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Industry Report: A New Era for CBD Manufacturers

by Eric Peterson by 2015 Holiday Gift Guide on August 13, 2019, 10:23 am MDT

With FDA oversight on the horizon, CBD suppliers and brands can learn a few lessons from the experiences of the natural foods and supplements industries 25 years ago.

Hemp production was outlawed in the U.S. in 1937.

Eight decades later, the U.S. Food and Drug Administration (FDA) is grappling with the now-legal plant and its derivatives, namely cannabidiol, better known as CBD. Unlike the THC that distinguishes marijuana from hemp, it is not psychoactive, and -- thanks to the 2018 Farm Bill -- hemp-derived CBD is now legal in all 50 states.

While it's one of more than 100 cannabinoids in cannabis plants, CBD accounts for as much as 40 percent of the plant's extracts. Anecdotal evidence points to medical efficacy for everything from arthritis to epilepsy to ADD; the sheaf of clinical evidence is slim but promising, and growing.

Due to the state-by-state reform of marijuana laws, CBD products started hitting the market in Colorado, California, and other first movers long before they gained traction on a national level. But that's now happening in a big way: The Chicago-based Brightfield Group forecasts the U.S. CBD market will grow 706 percent in 2019 to $5 billion and top $23 billion in 2023.

Now that CBD is showing up on the shelves of pharmacies, shoe stores, and spas across the country, there's a glaring void in the industry: The FDA has yet to establish guidelines for CBD suppliers and brands.

As rumors of an impending FDA ruling swirl around the cannabis industry, it's a similar threshold the natural foods industry crossed when it went mainstream about 25 years ago. While the differences are many and stark, there are many lessons to be learned from federal oversight in that space.

"There are 122 certifications a food company can put on their labels," says Bill Capsalis, ex-officio chair of Naturally Boulder and current president of Boulder Granola, reeling off a list that ranges from fair trade to non-GMO to kosher.

"From a manufacturing standpoint, when USDA Organic certification came into being, most manufacturers believed that was a great thing and a differentiator," he notes. "That sends a message to the consumer that I'm compliant with these certifications."

When it comes to CBD products, Capsalis describes a parallel with the Dietary Supplement Health and Education Act (DSHEA) of 1994. "They [the FDA] are pretty heavy-handed on the supplement side when it comes to labeling claims," says Capsalis. He sees the same approach being applied to hemp extracts and CBD. "That's where it's going to cross over."

"Think about flax or chia -- they both have nutritional benefits," he adds. "As long as people don't get too out there with their claims, [CBD products] will be similar to what you see with flax and chia. . . . A lot of people are using the term, hemp oil, instead of CBD on their packaging right now, and laying low with their claims."

Supplements "have gotten a bad rap over the years," opines Capsalis. "DSHEA attempts to eliminate confusion related to that."

That's the thread that connects DSHEA with the CBD market, he adds. "Initially, [CBD and hemp extract brands] are going to walk this tightrope in terms of labeling and labeling standards."

Nonetheless, Capsalis says federal oversight of natural foods and supplements are notably different on paper and in reality. "The FDA is like any other government agency: There's not enough people to keep track of everything under its purview," he explains. "It's almost a self-policing thing. It relies on the manufacturer to comply." (A recent report illuminated a similar dynamic at the state level for California's cannabis industry.)

Third-party testing "feels a little bit like the honor system," adds Capsalis. "It's been more than 20 years for USDA Organic certification. It's pretty well-established how the game is played. Most actors are compliant and want to do the right thing." 

On the flip side, he says that it's "hard to get caught" if you're not compliant. Capsalis calls such suppliers and manufacturers "bad actors," noting, "There's incentive to grow the crop faster, so there is temptation."

 

 

Capsalis expects a similar phenomenon with cannabis. "My guess is if the FDA begins certification on cannabis and hemp, I think they're going to be pretty rigorous up front, because there are a lot of bad actors out there," he says.

Future FDA standards will largely be certified by approved third-party businesses, adds Capsalis. "The third-party certification process is going to be where the rubber meets the road," he says.

While Capsalis says that different product categories will be impacted in different ways, he highlights one commonality all CBD brands will share: "They're going to consult an attorney on labeling."

A legal gray area

Jeni Lamb Rogers with PSL Law Group in Boulder has worked in food law her entire career, beginning as an intern for the U.S. House Committee on Agriculture. She worked as a food-focused lawyer for Holland & Hart and other firms in Colorado before joining PSL in early 2019.

USDA Organic is the only current federal certification that applies to hemp, Lamb Rogers notes. "It's the only federally regulated certification," she says. "It's possible to take that organic certification route legally now. . . . For an organic certification to work, you have to have organic certification throughout your supply chain."

Lamb Rogers points out that FDA oversight, unlike USDA Organic certification, "is a use-based system. How is a product marketed to consumers and what is that use? . . . That's a key area where CBD companies have gotten in trouble with the agency."

One problem is the lack of clinical research; a holdover mindset from the era of hemp prohibition is another. "FDA has taken a position [CBD] is technically illegal as an ingredient in food," says Lamb Rogers, due to the fact that there is nothing on file for full-spectrum hemp extracts. There is a "no objection" notification on file for the inclusion of hemp seeds and their derivatives, she adds. "There isn't a similar notification out there for a full-spectrum hemp extract."

The FDA kicked off an open call for comments with May 31 public hearing "recognizing there is this massive groundswell," says Lamb Rogers. CBD "is a product that has gotten out on the market before the FDA has a regulatory framework developed for it."

But there's a twist. "What's unique about this situation is there is already a CBD isolate out there that's been approved as a drug," adds Lamb Rogers. (An isolate is nearly pure CBD, while full-spectrum extracts contain other cannabinoids as well.)

The FDA approved GW Pharmaceuticals' Epidiolex in June 2018. In a press release about the approval, FDA Commissioner Scott Gottlieb, M.D. said that "the FDA is committed to this kind of careful scientific research and drug development. Controlled clinical trials testing the safety and efficacy of a drug, along with careful review through the FDA's drug approval process, is the most appropriate way to bring marijuana-derived treatments to patients."

Gottlieb's statement continued, "We'll continue to support rigorous scientific research on the potential medical uses of marijuana-derived products and work with product developers who are interested in bringing patients safe and effective, high quality products. But, at the same time, we are prepared to take action when we see the illegal marketing of CBD-containing products with serious, unproven medical claims. Marketing unapproved products, with uncertain dosages and formulations can keep patients from accessing appropriate, recognized therapies to treat serious and even fatal diseases."

The FDA's precedent with Epidiolex sets a sticky precedent, says Lamb Rogers. "It is possible a solution to this kind of issue from the FDA is that isolates are going to be viewed as drugs and that full-spectrum hemp extracts could be used as a supplement and/or an ingredient in a food product."

 

 

In some circles, there's a nascent taxonomy that categorizes isolates as drugs and full-spectrum extracts as supplements. Lamb Rogers notes that Natural Products Expo West doesn't allow isolates in its booths, but the show does allow full-spectrum extracts.

"I think it would be an unusual place for the FDA to draw the line," she adds.  "In some ways, a Congressional fix might be preferable. It's a real question. Do we see some Congressional unification on this?"

Some say the FDA could offer guidelines by September, and it's possible Congress could also act on the issue in the near term. But it probably won't offer immediate clarity. The Food Safety Modernization Act became law in 2011, but the final rules weren't cemented in place for more than four years. "Two years turned into four or five, depending on how you look at it," says Lamb Rogers.

In the interim, CBD suppliers and brands are looking to get ahead of the curve by way of third-party certification, she says. "Different players in industry are trying to self-regulate and they come down in different places."

Lamb Rogers says the U.S. Hemp Authority, spearheaded by the U.S. Hemp Roundtable  trade group, offers a self-regulating "baseline," but she notes that it's not without criticism from industry players. Her hope is that the FDA's final policy, like USDA Organic, is designed to be able to evolve and change with the industry. "It'll be interesting to see how that develops over time," says Lamb Rogers. "We're seeing a similar pattern pop up with third-party companies popping up in CBD. The difference is, it's such a young industry, people are finding certification is really challenging."

In the end, it's too early to tell what the contours of the final policy will look like once they get through the government's sausage-making process. "There's so much uncertainty," says Lamb Rogers. "I don't have a crystal ball."

A tricky place for the CBD industry

Pueblo West-based Stratos CBD is the sister company of Stratos, the THC-centric tablet manufacturer and is bringing the same pharmaceutical-informed approach to CBD tablets, tinctures, and topicals. "As far as we know, it's the only CBD tablet on the market," says Kate Heckman, vice president of marketing and branding.

"In terms of quality, we have four things we require of any supplier of raw CBD material," says Heckman, citing Colorado Department of Agriculture registration, USDA Organic hemp, CDPHE registration, and third-party testing. She says Stratos CBD's sole supplier, Elixinol, checks all of those boxes.

Interestingly, under FDA oversight, Heckman says that "requirements could go down. Pharmaceutical companies are responsible for their own testing, it's not a third-party audit. . . . Every batch we bring in has to have third-party testing."

Technician at Stratos

That's key with cannabis products: "Because we work with botanicals, the active ingredients vary from harvest to harvest and extraction to extraction," she explains. "We control for consistency through the manufacturing process."

While Stratos THC products are sold only in Colorado through dispensaries, the broader CBD market required an entirely different distribution strategy, says Heckman. "We work with day spas. We work with bike shops. We work with independent pharmacies."

The initial focus for wholesale is Colorado, but the long-term play is the entire country. "We're in the process of building out a nationwide sales force for our CBD products," says Heckman. "We are looking to have national distribution in 12 key markets by this time next year."

However, the rollout strategy is hampered by a lack of clarity around "what regulations come down from the FDA," says Heckman. "There is a speed element in place. Retailers are going to get comfortable with suppliers who are checking boxes."

She expects different regulations for CBD supplements, topicals, and foods with CBD as an ingredient. "We want to see the FDA investing in consumer safety," says Heckman, citing soil testing, plant handling, and extraction as key areas.

Heckman also cites a need for "clear labeling to create less confusion," explaining, "We still see products on the shelves that don't even say how many milligrams [of CBD] are in it."

Stratos CBD is "incredibly careful" about making specific medical claims on its packaging, she adds. "Our team has worked with the FDA and knows how quick these cease-and-desists can come."

Heckman says she fears the FDA "might place CBD strictly with pharma," or else CBD isolates could be regulated as pharmaceuticals while full-spectrum botanicals would fall under nutraceuticals. "That really comes down to patents. Can they patent the extraction process or the creation of a single CBD molecule? We'll see."

She adds, "We certainly don't want to speculate, but it would feel like a tricky place to put manufacturers, consumers, and retailers."

Eric Peterson is editor of CompanyWeek. Reach him at rambleusa@gmail.com.

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