Green Rush: The Beverage Business and CBD Part 1

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Once derided as the scourge of America’s youth, cannabis is now being touted as one of the country’s biggest potential cash crops. As of 2018, 18 states and the District of Columbia have legalized medical marijuana use and sales, with a further eight states allowing for recreational use. According to market research from New Frontier Data, the U.S. legal cannabis market, which includes both medical and adult-use sales, was valued at $8.3 billion in 2017 and is projected to grow annually by 14.7 percent through 2025, when it is expected to be worth almost $25 billion. In the first five weeks of 2018, cannabis-based businesses in North America received around $1.23 billion in investment, compared to $178 million in the same period last year.

But this new era of reefer madness goes beyond simply catching a buzz. Within the cannabis market, the non-psychoactive compound cannabidiol, or CBD, has emerged as a major growth driver. Boasting a range of health benefits and, most critically, a degree of legal protection, CBD is helping change the way modern consumers and brands think of cannabis. Having already shown up in a growing spectrum of food and beverage products, the market for legal CBD products is expected to grow to $1.6 billion by 2021, according to cannabis market analysts at The Brightfield Group.

Yet as this new frontier begins to open, the path toward profit is fraught with challenges. In the first part of a two-part series on CBD in beverage, we examine the nature of the compound itself and unravel the complex legality of working with this unique compound.

Function and Usage

As part of the overall movement to legalize medicinal marijuana and explore the therapeutic benefits of cannabis, consumer interest in CBD has increased over the past decade. Yet one of the main obstacles to developing a market for CBD is defining the exact functionality and use occasion those products.

In a larger context, CBD is just one of the over 80 active chemical compounds called cannabinoids that are typically found in cannabis. When these cannabinoids are ingested, they interact — along with other cannabinoids that are produced in the body — with the endocannabinoid system to regulate systemic functions and control the speed of communication between cells.

The information these cannabinoids carry and how the endocannabinoid system translates it is what makes each of them distinct properties. Thetrahydrocannabinol (THC), the most storied of them, is what gives marijuana its psychoactive qualities; when it binds with cannabinoid receptors in the brain, THC can change the way in which the body interprets signals from the brain, resulting in symptoms associated with being “high,” like slowed reaction time, feelings of euphoria or increased appetite.

CBD can be sourced from either marijuana and hemp, which are both varieties of the same species, Cannabis Sativa; the former is known for its psychoactive properties (high THC content), while the latter is grown for industrial applications (low THC content). Sourcing from hemp yields less CBD than sourcing from marijuana, however.

When ingested, CBD can indirectly influence cannabinoid receptors to behave in ways that lead to a wide range of effects that can positively change the body’s response to pain, anxiety, appetite and a number of other factors. Though further scientific research is required, according to the National Institute of Drug Abuse, CBD has also shown potential as a treatment for patients suffering from tumors, anxiety, cancer, Alzheimer’s, stroke and other ailments.

CBD also benefits from “the entourage effect,” which posits that cannabinoid molecules work better when users consume a diverse spectrum of compounds, including THC. Because of the tight regulations on THC, many existing hemp-derived CBD products are made from an isolate or a distillate that is 95 to 99 percent CBD. In contrast, products that contain a blend of other cannabinoids, turpenes, flavonoids and phytonutrients extracted from the entire plant are labeled as “full spectrum.”

“The CBD molecule itself is just CBD, whether you got from cannabis plant that had THC evident inside it or if it was from a hemp plant with little to no THC at all,” said Tim Shaw, COO of MariMed. The company offers a range of management and advisory services for cannabis cultivators, retailers and suppliers. The difference between a CBD isolate and full-spectrum product isn’t the molecule itself, he said, but rather how the presence of other cannabinoids can boost its bioavailability. “It’s not just THC — there are over 140 compounds in [cannabis]. The ratios of them give each ailment a different relief or not.”

Recently, CBD has been increasingly experimented with as a potential treatment for epilepsy and seizures in young children. In May 2017, the New England Journal of Medicine published a double-blind study examining the effects of consuming CBD oil, in combination with other medications, over a 14-week treatment period for children with Dravnet syndrome, a type of childhood epilepsy disorder. Researchers found a 39 percent reduction in the median number of seizures each month; however, they also noted more side effects, including vomiting and fatigue, than the placebo group. Seventeen U.S. states have passed CBD-specific laws that acknowledge the compound as a valid treatment for children suffering from a chronic epileptic condition.

However, CBD is not yet recognized as a dietary supplement by the U.S. Food and Drug Administration (FDA). In April, the FDA, for the first time, recommended a prescription CBD-based medication, the anti-epilepsy drug Epidiolex, for approval in a unanimous decision.

State Regulations

As individual states take sides on the issue of marijuana, CBD has often been caught up in the larger debate around legalization. As a result, a tangled web of regulations has caused confusion and uncertainty even as the industry is poised for strong growth.

First and foremost, it’s important to understand that CBD can be sourced from either marijuana and hemp, which are both varieties of the same species, Cannabis Sativa; the former is known for its psychoactive properties, while the latter is grown for industrial applications. Despite the actions of individual states to legalize medicinal or recreational use of the plant, marijuana is still illegal under federal law and classified as a Schedule I drug by the U.S. Drug Enforcement Agency (DEA), which are defined as “drugs with no currently accepted medical use and high potential for abuse.”

Marijuana-derived CBD products can only be sold at licensed dispensaries in states in which recreational or medical sales are legal; currently, that group is comprised of 30 states and the District of Columbia. While those restrictions make can make products less accessible, they also provide some benefits. Like all other marijuana products sold at dispensaries, they must be lab-tested, properly packaged and tracked through Metrc, a regulatory compliance system used to trace the product from plant to store shelf. Because these products can legally contain more than 0.3 percent THC, they contain the added benefits of a full spectrum of cannabinoids, making them more popular for medical use.

Outside of those states, when customers buy CBD products, they are made with industrial hemp. Industrial hemp is legally protected under the Agricultural Act of 2014, which separated it from the definition of marijuana and permitted states to grant a limited number growing licenses to certified operators within their borders. The law covers any part of the plant, whether growing or not, with a THC concentration below 0.3 percent.

“What the Farm Bill basically says is that if you’re attached to a pilot research program in a state that provides a framework for cultivation, you have the ability to grow and process hemp,” said Bryan Meltzer, a partner specializing in legal cannabis at New York-based law firm Feuerstein Kulick LLP. “If you are a brand, like a drink company, as long as you are sourcing your raw material from a Farm Bill compliant grower or processor, you’re able to sell hemp-based CBD products across state lines.”

However, it didn’t take long for the situation to become complicated. In late 2016, the DEA issued a final rule notice that confirmed a 2011 decision to classify marijuana extract, defined as any extract that contains one or more cannabinoids derived from cannabis, including CBD, as a Schedule I Controlled Substance under federal law. The rule took effect January 13.

In response, trade group the Hemp Industries Association, along with two other hemp companies and a diverse array of independent cannabis advocates, filed a legal complaint in the Southern District of New York that argued the decision effectively opened the door for law enforcement to target any business that sells hemp-based products. The case was dismissed in February, then again on appeal by the 9th Circuit Court of Appeals in San Francisco at the beginning of this month.

Like other allegedly healthy products built around a mix of science and anecdotal evidence, companies that make CBD products have struggled to explain its benefits without running afoul of FDA regulators. Over the past three years, the FDA has issued multiple warning letters to companies that produce CBD products for making unsubstantiated health claims, most recently last November.

Within the individual states in which marijuana-derived CBD products are legal for either medical or recreational use, each sets their own limits on how much THC can be in present, which is usually some amount less than one percent. Adding to the sense of confusion, a study published in the Journal of the American Medical Association last November found that only 31 percent of products tested contained the actual amount of CBD advertised on the product label, with 26 percent containing less than indicated and 43 percent containing more. In 18 of those samples, some amount of THC was detected as well.

“The dangerous part about hemp-derived CBD is that the market is unregulated,” said Shaw. “CBD is one of the more safer compounds on the market; nobody’s going to get hurt in terms of overdosing. But when you are buying something at the store that is unregulated, you don’t what you are getting.”

The end result is that makers of CBD products are effectively squeezed in a legal Twilight Zone between state legislators, federal regulations and health standards.

“The loophole that folks are using is that this is a hemp byproduct, therefore the state to state restrictions don’t apply to the hemp-based CBD,” said Shaw. “It’s being traded as a commodity of hemp byproduct that isn’t regulated. It’s somewhat like a GNC vitamin that isn’t necessarily under FDA regulation: any person can order a giant jug of CBD oil from China and make their own formulations, put it in a bottle and have a CBD company.”

The Indiana Experiment

Over the past year, Indiana has emerged as a case study in the complex legal framework surrounding CBD after state legislators passed a law approving the use of CBD oil as a treatment for epileptic patients who have received a doctor’s recommendation and are registered with the state government. However, crucially, it did not provide a way for those patients to actually purchase it.

As a result, retailers who chose to sell CBD oil were instantly in violation of Indiana laws prohibiting its sale or possession. Last July, Indiana State Excise Police, the law enforcement arm of the Indiana Alcohol and Tobacco Commission, raided an Indianapolis area location of Fresh Thyme Farmers Market and seized several thousand dollars worth of a dietary supplement that contained hemp-derived CBD oil. Over the course of a five-week period, excise police reportedly pulled more than 3,000 CBD products off shelves in nearly 60 stores.

Yet questions over the legality of such operations caused confusion even amongst the government agencies tasked with enforcing the new law. Indiana State Police, for example, cited a 2014 law removing hemp from the state’s list of controlled substances as proof that such actions were not warranted. In November, the office of Indiana Attorney General Curtis Hill issued an official opinion confirming CBD oil as being illegal in the state, which was quickly contradicted by Gov. Eric Holcomb, who said during an interview that he believed CBD oil was legal to sell and possess as long as it contained zero percent THC. In his opinion, Hill noted that even without the presence of THC, CBD is still classified as a Schedule I drug because it is sourced from another Schedule I drug: cannabis.

Last month, the Indiana House passed Senate Bill 52 (SB-52), which legalized CBD oil with a maximum of 0.3 percent THC and eliminated the statewide registry program. Under the law, retailers who sell or individuals who possess marijuana that is disguised as CBD oil are subject to financial penalties and possible jail time.

Other states are grappling with CBD issues of their own. A bill currently under debate in the Colorado state legislature would allow CBD products, which are currently available in natural food stores, to be prescribed and sold in pharmacies.

Meltzer said that brands seeking to enter the CBD market should find growing partners who are “over compliant” with FDA regulations, including destroying extracted THC, keeping detailed records and ensuring safe transportation.

“The more brands that focus on [compliance] and the less brands that are confused and are using CBD without going through the proper steps, the better it will clear up that confusion in the marketplace,” he said.