In a collaboration featuring 11 analysts spanning Cowen’s consumer, health care, industrials and regulatory teams, we offer a deep dive on the global cannabis market, with a particular emphasis on the U.S. For consumer goods, we believe the U.S. CBD market could represent a $16 bn opportunity by 2025.
$16 bn Consumer Opportunity (Azer, Blackledge, Charles, Chen & Kernan)
In our monthly proprietary consumer survey (n = ~2,500) we were surprised to see that nearly 7% of respondents in January 2019 reported using CBD as a supplement. This strong consumer interest is validated by the growing number of brands and form factors that are now available through increasingly diverse retail channels, including Amazon, Sephora and Neiman Marcus. That said, consumption of CBD on-premise will likely take longer, given regulatory uncertainty. And, while our analysis primarily focuses on consumer staples applications for CBD, it is interesting to see a growing number of specialty apparel brands embrace hemp as a sustainable textile.
Retail sales of CBD consumer products in 2018 have been estimated between ~$600 mm and $2 bn. By 2025, we believe CBD offerings could conservatively generate $16 bn in retail sales (assuming a ~40% increase in consumer incidence, to 10%, and spend of less than $2 / day). Our bottom-up analysis anticipates a diverse category, that is still led by traditional health & wellness form factors (e.g., $6.4 bn in nutraceuticals, and $4 bn in topicals). And, while likely smaller, we also expect categories like food, beverages, beauty and vapor to all generate sales between ~$1-2.5 bn by 2025.
Herein, we offer a detailed look at category brand and pricing architecture in the U.S. CBD market today, as well as detailed discussions of 19 public and private operators that currently have exposure to the category.
The Science of CBD (Nadeau)
Cannabis’s therapeutic potential is attributable to the valuable overlap between phytocannabinoids (i.e. plant-derived cannabinoids) and the endogenous cannabinoid system in humans, termed a “therapeutic handshake.” While THC’s activity in the body is fairly well elucidated, CBD’s pharmacokinetics are less well understood (no specific receptor for CBD has been identified). Clinical trial results to date demonstrate few adverse effects from oral CBD doses of up to 1500 mg/day or up to 30mg IV. The scientific understanding of CBD’s clinical effects is based mostly on studies in specific indications, like epilepsy. GW Pharma’s Epidiolex (highly potent, pure formulation of CBD) was approved by the FDA in 2018 for the treatment of seizures associated with Lennox-Gastaut syndrome and Dravet syndrome, and other companies (Tilray, MMJ Phytotech, Insys) have clinical trials underway in seizure disorders as well.
CBD Hemp Cultivation (Neivert)
According to the National Conference of State Legislatures, 41 states have set up cultivation and production programs to regulate the production of hemp. There is little research on CBD hemp cultivation methods as hemp cultivation research historically has focused on fiber and grain/seed. This lack of research, combined with a number of variables that affect hemp for CBD yield, makes hemp for CBD cultivation much more art than science at this point. That said, no other crop in the U.S. offers the type of return of the CBD Plasticulture Model, and we would thus expect the country’s two largest crops, corn and soybeans, to lose some acreage to CBD hemp.
Synthetic Biology Provides Alternative Cannabinoid Production Method; Life Science Tools Well Positioned To Benefit From QA/QC Testing Opportunity (Schenkel)
As an alternative to cultivation-based methods, cannabinoids can be produced using either chemical or synthetic biology approaches. Synthetic biology methods, which harness fermentation to produce cannabinoids, are particularly attractive considering they can potentially produce a variety of cannabinoids while being highly scalable, efficient, and environmentally friendly.
While QA/QC testing standards for CBD currently vary greatly by state (if any exist at all), we expect Life Science Tools companies to benefit from this nascent market opportunity as testing regulations are implemented and standardized. Similar to medical/recreational cannabis testing, instruments such as mass spectrometers and liquid/gas chromatographs are utilized to analyze CBD samples. Key vendors for mass spectrometry and chromatography instruments include Agilent, Danaher (SCIEX), PerkinElmer, Shimadzu, Thermo Fisher, and Waters Corporation.
CBD From a Retailer and Payor Perspective (Rhyee)
Healthcare: Drug Retailer Perspective: CBD products appear to be gaining traction with independent pharmacies, many of whom are already selling or planning to sell CBD oils. Independent pharmacies likely find the high-margin profile of CBD oils attractive, which we suspect is similar to those of more traditional over-the-counter drugs, as well as the differentiation it affords independents relative to larger chain pharmacies. For those selling CBD oils today, the focus is on quality, particularly as it relates to bioavailability. Large pharmacy chains, such as CVS and Walgreens, don’t currently sell CBD oil, but WBA noted it is monitoring the CBD market.
Healthcare: Payor Perspective: Generally speaking, managed care does not cover OTC products, with the same being true for Medicare and Medicaid. Based on our conversations with a number of payors, 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 are not 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. Separately, Payors noted three factors complicating commercial coverage of CBD oils, including (1) legal issues, as CBD oils derived from THC (cannabis) isn’t legal if it contains equal to or more than 0.3% THC; (2) lack of regulation by the FDA; and (3) its availability as an OTC medication.
Global Landscape (Azer)
While the global regulatory landscape varies, the CBD category outside of the U.S. has been evolving rapidly, with more change likely to come with the WHO’s current evaluation of CBD, as well as its recent addition to the EU’s Novel Food Catalogue. In Europe, CBD products are now widely available in markets like the U.K., Italy and Switzerland, though regulations vary with Italy allowing for “cannabis light” products, with allowable THC of as much as 0.6%, while in Switzerland CBD products can have as much as 1% THC, and are classified as a tobacco substitute. In Latin America, hemp has been in production since the 1500s is also rapidly expanding their regulatory frameworks around marijuana and hemp. Canadian licensed producers have been actively entering the market in Latin America to capitalize on this evolving opportunity, including Canopy Growth, Tilray, Aurora and Cronos.
Regulatory Outlook (Eric Assaraf – Cowen Washington Research Group)
The 2018 Farm Bill declassifies industrial hemp as a Schedule I substance, shifts regulatory authority from the DEA to the Department of Agriculture, and provides autonomy for states to regulate the industry. However, the new law does not change the FDA’s oversight authority over CBD products and FDA Commissioner Scott Gottlieb has made it clear that his agency will continue to step in when certain health claims are made. Additionally, FDA has stated that CBD cannot be added to food products sold across state lines or marketed as a dietary supplement, regardless of whether it is hemp-derived. The FDA will explore new pathways for CBD to be sold legally; however, it seems clear that there will be a period of regulatory uncertainty over CBD products at the state and federal level.
For more information, contact your Cowen Sales Representative.
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