The FDA spooked CBD companies this week, but it doesn’t change where the “Year of CBD” is headed…
The United States Food & Drug Administration (FDA) sent a warning shot across the bow of the cannabis health and wellness industry on Tuesday.
Investors immediately slammed U.S. Cannabis stocks, which resulted in a decline of 3.6% for the NICI U.S. Cannabis Index. Curaleaf’s stock suffered more, selling off 7% and continuing its decline yesterday.
The selloff was understandable. Companies capitalizing on the booming CBD market is a large part of investor expectations. Any obstacle to realizing those revenues lowers expectations and, hence, the price investors are willing to pay for stock.
But, the market’s response was ultimately an overreaction. That’s because the letter was more a reflection of fantastically poor judgment on Curaleaf’s part than on the marketability of CBD to consumers as a health and wellness product.
And that reaction could create an opportunity for shareholders of the largest cannabis company in the world…
Let the CBD Market Do the Work
Curaleaf’s error was that it made specific health claims about its CBD products. On its website, the company stated that its CBD is a treatment for chronic pain, pain resulting from cancer, for ADHD, and other untested claims.
But, for the industry as a whole, it is perhaps more worrying that the FDA said that Curaleaf did not include directions for use on its packaging. But the letter then goes on to contradict this charge by stating there is no such thing as proper directions for use since the FDA hasn’t approved CBD for any use.
And most worrying of all, the FDA targeted some of Curaleaf’s creams and balms; products that consumers don’t ingest. Generally, the FDA has been much more lenient about such products.
I’ve written before about smaller companies making unverified claims about CBD and the FDA going after them. Curaleaf is a much bigger target than those smaller companies, and the investing public has a right to be concerned.
The one thing you don’t do when marketing health and wellness products that aren’t drugs approved by the FDA for specific treatments is make specific claims. This is so obvious that it makes you wonder where Curaleaf’s lawyers were. By comparison, Curaleaf’s competitors make no specific treatment claims.
These companies want to avoid attracting the FDA’s attention. In fact, some avoid advertising the fact that their products even contain CBD, which frankly is a mistake in the other direction.
But there are two reasons not to panic here. First, Curaleaf did go further in its claims than many competitors. An easy to remedy error.
The big lesson here is that companies should simply sell CBD products and let the public learn how and why to use them from other sources. The news about CBD is spreading more quickly then even I, a CBD bull from the start, imagined it would.
So let the market do your work for you.
The second is that the FDA is currently reconsidering its rules. They will likely relax them in a way that is favorable for the CBD industry. S
This is likely a short-term problem.
Curaleaf is like the last speeder to get a ticket for going 70 in a 55 zone before the speed limit goes up to 70. It’s a ticket, but no one needs to worry about it too much since soon, everyone will be driving at 70 legally.
I suspect that Curaleaf will quickly correct its website to the satisfaction of the FDA and, based on an acquisition it entered into just last week, the company can get back to work building the largest cannabis company in the world.
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Taking the Lead Through the Scale Phase
Just last week, Curaleaf announced it was acquiring GR Companies Inc. (“Grassroots”) for $875 million.
The terms of the deal included a payment of $75 million in cash and the rest in Curaleaf stock. This purchase, along with a pending purchase of Cura Partners Inc., rolls more revenues into Curaleaf’s coffers than any other cannabis company in the world.
The Grassroots acquisition is brilliantly complementary, getting the company into Illinois, which recently went legal, and Pennsylvania. The combined company will be in 19 states, hold 131 dispensary licenses, and have access to 55% of the country’s population.
The deal puts Curaleaf in the lead as the industry enters the exceptionally high growth Scale phase. Canadian LPs may have an edge when it comes to European expansion, but multi-state operators (MSOs) in the U.S. are selling into the largest legal market in the world, and Curaleaf will sell more product than any of them.
I originally recommended Curaleaf to Cannabis IPO Insider members back in October, a position which they ultimately sold for a 90% gain. That doesn’t mean I’ve turned my back on the stock; we just took advantage of what the market gave us.
As conditions change, we change our NICILytics Rating for cannabis companies, which you can find in our NICILytics database. The database contains the latest report on Curaleaf and nearly 200 more publicly-traded cannabis stocks. We call it “The Vault,” and investors like you looking to be as informed about cannabis stocks as possible are free to find out more about it here.
And, to learn more about CBD and the many other cannabinoids found in the cannabis plant, read our comprehensive primer on cannabinoids. After all, these are incredible compounds that make the “Year of CBD” possible in the first place.
Executive Director, National Institute for Cannabis Investors
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6 responses to “A Bump in the Road to Cannabis Scale”
July 25 2019