA positive, generating 30% margins in the
most recent quarter, which is an encouraging sign. This intersects at a period where
other companies across the broad cannabis landscape have been investing heavily in
SG&A, which includes but is not limited to headcount increases and R&D.
Figure 104 CWEB and CVSI Are Posting Strong EBITDA… Figure 105 ...With Margins Exceeding 30%
$15.0
$10.0
$5.0
$0.0
-$5.0
-$10.0
$5.4
MRQ Adj. EBITDA (in $ mm)
$13.8
$4.1
$0.4
-$0.9
-$5.5
-$7.4
CWEB CVSI TPB GTI 1933 CURA TLRY
CBD
CBD-Crossover/Other
Note: 1933 = 1Q19 (ended 10/18) (ended 12/18), All others are 3Q18 (ended 9/18).
AUD/USD = 0.72
Source: Company Reports and Cowen and Company
40.0%
20.0%
0.0%
-20.0%
-40.0%
-60.0%
-80.0%
30.5% 30.4%
20.9%
2.3%
-18.6% -25.7%
-73.3%
CWEB CVSI TPB GTI 1933 CURA TLRY
CBD
MRQ Adj. EBITDA Margin
CBD-Crossover/Other
Note: 1933 = 1Q19 (ended 10/18) (ended 12/18), All others are 3Q18 (ended 9/18).
AUD/USD = 0.72
Source: Company Reports and Cowen and Company
While Charlotte’s Web generated 172% growth last year, we can see that sales are
expected to remain robust. Charlotte’s Web is guiding for 2018 revenues to be between
$65-80 mm, which would represent ~81% growth at the midpoint of the range. For
2019, the company is guiding for $120-170 mm, which would represent 100% growth
at the midpoint. Looking out to 2020, current consensus estimates of $295 mm would
imply further robust growth at over 100%. With momentum in CBD expected to ramp
on a go-forward basis, we would look for these more established, well capitalized
companies such as Charlotte’s Web, CV Sciences and Elixinol to consolidate market
share in the form of distribution gains from new channels coming online as well as a
from considerable amount of consolidation.
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Figure 106 Charlotte’s Web’s Top-Line Outlook
$350
$300
$250
$200
$150
$100
$50
$0
YoY Growth:
2018 = ~81%
2019 = ~100%
2020 = ~103%
$40
Charlotte's Web Revenue Estimates (in $ mm)
$73
$145
$295
2017A 2018E 2019E 2020E
Source: Company Reports, Bloomberg
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COLLABORATIVE INSIGHTS February 25, 2019
Private Companies
Botanica. Best known for its portfolio of adult use edible brands, which includes Spot,
Journeyman and Mr. Moxey’s Mints, Botanica recently launched a CBD only line of Mr
Moxey’s Mints, following the passage of the 2018 Farm Bill. The products are currently
offered in the U.S. and the U.K. and are available in one package format consisting of 60
mints at 5 mgs per CBD each. In the U.S., the mints retail for ~$40 per tin and going
forward, the company will look to come to market with smaller / lower priced offerings
to help drive immediate point of sale consumption across brick and mortar retail
locations. Over time, management forecasts that ~40% of sales will come from e-
commerce, with the balance coming distribution.
GenCanna. Based in Kentucky, GenCanna is a cultivator of premium hemp-derived
CBD. Additionally, the company offers whole-plant hemp extracts in the form of full
spectrum or isolated crystalline cannabinoid CBD for wholesale, available to customers
in the form of powders and oils and can be prepared as a proprietary water dispersible
powder to support large scale manufacturing needs. Their powders have a CBD
concentration of 99.5%+, which is isolated using CO2 extraction and crystal precipitation
(as is their bulk oil). GenCanna also offers a full range of packaged goods including
bottled oil drops, capsules and topical creams. All GenCanna products are produced in
an FDA registered and inspected, food-grade, GMP-compliant facility and are tested by
third parties for safety and quality. In November 2018, MariMed (MRMD, not covered)
invested $30 mm in GenCanna, which established a long-term supply agreement
whereby GenCanna became MariMed’s global hemp CBD supplier.
Highline Wellness. Co-founded by former Cowen alum Chris Roth and his business
partner Chris D’Alberti, Highline Wellness is a NYC-based CBD company currently
offering tinctures, chews (gummies) and topicals (pain cream). Highline products are
manufactured in Florida and the company sells direct-to-consumer. According to the
company, this provides for competitive pricing relative to their peers (which we would
classify as broadly mainstream). While still early days, Highline has an active presence
on social media platforms including a loyal group of followers on Instagram, which has
resulted in top line momentum to start off the year.
Lazarus Naturals. Launched in 2014, Lazarus Naturals is an Oregon-based CBD
company, which offers products ranging from tinctures and capsules, to topical oils and
balms as well as isolates. Lazarus is value priced across the competitive set with one of
the lowest price/mg of CBD relative to the companies that we benchmarked against.
The company offers 60% discounts to veterans, individuals on long-term disabilities as
well as for low-income households. All sales primarily come from e-commerce and
products are shipped to all 50 states across the U.S.
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Lord Jones. Founded by Robert Rosenheck and Cindy Capobianco, Lord Jones
manufactures and distributes super-premium CBD infused products. The company
provides a broad array of product offerings, including tinctures, confections, capsules,
and skincare, among others. Clearly catered towards the premium-end of the market,
Lord Jones has announced several high-profile partnerships over the past couple of
years which includes collaborating with Equinox, partnering with luxury hotel group,
The Standard, and most recently, being the first CBD brand carried by Sephora.
Mary’s. Founded in 2013, Mary’s produces and sells cannabis and hemp-derived CBD
products across three main segments, which include:
�
�
Mary’s Medicinals. Cannabinoid infused products for relief, available in 11 U.S.
states.
Mary’s Nutritionals. Hemp-derived CBD products for health & wellness, sold in
retailers and online in the U.S. and international markets
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COLLABORATIVE INSIGHTS February 25, 2019
�
Mary’s Whole Pet. Whole plant CBD remedies for pets, sold in retailers and
online in the U.S. and international markets.
Mary’s is a high-end brand, focused on clean delivery methods through its transdermal
patches, topicals and patented gel pen technologies. In March 2018, Mary’s Nutritionals
was chosen as the preferred CBD vendor partner for all Ritz Carlton, Marriott, JW
Marriott, W, and St. Regis Locations.
Mile High Labs. Based in Colorado, Mile High Labs is the largest extractor of CBD in the
world. The company sources hemp from third party cultivation partners across four
states, which include Colorado, Oregon, New York, and Kentucky. Mile High Labs
extracts exclusively from industrial hemp flower material to create full spectrum
extract, distillate and isolate. Their full spectrum extract contains a full range of CBD
terpenes and over 60% CBD on average, making it useful for low concentration
formulations in holistic and wellness applications, including tinctures and capsules. Mile
High Labs distillate is refined using proprietary molecular distillation technology and
contains ~85% CBD on average, making it ideal for vape pen cartridges, tinctures and
other high potency formulations. The company’s isolate contains ~99% CBD and is used
as a main ingredient in bioceutical and nutritional product applications. Mile High offers
end-to-end certified GMP hemp CBD manufacturing. In October 2018, Mile High Labs
raised $35 mm in a Series A, which according to CEO Jason Roth represented a “recordbreaking
investment [which] is a reflection of the growth in demand for quality CBD
products and Mile High Labs’ unique ability to meet that demand.” CFO Jonathan Hilley
also recently noted that he believes “the CBD market is in the early stages of a 20-year
secular growth trend.”
Papa & Barkley. Papa & Barkley is based in California, with a diverse portfolio of
products and lines. The company’s Releaf line spans multiple form factors, including
tinctures, capsules, patches, and balms, among others, which are comprised of different
THC:CBD ratios. Papa & Barkley’s Essentials line is specifically focused on CBD, and as it
stands, they offer a tincture in both a 15 ml bottle (450 mg CBD) and 30 ml bottle (900
mg CBD) and will soon be rolling out capsules, as well as an extra strength pain balm.
The company is only in California currently, but is looking at going to market in three
other primary states, as well as three other secondary states.
Recess. Launched in October 2018, Recess is a wellness company currently specializing
in beverages which are infused with full spectrum hemp extract. The company has
positioned itself as a modern day lifestyle brand and daytime productivity enhancer that
offers a universal message and idea instead of being anchored specifically to CBD. This
strategy shares similarities with traditional CPG products, such as energy drinks and
soda, which are not marketed for the active ingredient, but instead as the solution.
While the current product portfolio includes sparkling beverages only, Recess plans on
rolling out a plain water, as well as powders, which will cater to on-premise
consumption occasions, such as coffee shops, juice shops and cocktail bars.
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Reliva CBD Wellness. Reliva is a CBD-focused company, which form factors include
tincures, shots, sprays, topicals, gummies, and pet care. The company is run by Miguel
Martin, who previously served as the President and GM of Logic Technology
Development, an e-cigarette manufacturer in the U.S. Reliva’s products are focused on
value from an absolute pricing perspective, as nothing sells for over $19.99 at retail. The
company is unique insofar as they do not offer e-commerce, nor do they make and
claims on efficacy or rely on testimonials or influencer marketing, which Martin believes
will create a narrative on responsibility. Reliva focuses on independent c-stores and
grocery channels and is expected to be in ~1,000 stores by the end of March, growing to
4,000-5,000 stores by the end of the summer with the goal of doubling that store count
to ~10,000 locations by year-end.
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COLLABORATIVE INSIGHTS February 25, 2019
Figure 107 Boots - Cannabidiol & CBD Oil Offerings
Health Care: Drug Retailer Perspective (Rhyee)
CBD Products Gaining Traction With Independent Pharmacies
CBD products appear to be gaining traction with independent pharmacies, many of
whom are already selling or planning to sell CBD oils. We don’t find this surprising given
the high demand for and strong expected growth potential of CBD products, as well as
the differentiation it affords independents relative to larger chain pharmacies.
Independent pharmacies also likely find the high-margin profile of CBD oils attractive,
which we suspect is similar to those of more traditional over-the-counter drugs. OTC
drugs are a substantial profit driver for independent pharmacies. The greater
acceptance of and improving sentiment towards CBD products as a viable business for
independent pharmacies is evidenced by a panel held by the National Community
Pharmacists Association (NCPA) at its annual convention in October 2018, which served
to educate independent pharmacy owners of the legality, clinical uses, potential risks
and marketing tactics of CBD oils. For those independent pharmacies that have decided
to sell CBD oils, ensuring that they provide high-quality products is paramount, with a
focus on looking at the bioavailability of CBD. Additionally, independent pharmacies
emphasize the importance of patient education, in regards to treatment and potential
side effects. Anecdotally, reports note that many independent pharmacies have received
positive feedback from patients, attributing diminished opioid dependence and pain
relief to CBD oils.
Large Pharmacy Chains Don’t Appear As Quick To Offer CBD Oils
Large pharmacy chains, such as CVS Pharmacy and Walgreens, don’t currently sell CBD
oil. WBA management has noted that, while the company is monitoring the CBD market
and the potential to sell it, WBA currently has no public stance on whether it plans to
sell CBD products future. Interestingly, Boots, which is a pharmacy chain in the U.K.
owned by WBA, sells CBD oil in three different doses (Figure 107). As such, we wouldn’t
be surprised if WBA decides to sell CBD products in the future.
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Source: Boots.com and Cowen and Company
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COLLABORATIVE INSIGHTS February 25, 2019
Health Care: Payor Perspective (Rhyee)
Based on our conversations with managed care companies, whether CBD oils will be
covered as a medical benefit by government sponsored health programs is determined
by the Center for Medicare and Medicaid Services (CMS) and state governments.
Currently, CBD products aren’t a covered benefit or an extra benefit that has been
approved by CMS or states, and it isn’t known at this time whether CMS or states
governments are considering reimbursement for CBD products. That said, based on our
discussions with a number of payors, if a state government were to provide
reimbursement for CBD products under Medicaid, it would have to add CBD oils as a
covered benefit under the state plan, which may or may not require CMS approval. We
note that CMS and states do provide reimbursement for non-traditional treatments, if
they determine that there’s some benefit, such as issues around social determinants, As
such, we see the potential for CBD oils to become a covered benefit under CMS, even
without FDA approval.
On the commercial side of the market, payors we spoke with noted that CBD oils aren’t
eligible for coverage under commercial health plans because they’re not regulated by
the FDA. There are a couple of exceptions, such as GWPH’s Epidiolex, which is a
prescription pharmaceutical formulation of highly purified, plant-derived cannabidiol for
the treatment of seizures associated with Lennox-Gastaut syndrome (LGS), or Dravet
syndrome in patients two years of age or older. Epidiolex is covered by commercial
insurance as it is an FDA approved drug. Payors noted three factors complicating
commercial coverage of CBD oils, including (1) legal issues, as CBD oils derived from THC
(cannabis) aren’t legal if they contain equal to or more than 0.3% THC; (2) lack of
regulation by the FDA; and (3) their availability as OTC medications.
Health Care: Provider Perspective (Rhyee)
The certified use of medical marijuana appears to be gaining acceptance by the provider
community, as evidenced by the recent distribution of a memo by the chief physician
executive of Intermountain Healthcare, Utah’s largest health provider, to its network of
providers that the health system is lifting its prior directive that advised physicians not
to write letters recommending cannabis treatments. However, it’s difficult to assess
providers’ stance on recommending the use of CBD oils. With greater clinical evidence
supporting the efficacy in treating various conditions, we may very well see doctors
recommend CBD oils as well, which some claim to be effective in treating loss of
appetite in cancer patients, chronic pain, epilepsy, Huntington’s disease, sleep disorders,
multiple sclerosis symptoms, schizophrenia, and glaucoma.
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COLLABORATIVE INSIGHTS February 25, 2019
eCommerce To Be A Key Consumer Distribution Channel Long Term
(Blackledge)
A significant portion of the CBD products that are currently available fall into the
Personal Care / Beauty Products or Vitamins and Food Supplements verticals, both of
which are part of the larger Consumables category. Consumables continues to be a
highly under-penetrated eCommerce vertical in the midst of a progressive shift online,
and we see an opportunity for these CBD companies to expand online as secular
tailwinds continue to drive eCommerce growth for the larger Consumables market. For
context, we forecast overall US Consumables eCommerce sales of $51BN in ’18, or 11%
eCommerce penetration, rising to $111BN in ’23 or 19% eCommerce penetration.
Longer term, Consumables eCommerce market share, led by Amazon, should rise well
above our 19% penetration forecast in ’23, as the sector favors eCommerce vs. Brick &
Mortar, for multiple reasons, namely (1) changing consumption trends, particularly with
younger demographics, who would prefer to “Skip the Trip” for these high
replenishment factor goods; and (2) rising smart speaker penetration, like AMZN's
popular Echo device, driving gains in high replenishment re-ordering.
Figure 108 U.S. eCommerce Consumables Penetration ‘07-‘23E
25%
20%
15%
10%
5%
0%
3% 3% 3%
4% 4%
5%
6%
6%
7%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
8%
9%
11%
12%
14%
16%
17%
19%
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Source: Cowen and Company; U.S. Census Bureau
Due to the aforementioned macro factors, we view eCommerce as a major potential
customer distribution channel for CBD longer term as consumers’ spending habits
continue to shift, and purchasing of Personal Care Products, Vitamins & Food
Supplements and other Consumable items moves online at an accelerated rate. We
expect growth within the Consumables (Personal Care, HH Goods, etc) and Food &
Beverage verticals to consistently outpace overall eCommerce growth ’18-’23, resulting
in an increased share of U.S. eCommerce sales.
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COLLABORATIVE INSIGHTS February 25, 2019
Figure 109 Share Of U.S. eCommerce Sales ’13 vs. ‘18E vs. ‘23E
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
3%
2%
3%
4%
3%
3%
4%
4%
3%
3%
3%
4%
7% 7%
6%
6%
9% 7%
8%
12%
10%
9%
5%
3%
8% 10% 11%
10% 11% 13%
19% 17%
19% 20% 19%
Source: Cowen and Company; U.S. Census Bureau
Analyzing Two Key Verticals for CBD Adoption
As part of our monthly survey of 2,500 US consumers, we ask Amazon.com purchasers
to indicate which categories (out of a list of 30) they purchased on Amazon in the past
30 days. Our data shows that Personal Care Products and Vitamins & Supplements were
more likely to be purchased (vs. the average across all categories) by both Prime and
Non-Prime members throughout 2018.
Taking a closer look at 4Q18, in each month (on average) 19% of all Amazon Prime
Purchasers bought at least one personal care product and 15% purchased a Vitamin or
Supplement, while the average purchase rate across all 30+ categories was only 12% of
Prime purchasers. We noted a similar trend among Non-Prime Purchasers in 4Q18, with
13% who bought Personal Care Products and 10% who bought Vitamin or Supplements,
compared to the average purchase rate across all categories of 8%.
16%
2013 2018E 2023E
Office Equip/Supplies
Garden Equip/Supplies
Toys
Sporting Goods
Other
Media
Auto
Food & Bev
Furniture & Home Furnishings
Consumables
Electronics & Appliances
Clothing & Accessories
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Figure 110 Prime Member Purchaser % By Vertical, 1Q18-4Q18
Figure 111 Non-Prime Purchaser % By Vertical, 1Q18-4Q18
25%
20%
15%
10%
23%
17%
21%
22%
18%
16%
11% 11% 11%
19%
15%
12%
16%
14%
12%
10%
8%
6%
14%
13% 13%
12%
11% 11% 10% 10%
7%
7% 7%
8%
5%
4%
2%
0%
1Q18 2Q18 3Q18 4Q18
0%
1Q18 2Q18 3Q18 4Q18
Personal Care Products Vitamins & Supplements Average Across All Categories
Personal Care Products Vitamins & Supplements Average Across All Categories
Source: Cowen proprietary Consumer Internet Survey, n=~2500, Dec ‘18 Source: Cowen proprietary Consumer Internet Survey, n=~2500, Dec ‘18
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COLLABORATIVE INSIGHTS February 25, 2019
Amazon Has A Modest But Expanding Physical Footprint
For CBD companies, expansion through Amazon’s retail locations and more importantly
Whole Foods’ expanding retail footprint are also attractive avenues for reaching new
customers (assuming CBD companies can convince Amazon and Whole Foods to carry
their products). While we currently lack insight into when CBD products may become
available in Whole Foods stores, or what a regional or national rollout might look like,
below we analyze Amazon’s physical footprint to highlight the potential for distribution.
Amazon’s expanding physical footprint is made up of a small number of Go Stores,
Amazon Fresh Grocery Pickup in Seattle, Amazon Branded Book Stores and most
notably its Whole Foods Market business. Whole Foods is a health focused supermarket
chain based out of Austin TX that operates ~470 US locations and was purchased by
Amazon in Aug ’17. Since acquiring Whole Foods, Amazon has deeply integrated it with
the company’s Prime offering. In combination with Amazon’s Prime Now platform,
Whole Foods is now offering 2-hour delivery on thousands of in-store items in 63 cities,
which account for over 50% of the US population and over 2/3rds of US GDP. Whole
Foods also offers curbside pickup in over 20 markets.
Figure 112 Amazon Prime Now & Same Day Delivery Top 50 US Metro Areas By 2017 GDP (%)
2017 GDP
Rank
U.S. Metropolitan Areas
% of '17
US GDP
% of '17 US
Population
Amazon Prime Now
Available
Amazon Prime Free Same-
Day Delivery
WFM Delivery via
Prime Now
1 New York-Newark-Jersey City, NY-NJ-PA 9.8% 6.2% P P P
2 Los Angeles-Long Beach-Anaheim, CA 5.9% 4.1% P P P
3 Chicago-Naperville-Elgin, IL-IN-WI 3.9% 2.9% P P P
4 Dallas-Fort Worth-Arlington, TX 3.1% 2.0% P P P
5 Washington-Arlington-Alexandria, DC-VA-MD-WV 3.0% 1.9% P P P
6 San Francisco-Oakland-Hayward, CA 2.9% 2.2% P P P
7 Houston-The Woodlands-Sugar Land, TX 2.8% 1.4% P P P
8 Philadelphia-Camden-Wilmington, PA-NJ-DE-MD 2.5% 1.9% P P P
9 Boston-Cambridge-Newton, MA-NH 2.5% 1.5% P P P
10 Atlanta-Sandy Springs-Roswell, GA 2.2% 1.7% P P P
11 Seattle-Tacoma-Bellevue, WA 2.0% 1.8% P P P
12 Miami-Fort Lauderdale-West Palm Beach, FL 2.0% 1.1% P P P
13 San Jose-Sunnyvale-Santa Clara, CA 1.6% 1.1% P P
14 Detroit-Warren-Dearborn, MI 1.5% 1.3% P
15 Minneapolis-St. Paul-Bloomington, MN-WI 1.5% 0.6% P P P
16 Phoenix-Mesa-Scottsdale, AZ 1.4% 1.0% P P P
17 San Diego-Carlsbad, CA 1.3% 1.4% P P P
18 Denver-Aurora-Lakewood, CO 1.2% 0.9% P P P
19 Baltimore-Columbia-Towson, MD 1.1% 0.9% P P P
20 Charlotte-Concord-Gastonia, NC-SC 1.0% 0.7% P P P
21 Portland-Vancouver-Hillsboro, OR-WA 1.0% 0.9% P P P
22 St. Louis, MO-IL 0.9% 0.7% P
23 Riverside-San Bernardino-Ontario, CA 0.9% 1.4% P
24 Austin-Round Rock, TX 0.8% 0.7% P P P
25 Pittsburgh, PA 0.8% 0.6% P
26 Tampa-St. Petersburg-Clearwater, FL 0.8% 0.9% P P P
27 Indianapolis-Carmel-Anderson, IN 0.8% 0.6% P P P
28 Cleveland-Elyria, OH 0.8% 0.7% P P
29 Cincinnati, OH-KY-IN 0.8% 0.6% P P P
30 Columbus, OH 0.8% 0.6% P P P
31 Nashville-Davidson--Murfreesboro--Franklin, TN 0.8% 0.7% P P P
32 Orlando-Kissimmee-Sanford, FL 0.8% 0.6% P P P
33 Kansas City, MO-KS 0.7% 0.7% P P
34 San Antonio-New Braunfels, TX 0.7% 0.6% P P P
35 Sacramento--Roseville--Arden-Arcade, CA 0.7% 0.7% P P P
36 Las Vegas-Henderson-Paradise, NV 0.6% 0.6% P P P
37 Milwaukee-Waukesha-West Allis, WI 0.6% 0.5% P P P
38 Bridgeport-Stamford-Norwalk, CT 0.6% 0.3%
39 Virginia Beach-Norfolk-Newport News, VA-NC 0.5% 0.5% P P
40 Hartford-West Hartford-East Hartford, CT 0.5% 0.4% P
41 Salt Lake City, UT 0.5% 0.4% P P
42 Raleigh, NC 0.5% 0.5% P P P
43 Providence-Warwick, RI-MA 0.5% 0.4% P
44 Richmond, VA 0.5% 0.4% P P P
45 New Orleans-Metairie, LA 0.5% 0.4% P
46 Jacksonville, FL 0.4% 0.4% P P
47 Louisville/Jefferson County, KY-IN 0.4% 0.4% P P
48 Oklahoma City, OK 0.4% 0.4% P P
49 Memphis, TN-MS-AR 0.4% 0.4% P
50 Urban Honolulu, HI 0.4% 0.4%
Total 72.6% 54.0% 34 40 46
Amazon Prime Now Markets 62.3% 44.8%
Amazon Same Day Delivery Markets 66.0% 48.6%
Whole Foods Delivery via Prime Now Markets 69.2% 50.9%
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Source: Company reports, Cowen and Company, US Bureau of Economic Analysis
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Competition From AMZN Private Label Could Be A LT Concern, Offset By CBD’s
Established Brands
Should the market for CBD products expand rapidly over the next several years, one
source for increased competition could be Amazon’s own first party (private label)
business. Amazon offers private label goods across the gamut of product verticals,
including consumables and vitamins.
Per industry participants that have discussed AMZN’s private label business with us,
Amazon’s approach is similar across most new product lines, most notably that the
company is now focusing less on heavy discounting to take share from competition. By
contrast, we believe that while any foray into CBD could start with a big push by AMZN
to gain share, if sales and reviews aren’t working, AMZN would likely reduce resources
quickly. Additionally, Amazon Private Label tends to replicate top sellers for goods that
are high replenishment, commodity-type products with undifferentiated branding, then
add secondary brands over time. Amazon private label has in some cases captured huge
market share early (anywhere from 25-40% market share by SKU within the first six
months).
AMZN also tends to have the most success in verticals where branding is less important
(a fact that could provide an advantage to more established CBD companies). The
widespread availability and acceptance by a retailer such as Amazon could also help to
drive mainstream adoption of CBD products and thus provide a benefit for the industry
as a whole.
Other Potential Platforms: EBAY Has The Reach To Make An Impact
There are other platforms that may be easier to break into than Amazon that would also
provide an avenue to reach a wide array of consumers. Ebay could be an alternative for
CBD companies to tap into. EBAY has been losing share in eCommerce over the last
several years, and developing a leading marketplace in a new product vertical such as
CBD products could be an incentive to become an early adopter. Ebay currently has
179MM active buyers on the platform worldwide, and the company generated over
$90BN in GMV in 2018.
Our survey indicates that unlike Amazon, EBAY has had less success in driving
consistent purchasing in areas like personal care and beauty as well as in vitamins and
supplements. Our data suggests that unlike Amazon, these two key verticals are
purchased at about the same rate as any other category, which suggests that there is an
opportunity for these verticals to grow meaningfully, in our view.
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Figure 113 EBAY Purchaser % By Vertical, 2Q17-4Q18
10%
8%
6%
8%
8%
7% 7%
7% 7% 7%
7%
6%
8%
9%
7%
7%
7% 7%
8%
8% 8%
7%
6%
7%
4%
2%
0%
2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18
Personal Care Products Vitamins & Supplements Average Across All Categories
Source: Cowen proprietary Consumer Internet Survey, n=~2500, Dec ‘18
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Cannabidiol (CBD) Entrance Into Mass Retail May Start In Beauty Before
Entering Broadlines (Chen)
Cowen’s take is that first movers may predominantly consist of independent operators,
followed by beauty, convenience, and other major chains. We believe that growth could
take on a barbell dynamic, with early adopters being both high-end luxury players
alongside lower-end local convenience shops, with middle-ground retailers including
WMT, TGT, and COST likely being the last to sell CBD products after a test-and-learn
phase is observed among the early adopters. We expect that CBD in beauty could be a
~$1bn opportunity within skincare specifically; the skincare category currently
comprises ~23% of the overall $87bn beauty products market.
Luxury Department Stores Are Early Adopters. A number of independent retail
operators have recently announced plans to expand their physical presence to
incorporate CBD. For example, luxury department store Barneys New York is adding a
300-square-foot cannabis store-within-store concept called “The High End” to its
flagship store in Beverly Hills, where it will sell CBD beauty products and vintage
paraphernalia. Neiman Marcus also announced its “Trending Beauty” initiative, which
includes carrying leading CBD brands (5 SKUs) online and within 5 of its 44 stores.
Another example is Green Growth Brands (CSE: GGB, not covered) recently announcing a
deal with DSW Inc. (DSW, not covered) to sell its Seventh Sense brand within 96 USbased
DSW stores; this announcement comes after a 10-week trial phase where 74.4%
of product presented on shelves was reportedly sold. GGB also announced it will open
108 stores within Simon Property malls (SPG, not covered), starting in March 2019.
Beauty Could Be First Major Distribution Channel. Cowen believes that the future of
beauty will increasingly emphasize clean, natural ingredients within products – in line
with the broader health and wellness movement that is permeating into various other
retail verticals. Therefore, we believe that beauty could be the first major distribution
channel to adopt CBD given the compound’s properties as a natural remedy to manage
pain, inflammation, and anxiety.
Sephora.com currently carries 3 SKUs with CBD dosages (Lord Jones and Josie Maran),
and a variety of hemp-based products. Meanwhile, ULTA only has hemp-based offerings
but could adopt a comparable line to Sephora within its Prestige assortment. Average
Unit Retail (AUR) for the three Sephora CBD SKUs is ~$70, or $1.85/mL, which supports
our view that adopters will skew toward Prestige-cosmetics-oriented retailers such as
specialty beauty players (Sephora, ULTA) and department stores (JWN, M), before Mass
cosmetics carriers like grocery stores, pharmacies or broadline retailers adopt it, as price
points are closer to $10/SKU.
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Historically, broadline retailers, including WMT, TGT, and COST have shied away from
entering controversial categories in their earlier innings, preferring to be last movers
and not create controversies. We do note, TGT has previously made small inroads into
CBD. According to AdAge, TGT briefly sold hemp and CBD oils in late 2017 before pulling
all the products. Also, we note, WMT’s website does sell several hemp oil products.
Figure 114 CBD Presence Is Limited In Mass Retail Outlets
Source: Cowen and Company, company websites; Note: Search “CBD oil, CBD, Cannabis, Cannabis Oil”
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COLLABORATIVE INSIGHTS February 25, 2019
Growing Application For Hemp And CBD Within The Apparel & Footwear
Market (Kernan)
With the changing tide on marijuana legalization and hemp cultivation, the use case for
and interest in CBD applications are rapidly expanding. We think there lies within this
fervor potential for greater utilization of hemp derived textiles in apparel, footwear and
accessories after largely being relegated to specialist brands with a few exceptions. The
Western Producer, a Western Canada weekly agriculture publication, commented that
“industrial hemp could reach whole crop utilization” in an article published on 1/10/19
“Revenue Streams Expand For Hemp Growers.” We think this compliments the
sustainability movement that is gaining ground in global apparel and footwear
production and among Millennial and Gen Z consumers. Western Producer quotes Jan
Slaski, senior researcher for InnoTech Alberta, that “textile applications have brought
[about] the development of hemp-based uniforms, socks, underwear and other
apparel…” as its properties, which Patagonia describes as “linen-like,” provide a “quality
suitable for fine textiles.”
Approximately $820MM worth of legal hemp products were sold in the U.S. in 2017 and
roughly 13% of those hemp-based products are textiles according to Entrepreneur’s
9/4/18 article, “The Hemp Business Is Booming.” The article’s author Rose Leadem cites
a history of the crop dating back “to the 1600s when growing hemp was encouraged for
use in sails, ropes and clothing.” This period was followed by years of back and forth
regulation that alternately banned and unbanned hemp cultivation in the U.S. While the
2014 U.S. Farm Bill allowed for heavily restricted industrial hemp cultivation, the more
recent 2018 U.S. Farm Bill, as described by the Brookings Instituted, offers a more
“expansive” cultivation of hemp.
Figure 115 Textiles Have Low Penetration Among Legal U.S. Hemp Products (2017)
Textiles, 13%
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Non Textiles,
87%
Source: Cowen and Company; Western Producer
To frame the market opportunity for greater hemp utilization as a textile in apparel and
footwear from what is likely a nascent penetration currently, the U.S. clothing and
accessories market reached store sales of $262 billion in 2017 as reported by the U.S.
government, with potential to grow to $275B in 2018. We note that there are some
global brands that offer hemp fiber, mostly but not all on a limited basis, in their clothing
and footwear assortment. These brands include Patagonia, Columbia Sportswear’s
prAna brand, Orvis, Thought Clothing, Toad&Co, Jungmaven, Eartheasy, Sanuk, Toms,
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Figure 116 Patagonia Iron Forge Hemp
Canvas Ranch Jacket (55% Hemp)
Adidas and Nau. Nike offered a hemp-based SB Dunk Low sneaker in 2004, re-issuing
the shoe in 2016 around Earth Day. Patagonia, a $1B global brand that encompasses a
focus on the environment and social responsibility in its mission statement, views hemp
as a “natural fiber that’s cultivated with low impact on the environment.” The brand’s
assortment includes some hemp-based products made with 100% hemp, which it
imports from China, or blended with other fibers like recycled polyester, organic cotton,
and spandex.
Figure 117 prAna Sharla Sweater (55% Hemp)
Figure 118 Men’s (Hemp upper)
Source: www.patagonia.com Source: www.prana.com Source: www.sanku.com
There is also a growing market for apparel and footwear that provide recovery
attributes. For example, Under Armour has its Recovery line of apparel that includes
Celliant which is designed to “capture body heat and convert it to infrared light that is
returned to your body, boosting localized blood flow and upping the amount of oxygen
reaching your muscles.” Celliant is described as “utilizing a proprietary mineral matrix
that can be embedded into the core of a yarn or applied to a wide variety of fabrics.”
This demonstrates the ability to weave outside attributes into existing textiles to add
beneficial components beyond just providing an item of clothing. With CBD being
reported as having health and wellness properties, such as to combat inflammation,
there could be potential for CBD to be infused into textiles. Canada’s Fashion magazine
recently highlighted Devan Chemicals in its 1/4/19 article, “CBD Is Everywhere. Will
CBC-Infused Clothing Be Next?” Devan Chemicals is a Belgium-based company that has
“added CBD to their textile solutions portfolio.” The company’s “R Vital” fabric reflects a
weave of microcapsules of CBD that release when a person wears the clothing as
demonstrated in their website’s flow chart below. While still early stage, perhaps there
will be demand for widescale CBD infused textiles, although, as the article points out, it
is unclear how the “potency” holds up over time and after washing.
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COLLABORATIVE INSIGHTS February 25, 2019
Figure 119 Devan Chemical’s R-Vital – Flow Chart For A CBD-Infused Textile
Source: Cowen and Company; Devan Chemical
Tilray And ABG Sign Partnership
Privately held Authentic Brands Group (ABG) recently signed a deal with Tilray to
capitalize on the general wellness capabilities of CBD. ABG’s product portfolio includes
athletic based names such as Muhammad Ali, Shaquille O’Neal, Dr. J, Nautica and Prince.
The muscle recovery and wellness capabilities of CBD create branding opportunities
within these brands. CBD oil also has wellness characteristics beneficial for skin care
products. ABG’s Nine West Brand will offer wellness products containing CBD powered
by Tilray.
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Figure 120 Nine West Products Powered By Tilray
Source: Cowen and Company; Sourcingjournal.com
Tilray will also gain exposure to ABG’s 150MM followers through its micro-influencer
network, Winston. Tilray will have the ability to display its name on ABG cannabis
products. Tilray will initially pay ABG $100MM and up to $250MM in cash in stock. In
return ABG will pay TLRY 49% of revenues from any cannabis products with any ABG
brand name, with a minimum of $10MM/year for 10 years, essentially guaranteeing
TLRY will receive a return on its initial $100MM investment. This type of deal opens the
door for CBD products to partner with IP ownership to expand brands and CBD use
partnerships.
DSW And Green Growth Brands
Green Growth Brands’ CBD infused Seventh Sense products, including foot creams and
muscle balms, will be sold at 96 DSW stores nationwide out of DSW’s 500-store base.
As the sale of CBD wellness products become widely acceptable and stigma around once
illegal products subsides, opportunity should increase to move into other nationwide
retailers. Under our coverage universe, Dick’s Sporting Goods may have the potential to
offer wellness products containing CBD. DKS has a total of 864 stores nationwide. If
DKS were to offer products in a similar percentage of stores as DSW, this would provide
166 incremental distribution points for CBD wellness products.
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We Would Expect Starbucks To Be First Under Our Active Coverage To
Pilot CBD Oil, Though Not In Near Term Plan (Charles)
Under our active coverage, we would categorize Starbucks as the most forward thinking
with beverage innovation relative to Dunkin’, Tim Hortons and McDonald’s McCafe.
Starbucks has launched matcha and nitro cold brew on a widespread basis in recent
years, among other wellness-based offerings. During an interview with CNBC last
month, Starbucks CEO Kevin Johnson cited no plans to introduce CBD-based beverages
in the near term, but did not dismiss the notion of ultimately piloting the ingredient.
Despite early traction with craft/independent coffee shops, regulators in several states
recently banned CBD as an additive. The dynamics are fluid, likely delaying adoption
from major coffee players like Starbucks in the near term. That said, we acknowledge a
longer-term opportunity if coffee shops are able to properly measure and disclose the
CBD levels in their coffee, as bottled CBD beverages that disclose CBD oil levels in
packaging are not restricted under the current ban.
Should the regulation of CBD oil as an additive to food/beverage change or craft/
independent coffee shops find a way to comply with the existing regulation, we could
envision Starbucks ultimately piloting the ingredient. We believe Starbucks would need
to better understand the science behind the ingredient, in addition to the standard
evaluation of any new SKU around supply chain availability as well as meeting
Starbucks’ high speed of service standards. Furthermore, given Starbucks’ heavy
reliance on the drive-thru business at more than 50% of sales and 80%+ of ongoing
development, SBUX would need to gain clarity around potential liability this entails
around selling cannabis-infused beverages before introduction. We note in 2010,
Starbucks launched an Evenings program that sold beer and wine inside of participating
restaurants. The initiative ultimately scaled to over 400 locations before the program
was terminated in 2017.
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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.
Regulatory Considerations For CBD (Assaraf – Washington Research
Group)
2018 Farm Bill
The Agricultural Improvement Act of 2018 (also known as the 2018 Farm Bill) was
signed into law by President Donald Trump on Dec. 20, 2018. The main CBD-related
changes in the law are that it: 1) declassifies industrial hemp as a Schedule I substance
under the Controlled Substances Act, 2) shifts regulatory authority over hemp from the
Drug Enforcement Administration to the Department of Agriculture, and 3) provides
autonomy for states to regulate the industry.
However, the 2018 Farm bill does not change the FDA's oversight authority over CBD
products intended for human consumption. The statutory language emphasizes that
"nothing in this subtitle shall affect or modify … the authority of the Commissioner of
Food and Drugs … under the Federal Food, Drug, and Cosmetic Act [FDCA] … to
promulgate Federal regulations and guidelines that relate to the production of hemp.”
FDA Implications
FDA Commissioner Scott Gottlieb issued a statement and FAQ immediately following
the signing of the 2018 Farm Bill, essentially reminding CBD manufacturers of FDA’s
continued regulatory authority over CBD products.
On the positive side, Gottlieb indicated that the FDA is open to engaging with industry
players early to clarify uncertainty and to help develop a clear and consistent pathway
for bringing legal CBD products to market. To that end, the FDA intends to hold a public
meeting “in the near future” to gather stakeholder input on CBD products, including the
perspectives of consumers and manufacturers. The FDA will use this meeting to inform
an “efficient regulatory framework for allowing product developers that meet the
requirements under [FDA] authorities to lawfully market these types of products."
On the other hand, Commissioner Gottlieb expressed concern over the proliferation of
CBD products making drug claims. According to Gottlieb, "the FDA requires a cannabis
product (hemp-derived or otherwise) that is marketed with a claim of therapeutic
benefit, or with any other disease claim, to be approved by the FDA for its intended use
before it may be introduced into interstate commerce. This is the same standard to
which we hold any product marketed as a drug for human or animal use. Cannabis and
cannabis-derived products claiming in their marketing and promotional materials that
they’re intended for use in the diagnosis, cure, mitigation, treatment, or prevention of
diseases (such as cancer, Alzheimer’s disease, psychiatric disorders and diabetes) are
considered new drugs or new animal drugs and must go through the FDA drug approval
process for human or animal use before they are marketed in the U.S."
Even before the passage of the Farm Bill, the FDA has kept a close watch on certain
health claims being made by CBD manufacturers. A simple web search on the FDA's
website turns up dozens of previous warning letters to CBD manufacturers making such
claims (see below for links to FDA warning letters). According to Gottlieb, “the FDA will
continue to evaluate and take action against products that are being unlawfully
marketed and create risks for consumers.”
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In his statement, Gottlieb also presented the following warning for CBD additives to
food and beverages:
"Additionally, it’s unlawful under the FD&C Act to introduce food containing added CBD
or THC into interstate commerce, or to market CBD or THC products as, or in, dietary
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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 before they were marketed as foods or dietary
supplements. Under the FD&C Act, it’s illegal to introduce drug ingredients like these
into the food supply, or to market them as dietary supplements. This is a requirement
that we apply across the board to food products that contain substances that are active
ingredients in any drug."
In response to Gottlieb’s statement, Sens. Ron Wyden (D-Ore.) and Jeff Merkley (D-Ore.)
sent a letter to the FDA on Jan. 15 urging the agency to update federal regulations
governing the use and interstate sale of certain hemp-derived ingredients in food,
beverages or dietary supplements. The two senators, who authored the 2018 Farm Bill’s
Hemp Farming Act provision, indicated that it was “Congress’ intent to ensure that both
U.S. producers and consumers have access to a full range of hemp-derived products,
including hemp-derived cannabinoids.” They requested feedback from FDA within 30
days on the agency’s specific plans regarding implementation of the 2018 Farm Bill.
Sample Of FDA Warning Letters On CBD Products:
https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/ucm616278.htm
https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm583192.ht
m
https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm583197.ht
m
Notable State-Level Events
California
California has historically been more aligned with the FDA’s stance that industrial hempderived
CBD cannot be used in food or dietary supplements. However, that state does
permit the sale of food products with cannabis-derived CBD in licensed dispensaries.
The Food and Drug Branch of California Department of Public Health (CDPH) issued an
updated FAQ on CBD in food products in July 2018 indicating that its definition of “food”
does not include cannabis products like edibles, which are legal in California. CDPH also
technically bans the sale of CBD oil outside of licensed cannabis retailers, though it isn’t
always enforced.
Separately, California Governor Jerry Brown signed a law in late September 2018
(Assembly Bill 2914) that bans the addition of CBD or THC to any cocktail at a public
establishment. The new law “prohibit[s] an alcoholic beverage licensee from, at its
licensed premises, selling, offering, or providing cannabis or cannabis products, including
an alcoholic beverage that contains cannabis or cannabis products, and would provide
that no alcoholic beverage shall be manufactured, sold, or offered for sale if it contains
tetrahydrocannabinol or cannabinoids, regardless of source.”
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Maine
Despite being one of 10 states to legalize marijuana for recreational use, health officials
in Maine recently ordered businesses in the state to remove CBD-infused edibles from
store shelves according to an article in the Portland Press Herald. Similar to California,
the Maine Department of Health and Human Services appears to be following the FDA’s
lead in determining that CBD is an unapproved food additive.
State health inspectors in Maine have reportedly told businesses to remove “all foods,
tinctures and capsules” containing CBD from their shelves; however, business owners
can still sell “CBD products that can be smoked, vaped, worn as a patch or applied as a
lotion, and all medical marijuana patients can still buy oral CBDs from licensed
caregivers or dispensaries.”
New York
In response to the 2018 Farm Bill, the New York State Department of Agriculture and
Markets issued a FAQ dated Dec. 18, 2018 on the manufacture and sale of hempderived
CBD products. The department indicates that its current guidance is subject to
change and that it will likely be issuing additional regulations as the industry evolves.
The FAQ suggests that New York will allow the sale of CBD products sold as a topical or
dietary supplement (pill or tincture), the latter of which runs counter to FDA’s current
position. However, the guidance appears to restrict CBD products for vaping/inhalation.
Additionally, New York will require licensure and prior written approval to produce and
sell certain food and beverages under the New York State Industrial Hemp Research
Pilot Program. Licensees under the program can sell products that are “(1) listed in your
Research Plan and (2) produced in a facility meeting dietary-supplement GMP standards
and (3) properly labeled and packaged for sale pursuant to FDA regulations for dietary
supplements, and (4) in compliance with all provisions of the Research Partner
Agreement.”
Otherwise, New York will restrict the manufacture and sale of ready-to-eat food and
beverage products with added CBD infusions or CBD extracts and lists products such as
“CBD chocolate syrup, CBD soda, and CBD-infused frosting drizzled cookies.” In early
February, the New York Times reported that the New York Department of Health and
Mental Hygiene was beginning to more aggressively enforce this restriction in New York
City restaurants and eateries.
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North Carolina
The North Carolina Department of Agriculture and Consumer Services recently
announced its intent to issue warning letters to manufacturers and retailers who sell
products containing CBD oil in the state. According to a Feb 8 press release, North
Carolina will follow current federal laws, meaning that “CBD cannot legally be added to
any human food or animal feed that is for sale,” as CBD is the active ingredient in an
FDA-approved therapy and cannot be considered a dietary supplement.
North Carolina intends to take an “educate before regulate stance with industry,”
according to the release. However, the state will “reserve the right to be more assertive”
to ensure consumer health and safety, likely meaning product embargoes and seizures.
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Ohio
State and local health officials in Ohio have also begun cracking down on retailers selling
CBD products, according to a recent report from the Cincinnati Enquirer. The Ohio
Department of Agriculture is reportedly ordering the “embargo” of products containing
CBD, which has forced some businesses to remove products from store shelves.
Like most states, Ohio has not yet set up regulations for hemp, which the 2018 Farm Bill
requires from each state before the manufacture and sale of certain hemp-derived
products. In the meantime, CBD sales are technically limited to one of the Ohio’s 56
licensed dispensaries, under the state’s medical marijuana program.
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Global CBD Landscape (Azer)
International Drug Conventions (UN)
There are three international conventions that are core to the drug control system: (1)
1961 Single Convention on Narcotic Drugs, (2) 1971 Single Convention on Psychotropic
Substances and (3) 1988 Single Convention Against Illicit Traffic in Narcotic Drugs and
Psychoactive Substances.
Under the 1961 Convention, cannabis extracts and tinctures are currently classified as
Schedule I substances based on high abuse and dependence potential. Resin and herbal
cannabis are classified as Schedule IV, the most prohibitive category, including
dangerous substances that have little to no medical benefits. THC is classified as a
Schedule II substance in the 1971 Convention. CBD does not currently have its own
scheduled class in the Conventions. Based on recent recommendations from the World
Health Organization (WHO), these classifications are likely to change in the short term.
Although the cannabis plant, as a whole, is scheduled under the conventions, there is not
a distinct separation between marijuana and hemp at the moment. However, there is an
exemption in the conventions for industrial uses of hemp, permitted there is no
potential for abuse. The language in the treaties is vague and has allowed member
states to interpret the conventions in a way that permits the use of hemp to fit their
national legislation. This is a principle based on the practice of “good faith.”
Cannabis Recommendations (WHO)
Beginning in November 2017, CBD was subject to its first pre-critical review conducted
by the WHO at the 39th meeting of the Expert Committee on Drug Dependence (ECDD).
Following the critical review of CBD at the ECDD’s 40th meeting, it was recommended
that “pure CBD should not be scheduled in the International Drug Control Conventions.”
Further clarifications were recently added outlining that CBD preparations containing
less than 0.2% THC should be removed from the drug conventions. The clarification does
not specifically mention the difference between CBD preparations derived from hemp or
marijuana. This outcome is based on expert consultations that found that CBD has no
potential for abuse or dependence. CBD will be the first cannabinoid not controlled
under international law.
The WHO also recommended that THC be removed from the 1971 Convention and listed
under Schedule I. Similarly, it recommended that herbal cannabis and resin remain
under Schedule I and removed from Schedule IV of the 1961 Convention. Extracts and
tinctures were also recommended to be removed from Schedule I. This marks a historic
decision because this was the first time cannabis has ever been subject to a critical
review conducted by the WHO.
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In March 2019, the Commission on Narcotic Drugs, comprised of 53 countries, will vote
on the WHO’s recommendations to schedule substances. A simple majority is required.
However, it is uncertain whether the member states will vote on cannabis and its
derivatives since the WHO delayed the announcement of the recommendation by two
months. This may postpone the vote until 2020.
When the vote is passed to remove pure CBD and CBD preparations, countries that
permit the use of pure CBD and preparations of CBD will not be in violation of any
international treaties. Although countries would no longer be obliged to enforce any
control on CBD, national jurisdictions may still implement measures to regulate or
prohibit CBD use.
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European Landscape
European Parliament Resolution
In February 2019, the European Parliament passed a significant resolution to create
harmonized policies and standardized practices for medical cannabis products in the EU.
The Parliament stressed the importance of conducting clinical trials, which requires a
formal assessment of socio-economic and regulatory barriers that have prohibited
access to research in the past. This is not a legislative, binding resolution; the European
Commission will need to consider a regulatory framework that permits access and
availability to cannabis medicine, therapies and scientific studies.
The European Parliament explicitly stated support for the WHO’s recommendations to
institutionalize the medical and scientific uses of cannabis. Having these two
international institutions aligned on standardizing medical cannabis policies will
facilitate support for interstate agreements and trade, and paves way for rapid
legislative change and growth.
EU Standards And Regulations
There is not a supranational regulatory framework for cannabis in the EU. However,
general standards, such as Good Manufacturing Practice (GMP), Good Agricultural and
Collection Practice and Good Distribution Practice, are now significant for cannabis
compliance. Licenses and authorization must be obtained for certification. This is
especially required for pharmaceutical grade cannabis, which is why many Canadian LPs
can export to Europe and made investments to build GMP-certified facilities. Although
not necessary for non-prescribed cannabis, products with GMP-certification have
trusted quality recognition across the EU.
In the EU, the legal limit for THC content is less than 0.2%, in comparison to North
America where it is less than 0.3% THC. There are some disparities across the continent
with higher margins in Italy (up to 0.6%) and various import requirements country to
country. Outside of the EU, Switzerland permits up to 1% THC content, which is treated
as a tobacco substitute.
EU Novel Food
Recently, CBD has been added to the European Union’s (EU) Novel Food Catalogue.
Foodstuff may be supplements, ingredients or other substance forms. A “novel” food is a
product not previously consumed in the EU, to a significant degree, prior to May 15,
1997, such as for example, foods that enter the market through new technology or
agricultural products normally consumed and grown outside of the EU (e.g. chia seeds,
vitamin K, UV treated food).
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Amendments to the Catalogue occur frequently and provide a regulatory framework for
EU Member States (MS) to follow. Some MS (i.e. UK, France, Germany, Italy, and
Holland) requested to update the catalogue with CBD and hemp-derived products. The
European Food Safety Authority (EFSA) is now conducting a risk assessment for CBD.
This categorization includes pure CBD extracts and products that contain CBD extracts.
The EFSA’s assessment is limited to a daily intake of 130 milligrams. The outcome of the
review is expected in March 2019. By October 2019, the European Commission will
release a draft act to authorize CBD in the updated Catalogue.
While the EFSA assesses CBD, some countries have already banned the sale of CBD and
removed product from the shelves (e.g. France, Austria). MS may have their national
food or health agencies provide further guidance for CBD products and preparations.
Obtaining authorization for CBD and hemp-derived products (e.g. tinctures, edibles,
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beverages) will be imperative. This regulatory framework does not affect skincare,
cosmetics or topicals with CBD or hemp ingredients.
Europe
UK
The UK legalized prescription based medical cannabis in November 2018. Medical
cannabis treatments that are advertised with specific medical claims must obtain
authorization from the Medicines and Healthcare Regulatory Agency (MHRA). Currently,
licensed medical cannabis products are Sativex, Dronabinol and Nabilone. Epidiolex,
medical grade pure CBD produced by British pharmaceutical company, GW
Pharmaceuticals, is undergoing the licensing process. “Unlicensed” products may be able
to be obtained, such as products from Tilray or Bedrocan, under special circumstances
which are unmet by other licensed products. Canopy and Aurora announced at the
beginning of 2019 that it plans to export to the UK later this year. Despite changes in
legality, the number of patients who have been prescribed medical cannabis treatments
is quite limited.
While pharmaceutical grade products are difficult to obtain, CBD products are widely
available across the UK. Pure CBD is not a controlled substance under the Misuse of
Drugs Act 1971. Therefore, as long as CBD products are not authorized by the MHRA,
medical claims on labeling and packaging cannot be made. There are also no enforced
regulations for testing or packaging. These loopholes in the legislation have led to an
increasing number of CBD products marketed as health supplements or wellness
products. Due to the growing trend, CBD products have been widely available across the
UK, primarily sold in boutique shops, cafes, health stores and online. Holland and
Barrett, a health foods store, was the first High Street store to carry CBD products in
2017. Other mainstream outlets now sell hemp-based beauty products, CBD tinctures,
edibles, vapes, e-liquids and other forms of the substance. A handful of restaurants also
offer CBD cocktails or hot drinks, and the number of kitchens and chefs using cannabisbased
products is increasing across the country.
However, in January 2019, the UK Food Standards Agency (FSA) announced that it
plans to conduct an investigation of CBD products for consumer safety. It is expected
that the FSA will later provide requirements for authorization. This may take up to 18
months. Although enforcement is unclear at the moment, some CBD products have
already been removed from the shelves. Since the FSA’s assessment does not apply to
cosmetics or skincare products with CBD, some CBD companies have expressed interest
in launching beauty products now.
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A license is required in order to cultivate hemp in the UK. There are restrictions on
where the farm can be located that must be approved by the Home Office. Many
companies still struggle to secure banking and payment options for their hemp-related
businesses. A lobbying group, the British Hemp Association, was formed to educate and
push for legislative changes, such as whole plant processing and financial support. Due
to barriers of entry, the number of hemp farmlands is small, around 810 hectares.
Italy
Medical cannabis has been legal in Italy since 2013, yet access and supply remained
restricted for years. In 2017, the Military Chemical and Pharmaceutical Plant (MCPP)
received a license to cultivate medical cannabis, which supplemented the imported
supply from the Netherlands (i.e. from Bedrocan). The MCPP cultivates a medical
cannabis product, FM2, that contains 5-8% THC and 7.5-12% CBD. A high THC product
(FM1) and a CBD product (FM0) will soon be available. The MCPP only produces 100-150
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kg per year, which has led to a shortage of supply. In 2018, an import license was
granted to Canadian licensed producer (LP), Aurora, for 100 kg of medical cannabis per
year to help meet the demand.
Italy has a rich history of hemp cultivation and it used to be one of the main producers in
the world prior to prohibition of the plant. The market opened up in 2016 when the
government announced that a license to cultivate hemp for industrial, food, cosmetic
and energy purposes was no longer required. Whereas the rest of the EU requires THC
content to be below 0.2%, Italy permits a margin of up to 0.6%.
Based on the license exemption, many companies started producing and selling high
CBD, low THC referred to as “cannabis light.” Cannabis light products must state that the
product is not for human consumption; however, once a person purchases the product
the use is essentially up to their own discretion. These products are legally sold and
branded as “collectors’ items.” Since it is a “collectors’ item,” imported “cannabis light”
products are not taxed. However, it is necessary to have proper test and analytics when
crossing the border to guarantee the product passes customs.
One of the first “cannabis light” companies, EasyJoint Project, launched in 2017 and is
sold in hemp specialist shops. There are now around 1,000 e-commerce sites and other
retail stores that sell CBD oil, capsules, CBD for pets, dried flower, vapes and cosmetics.
Legally, the Health Ministry must approve products, yet this is not frequently enforced.
Foreign companies have invested in land over the last couple of years, including public
Canadian companies Wayland, LGC Capital, Canopy and CROP. In 2018, Wayland
entered a JV with CBD Italian Factory S.S. with plans to supply the local market with
CBD for medical, therapeutic and veterinary purposes. LGC Capital entered an
agreement with EasyJoint to acquire 47% of the company to gain access to the local
“cannabis light” companies’ 415 retail outlets and 11 branded stores. In February 2019,
Canopy made an investment in Italian organic hemp producer and CBD extractor,
Canapar Corp. CROP, a Canadian holdings company, acquired 30% of Italian company,
Zhemplar, to cultivate and extract low THC, high CBD products, under a white label
brand, Tiffany CBD and Hempire Italia. The company also has exclusive rights with Yield
Growth Corp to over 55 wellness products that can be infused with CBD.
Switzerland
Switzerland is recognized for its progressive drug policies and evidence based
approaches. Medical cannabis has been regulated since 2008 and continued to open
with regulatory changes in 2017. The number of patients is relatively small, at around
3,000 people. Prior to June 2018, it was not possible to obtain pharmaceutical grade
pure CBD for medical purposes. That changed once the Food and Drug Administration in
the U.S. approved Epidiolex; subsequently, the Swiss law changed, too. Pharmacies can
now prepare magistral formulas for CBD for patients who meet certain conditions
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Although cannabis is controlled under the Narcotics Act, CBD is not included in that
legislation. The country permits 1% THC to be cultivated, produced and used, which is
regulated as a tobacco substitute. These products (e.g. pre-rolled joints, dried flower,
and cannabis cigarettes) are regulated under the Tobacco Ordinance and can be
purchased in supermarkets, specialty shops, kiosks and cafes. The first cannabis
cigarette was available for purchase in 2017. These products are predominantly
consumed by affluent businesspeople during breaks at work or the end of the day.
The Federal Office of Public Health (FOPH) provides regulatory oversight for tobacco
and CBD products. Registration with the FOPH is required for tobacco substitutes to
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guarantee quality control and compliance. However, this is practiced under “selfsupervision”
requiring the company to register products prior to market placement. In
recent years, the FOPH has been removing CBD products from storefronts due to lack of
self-compliance, transparency and false claims.
Swiss law also permits CBD to be used in pure or synthesized form for cosmetic
products. The Federal Food Safety and Veterinary Office regulates cosmetic products as
well as products that contain hemp-derived ingredients and CBD liquids for e-cigarettes.
None of these products can make any pharmacological claims. The Federal Office for
Agriculture regulates hemp seeds, oil, fiber, etc, and seeds must be certified and listed
under the European Union’s Common Catalogue of Varieties.
From 2017 to 2018 there was an influx in the number of cannabis companies in
Switzerland, leveling off from around 500 companies to around 100 companies. While
many are supplying the local market, a number of companies are exploring and