Tremendous growth potential with production expected to grow 75% annually over the next three years.
Industry Update 9/9/19
Understanding CBD's tremendous growth potential
Demand for CBD (cannabidiol) products is experiencing strong growth, which we believe
will only accelerate following the recent passage of the Farm Bill. From lotions and balms
in the topicals category to edibles and beverages targeting health and wellness, the
expanding variety of CBD products is matched only by the increase in reasons cited for
their use. With a growing class of companies targeting this opportunity and a looming
regulatory update from the FDA, we thought it timely to take a closer look at everything
In this overview, we offer our detailed forecast for CBD product sales in the US and
review hemp-derived CBD’s current regulatory status. We also examine some of the
science behind CBD’s rise and take inventory of its therapeutic benefits. The hemp CBD
supply chain is fleshed out as well, from the cultivation of hemp and extraction to brands
and retail distribution. In our view, the overall picture that emerges is compelling: despite
lingering FDA uncertainty, we believe CBD’s broad range of therapeutic applications,
dramatically increasing consumer interest, and recent federal legalization in its hempderived
form bode well for future growth.
Many of the companies in the Canaccord Genuity coverage universe have meaningful
exposure to the US CBD market. Backgrounds can differ broadly, including companies
focused largely on marijuana and hemp-based consumer-branded products, traditional
multi-state operators (MSOs) primarily intent on building out dispensary networks,
and Canadian LPs developing US-facing revenue streams. For a full discussion of CBD
exposure for covered companies, please refer to page 40 of this document.
Notable content includes a state-level forecast and US estimates that differentiate
between hemp CBD and marijuana CBD channels, an overview of regional US hemp
production, and descriptions of over 30 public and private CBD companies along with
their roles within the emerging supply chain. Following an executive summary and
high-level takeaways, we begin with a discussion of the science underpinning CBD’s
substantial therapeutic promise.
• We estimate US CBD sales will deliver a dramatic 45% CAGR to $18B by 2024
• US states with robust legal cannabis markets should see disproportionately high share
of this demand
• Mix of consumer products is likely to mirror marijuana product mix, albeit with less
• Competition is rising across the supply chain with the entry of Canadian LPs,
mainstream CPG, and mass retail
• Looming guidance from FDA could accelerate the pace of innovation and compel more
outside interest by allowing ingestables
Forecasting US CBD sales is more art than science
While CBD products are relatively new on the scene, federal legalization has made corollaries with
other health and wellness products more useful when sizing the market opportunity. Nevertheless,
results from this exercise span a wide range: compared with vitamins and supplements, our CBD usage
rates and annual per capita spending assumptions look spot on; however, viewed against the backdrop
of a massive functional food and beverage market, our estimates appear conservative. We also looked
at trends for cannabis sales through the dispensary channel to inform our estimates. In the end, we
attempted a bottom-up forecast curated somewhat using legal cannabis state markets as a proxy for
varying degrees of consumer acceptance. Wellness, nutraceuticals, and other related products served
mainly as sanity checks against where our numbers shook out.
Looming FDA regulatory framework could provide positive catalyst
Despite hemp’s removal from the CSA, FDA regulations do not yet permit CBD as a food additive or
dietary supplement. As a result, engagement by mass retail and major CPG has so far been largely
confined to the “topicals” market. With the FDA evaluating how it might update its regulatory
framework to address products for non-drug uses, a pathway to federally legal ingestible CBD
consumer products appears to be opening. We expect an update from the FDA on these issues this
fall. Permissibility of CBD in foods and other ingestible forms could prove a major catalyst for
companies across the space, heralding a new level of investment in CBD assets by outside players
and enhancing overall growth for the industry.
The science of CBD: Budding evidence supports health
In order to appreciate rising interest in everything CBD, it is important to better
understand this “medical” cannabinoid by exploring its origins and how it works,
noting that CBD is only one of a hundred or so other known cannabinoids.
? Non-psychoactive cousin of THC found in the cannabis plant
? Shown to treat a host of medical issues with serious pharmacological research
still early stages
? Effects enhanced when combined with terpenes and other cannabinoids
? Possible to be produced in ways other than extraction from marijuana or hemp
CBD’s story beginning to be told to a wider audience
CBD (cannabidiol) is non-psychoactive cannabinoid found in the hemp strain of
cannabis sativa. Grown for a wide range of industrial purposes, hemp is distinct from
other strains of cannabis by containing higher concentrations of CBD and very small
amounts of the psychoactive compound THC. CBD is one of more than 80
cannabinoids that can be extracted from hemp. Each cannabinoid affects the body
differently, and CBD is known to offer a range of health benefits including suppressing
seizures, managing pain, reducing inflammation, relieving anxiety, combating addition,
and promoting sleep.
CBD has therefore come to be popularly known as the medical cannabinoid, although
medical benefits have been cited for other cannabinoids including THC, THCV, and
CBN. First discovered in 1940 by Dr. Roger Adams at the University of Illinois, it is not
until the past few years that CBD has become part of the common lexicon, and a
serious topic of study in medical research, despite testing on the therapeutic benefits
of cannabinoids as far back as the 1970s.
Rapid increase in amount of academic research post Farm Bill
While anecdotal evidence supporting the therapeutic benefits of hemp CBD and other
cannabinoids has been extant for some time, there has recently been a dramatic rise
in the amount of academic research on the subject. Funding remains largely from
private sources, although much of the increase in research activity can be attributed
to hemp’s new federally legal status. Prior to passage of the Farm Bill, the DEA relaxed
requirements for conducting clinical trials into CBD back in 2015. Research is being
conducted into CBD’s efficacy for managing pain, treating Alzheimer’s, and reducing
cartilage damage from arthritis. Research is also being funded by growers who want to
experiment with different lighting sources in order to improve yields. We believe the
number of universities engaged in hemp CBD related research is likely to grow
meaningfully over the next few years now that universities are free to take money from
hemp and hemp CBD companies.
Figure 2: CBD’s potential therapeutic benefits
Source: Expert Committee on Drug Dependence, Geneva 2017
Di sease/Condi ti on Effect
Alzheimer's Shown to be an inhibitor of inflammation and cell death in
Parkinson's Lessened dopamine impairment, improved psychiatric rating and lessened
Multiple Sclerosis Reduced signs of brain inflammation in animal studies
Huntington's Shown to be neuroprotective in animal studies
Chronic Pain Positive effects on patients suffering neuropathic pain that are resistant to
Psychosis Lessened behavioral and nervous system effect in animal testing for
Anxiety Reduction of muscular tension, social anxiety, problems concentrating, and
fatigue in patients
Depression Shown to have an anti-depressant effect in animal testing
Cancer Antiproliferative affect for certain caner types, chemopreventive effects
Nausea Known to supress nausea is animal testing
Inflammation Proven inhibitor of inflammatory proteins, cytokines, and pathways
Arthritis Shown to inhibit TNF-alpha an inflammation causing protein
Crohn's Displayed reduction in disease activity index with Crohn's patients
Cardiovascular Shown to reduce infarct size lessening the chance of a cardial event
Diabetes Lessened effect of fibrosis and/or cardial events
FDA approval of Epidiolex a critical milestone
While the science continues to progress, CBD has been shown to benefit patients
suffering from epilepsy and other neurological conditions including Alzheimer’s,
Parkinson’s and brain cancer. CBD’s proven ability to work as an inhibitor to
inflammation carries the hope of numerous applications from pain relief to
neurological disorders. Last year, a significant milestone was achieved when the FDA
approved Epidiolex, a CBD drug and the first approved cannabis drug to be plant
derived. The FDA is responsible for regulating all drugs in the US. Any drug
manufactured for consumption in the US must first receive approval from the FDA
based on safety and efficacy treating a specified medical condition. Essentially the
risks of taking said drug must be determined to be outstripped by the rewards. This
approval process typically involves multiple layers of testing on animals and humans
for safety and clinical application. To date, several drugs containing synthetic
cannabinoids or cannabinoid-like compounds have received FDA approval and are
being used by patients.
GW Pharmaceuticals, the manufacturer of Epidiolex, is targeting the treatment of
seizures associated with Lennox-Gastaut and Dravet syndromes, two rare and severe
forms of epilepsy. An estimated 30,000 children and adults suffer from Lennox-
Gastaut syndrome and a smaller number from Dravet. While Epidiolex is the first drug
to be approved that contains substances derived from cannabis similar drugs have
previously been approved by the FDA derived from synthetic CBD. Epidiolex is
available for sale through licensed pharmacies and can now be covered by insurance
(unlike state authorized medical cannabis), and GW Pharmaceuticals has other
cannabis drug at various stages in the FDA approval process.
Potential as opioid alternative and palliative for withdrawal
Similar to how cannabinoids are understood to function in the endocannabinoid
system, opioids work by attaching to a wide range of receptors within the endogenous
opioid system, where they play a significant role in managing pain. While effective,
high rates of addiction are a major downside. Opioids change the chemistry of the
human brain, enhancing tolerance for opioid-based drugs and driving a need to
increase usage to maintain effectiveness. Greater usage increases dependence,
which can lead to addiction and in many cases overdoses.
According to data from the National Institute on Drug Abuse, more than 130 people in
the United States die from opioid related overdoses daily, and opioid addiction has
become so prevalent that government officials including President Donald Trump have
deemed it a national crisis. CBD, especially when used in conjunction with THC, offers
an alternative method of managing pain, but without risk of addiction and other
negative side effects of opioids such as drowsiness, physical impairment and
constipation. Meanwhile, CBD has been shown in studies to help reduce or eliminate
many of the withdrawal symptoms faced by individuals who have been long-term
Works in concert with a system of receptors
CBD functions by interacting with the endocannabinoid system (ECS), which helps to
regulate of a range of biological functions. Its constituents of the ECS include
neuromodulatory lipids (fats; waxes; vitamins A, D, E, and K; and sterols) and
dedicated receptors that can receive certain compounds. These receptors are
classified into types 1 and 2 or CB1 and CB2, based largely on their location and
function. CB1 is found primarily in the brain and central nervous system
(hippocampus/memory, cerebral cortex/behavior, cerebellum/motor control,
putamen/movement, hypothalamus/appetite and amygdala/emotion), while CB2 and
CB1 can be found in other locations such as the spleen, other organs, glands, bones,
and blood vessels.
Signal transduction occurs when a cannabinoid receptor binds with a cannabinoid (or
cannabinoids), resulting in a cellular event or series of events. Events can include
changes in a cell’s behavior, the regulation of its genes, the transmission of signals
sent to other cells, or a combination thereof. While we are focused on humans, the
presence of endocannabinoid systems in other animals has created the possibility for
cannabis-derived therapies for pets, and there are already CBD products in the market
targeting the pet industry.
On short list of better-known cannabinoids
Generally, the organic compounds in cannabis responsible for psychoactive and therapeutic effects
in humans and other mammals are known as cannabinoids, while the organic compounds that determine
odor and taste are called terpenes and flavonoids. Cannabinoids are found in their highest
concentrations on the cannabis flower. While this paper is primarily concerned with CBD, in order
to provide context, we offer brief descriptions of several additional cannabinoids including CBG
(cannabigerol), THC (tetrahydrocannabinol), THCV (tetrahydrocannabivarin), and CBN (cannabinol).,
as well as some of the more commonly found terpenes.
CBG - A relatively recent discovery, CBG can be viewed as the parent compound for THD, CBD, and
CBN. Essentially, CBG turns into THC and CBD through heat and CBN by aging. On its own, CBG is
known to promote feelings of relaxation by inhibiting the uptake of GABA (a neurotransmitter) and
THC - The most abundant and commonly known cannabinoid, THC is responsible for the “high” or
euphoric feeling that comes from consuming cannabis. THC must be activated by heat in order to bind
to cannabinoid receptors in the body. In modern cannabis strains, THC content is typically 15% to
20%, although it can have a wider range of potencies depending on desired effect. In order to avoid
any psychoactive effect, cannabis strains should contain 1% THC or lower.
CBD - CBD is non-psychoactive and can counter some of the psychoactive effects of THC. CBD is also
known as the medical cannabinoid, exhibiting a wide range of medical effects including suppression
of seizures in children with epilepsy. CBD- heavy strains tend to have anywhere from a 1:1 CBD/THC
ratio to 3:1, and often rely on extraction processes to achieve high CBD ratios in edibles and
THCV - Another psychoactive cannabinoid, THCV delivers a jolt of energy and can act as an appetite
suppressant. It must reach 428 degrees Fahrenheit to activate.
CBN - While less is known about CBN, it is currently understood to have some of the benefits of
CBG, including aiding sleep, but with a narrower scope. CBN forms from degraded or aged CBG, THC
and THCV, leaving just trace elements of the source compounds. Extraction methods are being
discovered that can isolate CBN and yield higher quantities.
Therapeutic benefits enhanced by the entourage effect
CBD affects the ECS in a variety of ways when terpenes and other cannabinoids are
present. This interplay between cannabinoids and terpenes is known as the
“entourage effect.” Given myriad formulations made possible by blending and
adjusting levels of THC, CBD, other cannabinoids and terpenes, manufacturers and
their partners are busy developing customized cannabis formulations to differentiate
their product lines. First introduced by scientists in Israel, the entourage effect asserts
that user experience can be optimized through custom formulations. The theory
proposes that certain blends and dosages of cannabinoids and terpenes can work
together to achieve “best-use” profiles for customers, when compared to the
compounds in isolation. One highly practical use of the entourage effect is the
inclusion of CBD in sufficient levels to partially mitigate the psychoactive effects of
THC, which in today’s more powerful strains can sometimes lead to cases of overmedication.
On another front, testing labs have begun working with terpene solutions providers to
develop processed products that more closely resemble native plants in flavor and
potency. The bulk of efforts to exploit the entourage effect are focused on
formulations, whether in specific strains of flower or processed product, targeted to
specific medical treatments. Further, the industry from cultivators to dispensaries is
beginning to more systematically articulate the effects of its offerings
One common method uses a color spectrum to classify THC and CBD content and
respective use cases. These formulation spectrums range from THC dominant to CBD
dominant, with balanced formulations in the middle.
The entourage effect is not limited to CBD and THC; various other cannabinoids
interact in the system with CBG, CBN, and THCV being recently discovered
cannabinoids with distinct benefits. CBG is a raw cannabinoid found in unprocessed
flower; it can be viewed as the parent compound for THD, CBD, and CBN. Essentially,
CBG turns into THC and CBD through heat and CBN by aging. On its own, CBG is
known to promote feelings of relaxation by inhibiting the uptake of GABA (a
neurotransmitter) and relaxing muscles. CBN is currently understood to have some of
the benefits of CBG, including aiding sleep, but with a narrower scope. CBN forms
from degraded or aged CBG, THC and THCV, leaving just trace elements of the source
compounds. Extraction methods are being discovered that can isolate CBN and yield
higher quantities. Finally, THCV is a psychoactive cannabinoid that delivers a jolt of
energy and can act as an appetite suppressant. It must reach 428 degrees Fahrenheit
to activate. Hemp, like other varietals of cannabis, has a diverse spectrum of active
molecules. With CBD, extracts that capture the full range of these molecules rather
than isolating just the CBD are known as full spectrum. Many believe full spectrum
CBD oils result in better bio-availability (absorption) and more directly can achieve the
enhanced benefits of the entourage effect.
Novel methods of sourcing CBD beginning to emerge
It is important to distinguish between hemp-derived CBD and marijuana-derived CBD,
despite the hemp strain of cannabis being closely related to its psychoactive cousin.
According to the US Department of Agriculture, the key difference between hemp- and
marijuana-derived CBD is the amount of THC found in the flower during harvest. For
industrial hemp, the THC concentration is less than 1%, with the legal limit for
production in the US capped at 0.3% THC. Marijuana, by comparison, typically has
THC concentrations ranging from 3% to 15%, and can even exceed 30%.
Use cases offer another notable difference between hemp and marijuana. Hemp is
used for a variety of industrial purposes including to make paper, clothing, textiles,
food and other products, while marijuana is produced largely for its psychoactive and
Sales channels demonstrate divergence between hemp-derived CBD and marijuanaderived.
CBD from hemp can be purchased through traditional retail channels and
online and is legal for sale in all fifty states in the US. Marijuana-derived CBD can only
be sold through licensed dispensaries (medical and recreational licenses) in states
where the sale of and consumption of cannabis products is legal (at the state level at
Emerging sources of CBD include Synthetic and yeast-derived. Synthetic CBD offers a
third type and can be manufactured without the presence of any THC. Synthetic CBD
is distinct from synthetic marijuana and can be viewed as a purified analog of CBD.
CBD’s simple molecular structure allows for its production in a pharmaceutical
environment and promises to greatly reduce costs and streamline FDA approval long
term. Lastly, CBD is being produced using yeast. While this method is also at an early
stage, several companies in Canada and the US have already demonstrated its
viability and are working to scale the process.
Canaccord Genuity forecast: US CBD spending to be led by
legal cannabis state markets
? Strong growth expected for CBD through 2024 forecast period and beyond
? States with robust legal cannabis markets should see strongest hemp CBD
? Two distinct channels for hemp CBD and marijuana-based CBD
? Dispensary CBD sales mix instructive for where hemp CBD mix will trend once
? For now, topicals are main mass retail opportunity
We are forecasting US CBD sales to grow at a 45% CAGR, from $1.9B in 2018 (BDS
Analytics estimate) to over $18B in 2024. We note that our 2024 estimate does not
reflect the peak revenue opportunity for the US CBD market and may prove
conservative given rapid CBD adoption to date and likely meaningful expansion of
distribution channels. For context, BDS’s 2018 estimate was approximately 23% the
size of our estimate for legal cannabis sales, and we expect US CBD sales to increase
to 42% of the US cannabis market in 2021 and 51% in 2022. While our forecast
involves two distinctly separate channels for hemp-based CBD and marijuana-based
CBD (dispensaries), we see synergies between legal US cannabis markets and hempbased
CBD demand. Interestingly, demand has been increasing for CBD dominant
formulations (primarily 4:1 and 2:1 CBD:THC) at dispensaries, with CBD dominant
products growing from roughly 2.5% of dispensary sales in 2014 to more than 11%
YTD in 2019 according to point of sale data from BDS Analytics.
Figure 7: Annual CBD sales estimates (2018-2024E)
Source: BDS Analytics, Canaccord Genuity estimates
CBD forecasts appear conservative in relation to traditional product categories
Another way to size the US CBD opportunity is to view it in relation to existing products
focused on health and wellness, pain management, and use cases like those
addressed by CBD. Our forecast for $10B in CBD sales by 2023 appears conservative
when compared to several of these product categories. For example, the global
market for nutraceuticals, of which the US represents roughly 25%, is expected to
grow from approximately $435B in 2018 to more than $670B in 2024 (a 7.5% CAGR),
according to estimates from. Nutraceuticals include functional foods, dietary
supplements and functional beverages.
Meanwhile, according to analysis by Reports and Data, the US dietary supplements
market was estimated to be $43B in 2018 and is expected to grow at a 5% CAGR
through 2026, while the global market is estimated to have been $125B last year and
growing to more than $210B in 2026. Within functional beverages, almond milk,
coconut water and kombucha, which all have experienced rapid growth over the past
few years, drove roughly $1.4B, $1.2B and $500M is sales last year respectively
whiles sports drink sales were roughly $22B. Lastly, spending on over-the-counter
pain medications in the US including Tylenol and Advil was $18B last year and
expected to grow to $19B this year.
Spending assumptions in line with vitamins and supplements
While our CBD forecasts differ by state based on multiple factors, and our average
spending rate varies by the state’s level of adoption, our annual spending rate per
consumer is $116 this year and growing at an estimated inflation rate over our
forecast period. This rate is largely in line with the average spending per person in the
US on vitamins and supplements (approximately $114 in 2018) according to a CRN
Several trends are behind rising CBD demand
The market for CBD products can be broken down into two primary categories,
consumer (or nutraceutical) and medical. Medical products in this paper refer strictly
to those that can be obtained with a prescription. Consumer products are purchased
from traditional retailers (and dispensaries in the case of CBD derived from cannabis
or combined with THC) for health and wellness purposes. According to research from
the Brightfield Group, the average CBD user is female and between the ages of 26
and 49. In terms of economic standing, CBD user demographics cross a wide range of
income levels. In terms of frequency, approximately 80% of CBD consumers use the
products at least once a week and more than one third of users do so daily.
Brand loyalty is strong among CBD users, with most purchasing the same brand
repeatedly and, in many cases, exclusively. As mentioned previously, CBD is known as
the medicinal cannabinoid. While certain claims about its effects have yet to be
proven, CBD is being used to treat a wide range of ailments including chronic pain,
anxiety, menstrual cramping, insomnia, mild depression, nausea, acne, digestive
issues and inflammation. CBD products are largely self-prescribed to treat these
issues, and often supplement or replace traditional over-the-counter products. A
recent study published in the US National Library of Medicine found that 62% of CBD
users were attempting to treat an existing medical condition. While 36% stated that
CBD on its own was sufficient for relief, only 4% reported inefficacy.
Given the medical community’s ongoing acceptance of CBD, it is also interesting to
note how participants were introduced to CBD. The vast majority of participants stated
they were introduced to CBD by independent internet research, family or friends – all
independent of the medical community. In fact, less than 10% of respondents
indicated that they were informed by doctors regarding either treatment or wellness
options with CBD. In a study performed by the Brightfield Group and HelloMD, the
effectiveness of hemp-derived CBD products was compared to other forms of
medication including THC products, over-the-counter products, prescription drugs, and
common herbal remedies. In each case 50% or more of respondents responded that
hemp-derived CBD relieved their medical conditions “more effectively or much more
effectively,” than the other products groups. This response was highest (77%) when
compared with over-the-counter products, and lowest (50%) when compared with
CBD for pets could also offer a large market opportunity
The US pet industry is large, but growth is slow, with an estimated $75B in expected
spending in 2019 up slightly from $73B last year, according to the American Pet
Products Association. Growth is more dramatic in the over-the-counter pet meds and
specialty foods categories, however. Of that total spending, more than $16B is
expected to be on supplies and over-the-counter medication while nearly $32B is
expected to be on food. CBD-based products in the form of oils, topicals, food, pills,
treats and supplements are increasingly given to pets to manage pain, promote
digestion, reduce inflammation, or treat anxiety and other conditions.
CBD products fall into a broader category of alternative therapies including
aromatherapy, reflexology and naturopathy. A survey by the Michelson Found Animals
Foundation revealed that nearly 75% of pet owners have tried alternative therapies for
their pets in order to treat a list of conditions similar to those aforementioned.
Companies with notable exposure to pet CBD products include 1933 Industries,
Better Choice, Canna-Pet, HolistaPet, King Kanine, Mary’s Whole Pet and Medterra.
Consumption to favor infused products, despite pause for FDA
We believe CBD consumption trends will largely mirror those observed in legal cannabis markets,
albeit with dramatically lower levels of smokable flower. For legal recreational markets, the
fastest growth areas have been concentrates and edibles, and within those categories growth has
been strongest for vape, gummies and beverages.
While hemp-derived CBD edibles are fairly limited in availability today, we believe forthcoming FDA
guidance may liberalize their distribution, eventually allowing availability in mass retail
channels. Consumption formats likely to prove popular for CBD include edibles, beverages,
tinctures, and vape. As an indication of the industry’ conviction in looming liberalization by the
FDA, we know of major beverage players already stocking inventory of CBD beverages in the US ahead
of the mass retail opportunity.
For a sense of how consumption has shifted in the cannabis market, we can look at BDS Analytics
point-of-sales data. While the latest dispensary points-of-sales data for key markets including
Arizona, California, Colorado and Oregon from BDS Analytics shows flower representing the large
category, flower’s share is on the decline. In June of 2019, flower represented approximately 36%
of dispensary sales versus 40% in June 2018. Meanwhile, vape accounted for 26% of sales, up from
22% in June 2018, non-beverage edibles were 12%, non-vape concentrates were 10%, pre-rolls were 7%,
and beverages were 1%. Non-beverage edibles, non-vape concentrates, pre-rolls and beverages sales
as a percentage of the total market sales in June were in line with last year; however, there was
significant growth in the market. We expect the shift away from flower and toward other product
areas will continue, and we see vape and edibles as major beneficiaries.
BDS has also tracked the product mix for CBD sales in the US. Of the roughly $1.9B in sales in
2018, ingestables (includes edibles) were the largest category, accounting for 48% share. This was
followed by topicals with 27% share, inhalables (includes vape and flower) at 21% of the mix, pet
products with a little over 3%, and pharmaceuticals with under 1%.
We see CBD beverages as one of the biggest potential winners
We believe CBD beverages present an attractive opportunity for mainstream beverage
companies. While there has been more focus on the impact of cannabis consumption
on sales of alcoholic beverages, we see huge incentives for purveyors of sugary drinks
to enter the CBD market. Shifting consumer trends have been favoring functional
beverages for some time, and kombucha, kefir, and coconut water are just a few of a
wide range of drinks popularized by their association with health and wellness. With a
notable slowing of demand for sugary sodas and other sugary drinks, industry players
are looking to reinvigorate growth by expanding their product portfolios. Recent media
reports suggest that Coca-Cola is interested in making investments in cannabisinfused
beverages, and we believe CBD-based beverages are a good option,
complementing investments in sports drinks and other wellness beverages.
Ironically, CBD may turn out to be a better fit than THC for the mainstream beverage
market. Investments in cannabis such as Constellation Brands’ investment in Canopy
Growth are certainly motivated in large part by a long-term goal of offsetting declining
alcohol sales in states with robust legal cannabis markets. A 2018 study by the
University of Connecticut and Georgia State University found that lower alcohol sales
in the US were in large part directly caused by the introduction of legal marijuana
markets. We note that in Aspen, Colorado, cannabis sales recently surpassed those
for alcohol for the first time, a clear expression of the substitution effect. However, the
THC products cannibalizing alcohol sales are not in beverage form, and there is a
sound argument against THC-infused beverages ever gaining significant traction due
to slow time-to-onset and other factors.
Mass retail could offer meaningful upside opportunity
As previously mentioned, we believe the majority of CBD sales will continue to be in markets with
sizable legal cannabis sales. Beyond e-commerce, retail distribution is currently largely through
dispensaries, specialty health and wellness stores, vitamin and supplement stores, convenience and
grocery stores, and fitness centers. Following passage of the Farm Bill, mass retail is likely to
grow faster than other channels, driving the bulk of sales toward traditional retail in coming
As previously mentioned, our estimates have the total CBD market growing at a 45% CAGR over our
forecast period with traditional retail sales increasing at a 66% CAGR through 2024 versus
dispensary sales growth of 27%. Growth for mass retail could be even stronger. In 2019 we expect
especially strong demand, with dispensary CBD sales increasing by 32% Y/Y and traditional retail
growing by roughly 87%. By the end of our forecast period, we believe the mix shift will have
almost completely flipped, with traditional retail representing the majority of CBD sales at nearly
$5.5B for dispensaries.
Drilling down to the state level
As a proxy for what the CBD market could look like at the state level, we have assumed some
symmetry between hemp-based CBD adoption and that of cannabis in legal cannabis markets. Key states
in our forecast include Arizona, California, Colorado, Florida, Illinois, Massachusetts, Michigan,
Nevada, New Jersey, New York, Ohio, Oregon, Pennsylvania and Washington and represent 79% of our
total forecast for 2019. This compares to 93% for the cannabis market, allowing for differences in
the structure of the distribution channels of each market.
We expect adoption in legal cannabis markets to be the highest for CBD despite federal legalization
and national availability for CBD products, due to greater overall acceptance in legal markets. We
believe the usage rate amongst adults (over 18) for CBD across the US was roughly 6% in 2018 with
Colorado and Washington having the highest usage rates last year at 21% and 17% of adults
respectively. We note that along with Oregon, Colorado and Washington represent the most mature
legal cannabis markets in the US with total legal sales of $1.5B and $1B respectively last year
(Oregon had $644M). Meanwhile, we believe CBD adoption was less material last year in states
without significant legal medical or adult-use cannabis markets.
Moving forward, we expect adoption to grow significantly in currently legal US cannabis markets and
in states with nascent cannabis sales today. We are forecasting a US usage rate of 8% in 2019,
growing to roughly 35% by 2024. Growing usage will be driven by greater awareness of CBD products
and their benefits, continued development of pharmaceutical products, availability of CBD products
through mass retail channels and e-commerce including ingestible CBD.
By state, we expect there to be a significant range in usage, with the most mature
cannabis markets achieving usage rates of approximately 45% of the adult population
in future years. We believe the 45% represents a reasonable peak usage rate for
adults in mature markets. We note that markets with limited or no legal cannabis
sales today have usage rates of less than 5%.
We expect California ($730M), Florida ($291M), New York ($215M), Washington
($160M) and Colorado ($151M) to see the highest levels of CBD spending this year,
accounting for a total spending of more than $1.4B or 54% of our 2019 estimate.
Following the top tier, we expect Arizona ($134M), Michigan ($123M), New Jersey
($109M), Massachusetts ($107M), Oregon and Illinois (both $78M) to see the next
highest spending levels for CBD in 2019.
Each of the above states has a robust legal cannabis market for recreational sales
(California, Washington, Colorado, Massachusetts and Oregon) or medical (Florida,
New York, Michigan, New Jersey and Illinois). We note that Michigan and Illinois will
soon evolve from medical markets to recreational (launching 2020).
In total, the top ten states within our CBD forecast are expected to have combined
legal cannabis sales of nearly $10B this year (as compared with $2.1B for CBD).
By 2024, we expect California, Florida and New York to remain the largest CBD,
markets, followed by Illinois and Michigan. In total we expect the top ten markets to
represent approximately 68% of our total forecast for the CBD market or $12.4B in
sales. Outside of our current focus cannabis markets, we believe Texas ($539M CBD
sales in 2024E), Virginia ($511M), Missouri ($367M), Maryland ($362M) and
Tennessee ($282M) to be the largest markets for CBD in the US in 2024.
Emerging group of attractive CBD state markets, distinct from top cannabis
While we expect the current key cannabis state markets to grow at an average CAGR
of roughly 42% from 2019 through 2024, certain small medical markets appear
positioned for outsized CBD growth. With sizable populations and demographics
favorable to CBD adoption, these states are forecast to grow at an average 60% CAGR
from 2018 levels. States within this category include Texas, Tennessee, Hawaii,
Indiana, Missouri, Oklahoma, Virginia, Connecticut and Kentucky. Of these states we
expect Texas to experience the highest level of incremental spending ($492M)
through our forecast period. The only states in this group with legal recreational
cannabis sales are Hawaii and Vermont, but all the other states within this group
border at least one state with sizable and growing legal cannabis sales. We believe
close vicinity to legal cannabis markets should drive greater awareness and
acceptance in these states for CBD.
Meanwhile, our more conservative assumptions are reserved for Georgia, Minnesota,
North Carolina, Wisconsin, Alabama, Louisiana, South Dakota, Nebraska, Montana,
North Dakota and Wyoming. On average we expect CBD sales in these states to grow
at a five-year CAGR between 2019 and 2024 of roughly 45%. We note that our slow
growth states have mostly nascent markets today. We expect the slower growth to be
driven by the continued restrictive attitude toward cannabis sales in the states even
for medical purposes. Georgia could defy our conservative expectations given the
state’s large population, the progressive culture of Atlanta, and its close vicinity to
Florida’s large and growing cannabis market. Further, legalization of recreational use
in the upper midwestern states of Illinois and Michigan could spur greater acceptance
in Wisconsin and Minnesota, helping those markets best our estimates.
2019E Sales % Market 2024E Sales % Market 19-'24E CAGR
Texas could prove an attractive medical cannabis market and a boon for CBD sales
To date, Texas has been one of the most restrictive medical cannabis markets in the
country, only approving consumption for patients suffering from intractable epilepsy
and only at low dosages. As of this spring, the patient pool for medical marijuana in
Texas was only approximately 500 people. Last month, however, lawmakers passed
bill HB 3703, increasing the number of qualifying conditions and easing access by
requiring approval from only one specialty physician.
Governor Greg Abbot signed the bill earlier this month. Patients in Texas can now
purchase low level THC cannabis products (less than or equal to 0.5% THC) for all
forms of epilepsy, seizure disorders, autism and terminal cancer. Previously even
patients with intractable epilepsy were required to get a recommendation from two
licensed neurologists which proved to be a challenging and costly process. In addition,
the bill authorizes the Texas Department of Public Safety to oversee the regulation
and administration of cannabis distribution.
We note that even with this expansion, the number of qualifying conditions in Texas is
limited in comparison to those of other more mature medical markets. We believe a
broadening of qualifying conditions and other liberalizing actions could drive
substantial upside to CBD forecasts in the state, which already reflect sizable growth.
As a reminder we expect Texas to have $539M in CBD sales in 2024.
CBD regulations are evolving
? Farm Bill was major catalyst for CBD industry growth
? Hurdles remain, especially regarding treatment by FDA
? States have stepped up with regulations of their own
? Awaiting guidance from FDA that could to open broader mass retail opportunity
Brief history of hemp in the United States
Hemp has a very long history within the United States, with hemp cultivation tracing it roots as
far back as the early 1600s, when settlers in Virginia grew hemp to make rope, sails and clothing.
Throughout the 17th and 18th centuries, hemp production continued to be practiced by farmers across
many North American colonies, where it was used in the production of sails, ropes and caulking for
warships and merchant vessels, at the time in high demand. Cultivation of hemp began to decline in
the 19th century, as production shifted to steamships with steel hulls.
In the 1900s, regulation in the United States would further diminish hemp production.
Beginning in 1906, there was a general increase in restrictions on all forms of cannabis including
hemp, with many states labelling the plant a poison.
While the Marihuana Tax Act of 1937 was the first federal law to regulate cannabis, it was the 1970
Controlled Substances Act that sealed hemp’s fate by making no distinction between hemp and
psychoactive varietals of cannabis, ultimately imposing strict regulation on its cultivation. The
distinction between hemp and marijuana resurfaced in 2014, with passage of the 2014 Farm Bill.
Importantly, the bill provided a separate definition for industrial hemp within the framework of a
hemp cultivation pilot program. Under the program, industrial hemp was defined as Cannabis sativa
L., with a THC concentration of no more than 0.3%. This bill laid the foundation for the
transformational 2018 Farm Bill.
Implications of 2018 Farm Bill
On December 20, 2018 the Agriculture Improvement Act of 2018 (“2018 Farm Bill”)
was officially signed into law by President Donald Trump. The 500+ page bill outlined
the annual spending to be made by the US Department of Agricultural and contained
key regulations relating to industrial hemp. Importantly, the bill removed industrial
hemp from the definition of marijuana, effectively de-scheduling hemp and removing it
from the purview of the Controlled Substances Act (CSA). This also had the effect of
removing hemp-derived CBD from the CSA and the jurisdiction of the Drug
Enforcement Agency (DEA). Accordingly, it is now legal for these products to be
manufactured, distributed and sold throughout the United States. It is important to
note that CBD extracted from non-hemp varietals of the cannabis plant is beyond the
cover offered by the Farm Bill.
Less burdensome tax rates
Following hemp deregulation, hemp and its derived products are no longer impacted
by IRS Code Section 280E, which disallows deduction of operating expenses for
cannabis companies when calculating taxable revenue and has resulted in cannabis
profits taxed at rates as high as 70%, compared to the corporate rate of 21%. Under
Section 471 of the Farm Bill, commercial hemp farmers may now deduct costs for
direct materials, direct labor, utilities, maintenance, rent, and quality control.
A series of indirect costs are also allowed in the calculation of the cost of goods sold,
including production taxes, depreciation, employee benefits, factory costs, and
administrative insurance. In this way, commercial hemp farm using cash accounting
can grow relatively tax free by investing earnings into deductibles, until the business
reaches annual revenue ceiling of $25 million. Furthermore, businesses under this
$25 million ceiling are no longer required to track inventory, allowing companies to
deduct the cost of production, even if the entire harvest has not been sold.
Greater access to banking and potential for public listings on major exchanges
The Farm Bill opens to door for commercial hemp businesses to gain access to
banking services and structured borrowing agreements, though it has yet to be seen
how willing banks will be to lend against the harvest of hemp. In recent months, there
has been progress on this front, in both debate on the floor of Congress and in the
regulation that allows for hemp companies to bank at credit unions. The National
Credit Union Administration (NCUA) has said that banking services are available to
hemp and hemp-derivative businesses due to the passage of the Farm Bill.
While end regulation will be dependent on what the US Department of Agriculture
allows, the current guidance from the NCUA allows for “the customary range of
financial services for business accounts, including loans, to lawfully operating hemp
related businesses within their fields of membership.” The NCUA will be updating its
guidance this fall, after the USDA gives its federal rules for hemp production. However,
these actions have not moved the US Treasury, meaning that traditional banks are still
out of reach.
As far as up-listing opportunities, CV Sciences is exploring a move to NASDAQ. If
successful, we expect a flurry of capital markets activity to ensue as US hemp-based
CBD companies attempt to capitalize on larger pools of institutional investor capital.
Questions linger on treatment by FDA, although guidance forthcoming
While the 2018 Farm Bill removed hemp from the definition of marijuana and thus from the purview of
the Controlled Substances Act, questions regarding federal legality of hemp-derived CBD products
persist. Major sticking points include CBD products ingested through the mouth, marketing CBD
products with medical claims, and labelling. According to a recent FDA update, it remains federally
illegal to market products that add CBD to foods, or label CBD as a dietary supplement. Following
the passage of the Farm Bill, then-FDA Commissioner Scott Gottlieb, while acknowledging CBD’s
therapeutic value, issued a statement saying the FDA maintained the authority to regulate products
containing cannabis and its constituents under the federal Food, Drug and Cosmetic Act.
The FDA has yet to establish regulations allowing hemp-derived CBD products to be lawfully marketed
as food products or dietary supplements. Also, if a CBD product is sold along with therapeutic
claims, the general rule is that it cannot be sold without express FDA approval, or an FDA
monograph if it is an over-the-counter product. This issue recently came to a head when the FDA
issued a warning letter to Curaleaf , the largest cannabis operator in the US, for selling CBD with
unsubstantiated medical claims. Subsequently, CVS pulled Curaleaf’s CBD products from its shelves.
Importantly, according to Canaccord Genuity analyst Matt Bottomley, Curaleaf has highlighted that
the FDA’s letter was not related to any concerns over product quality, safety or packaging but
stemmed from links on its website to National Institutes of Health reports discussing various uses
and benefits of CBD.
We believe clarification from the FDA on the above outstanding issues will be forthcoming. Late
May, the FDA held public hearings on hemp-derived CBD and listened to lengthy testimony from
numerous industry stakeholders and policy makers as part of a discovery phase for setting up a
regulatory framework for CBD products. The FDA recently announced that it will expedite the
development of rules regarding CBD and will issue a report on its progress in developing regulatory
rules by the early fall.
USDA slow to draft testing rules
When the Farm Bill was passed in 2018, it not only removed hemp from the CSA but also generated a
series of regulatory tasks touching multiple agencies. One such task is to establish standards for
producing hemp safely and lawfully and involves setting testing standards. This falls under the
purview of the US Department of Agriculture (USDA), and so far developing those standards has been
slow going. Testing THC appears to have become a stumbling block. Despite explicit language in the
bill naming pos-decarboxylation as a preferred testing method, no such method exists for testing
THC levels, and the default approach called gas chromatography (GC) has been known to increase the
levels of THC to above the 0.3% threshold. While this issue will likely be resolved, the USDA’s
self-imposed August deadline for the release of rules has slipped. One impact is that state and
local authorities will continue to find it difficult distinguishing between hemp and marijuana.
This in turn delays full progress toward unfettered hemp movement throughout the US.
Somewhat vague regulatory status of hemp-derived CBD has spurred state
Without a coherent FDA regulatory framework in place, hemp-derived CBD is presently
subject to state by state regulations, at least when it comes to food, beverages and
dietary supplements. Regulatory fragmentation is keeping national and multi-national
food and beverage companies on the sidelines, allowing smaller players opportunities
to capture market share before increasing competition ensues.
Hemp-based CBD rules vary widely by state. Some states including Tennessee require
CBD to be made in state-certified facilities, while others like Alaska subject the
product to regulatory review from several state agencies. Certain states have slowed
the role out of derivative CBD products. Massachusetts bans CBD-infused food and
beverages, limiting delivery format to capsules, tinctures, and vape. Even with the
passage of the Farm Bill in 2018, some states have been slow adopters, with Texas
only legalizing CBD at the state level in June of 2019.
Figure 17: Hemp regulations by state
Source: Hemp Business Journal
Disparate state regulations for marijuana-derived CBD are also evident in state
Encompassing cannabis-derived CBD, laws legalizing the use of marijuana for medical
purposes or medical and recreational use have been passed in 35 states, along with
the District of Colombia and the territory of Puerto Rico. Of the remaining states, only
Idaho, Nebraska, Kansas and South Dakota do not have programs through which CBD
use is legal. Kansas recently passed a law to permit the use of CBD products with 5%
THC for treating debilitating medical conditions. States with medical programs
restricted to CBD products include Alabama, Georgia, Indiana, Iowa, Kansas,
Kentucky, Mississippi, North Carolina, South Carolina, South Dakota, Tennessee,
Utah, Virginia, Wisconsin and Wyoming.
Alabama 2014 Law allows for the legal possesion of CBD for people
from a debilitating epleptic condition.
Georgia 2015 Allows the use of cannabis oil that contains equal
or less than 5%
Indiana 2017 Allows the use of CBD for treatment resistant
epilepsy that is less
than 5% in strength and has no more than 0.3% THC.
Kansas 2018 Allows for the use of CBD that contains no more
than 5% THC for
debilitating disesases. Current law passed May 2019.
Kentucky 2014 Cannabidiol is excluded from the definition of
marijuana and can be dispensed by physicians.
Mississippi 2014 Allows for the use of extracts, oils and resins with
no more than
15% CBD and no less than 0.5% THC for patients with seizure disorders.
North Carolina 2014 Allows for the use of hemp extract that is less than
0.9% THC and
at least 5% CBD by weight. It remains illegal to cultivate and manufacture hemp extract in the
South Carolina 2014 Patients Suffering from certain forms of epilepsy may
use CBD oil
that is less than 0.9% THC and more than 15% CBD.
South Dakota 2017 CBD is a controlled substance although separate from
Law specifies that CBD must be a product approved by FDA.
Tennessee 2015 Cannabis oil that is less than 0.5% THC and at least
10% CBD can
be used for intractable epilepsy, seizure disorders, multiple sclerosis, spasticity, terminal
cancer, Alzheimer's, Parkinson's, Huntington's, autism and ALS.
Utah 2014 Allows the use of cannabis extract which is less
than 0.3% THC
and at least 15% CBD for intractable epilepsy.
Virginia 2015 Oils that contain at least 15% CBD and no more
than 5% THC can
be used for patients for which a practioner determins there to be a benefit.
Wisconsin 2014 CBD can be used for the treatment of medical
Wyoming 2015 Hemp extract can be used when containing at least 15%
no more than 0.3% THC for the treatment of intractable epilepsy.
The 2020 election likely to bring the topic of cannabis legalization back to the
In the upcoming election, all candidates seeking the Democratic party nomination, except Joe Biden,
have shown support for full legalization of cannabis. So far, cannabis legalization does not appear
to be an issue Republicans are likely to champion, despite bipartisan support for The STATES Act
and The SAFE Act. While President Trump has recently been vocal about combating the opioid crisis,
his offic is yet to draw a connection between cannabis legalization and potential for weaning
Americans off of these addictive drugs. Evidence of the role CBD might be able to pl fighting
opioid addiction is on the rise, however, and perhaps Trump could take up t cause. According to a
report by the American Journal of Psychiatry, patients who too CBD had a lessened craving for
opioids or heroin when recovering from addiction. Given Trump signed the Farm Bill into law, he has
an easy path toward taking credit for a CBD based addiction treatment program in key battleground
states like Ohio, where opioid addiction is endemic.
Supply chain: “Heartland meets the Left Coast”
? Hemp already global crop, mainly for industrial products
? US hemp production expanding dramatically to meet CBD demand
? Increasing extraction efficiency and growing capacity has driven down CBD costs
? Fragment share for leading CBD brands as outside competition looms
? E-commerce a key retail channel for hemp CBD, but mass retail increasingly entering the picture
The CBD supply chain is constantly evolving given rapid growth for the industry and a changing
regulatory landscape. Its most basic structure has four stages: cultivation, extraction,
formulation, and retail & distribution. We note that while hemp CBD companies are rarely active in
just one stage, there are also few examples of companies spanning all four in a meaningful way. We
are mainly focused on the hemp-derived CBD supply chain, although we may allude to other sources of
Large-scale producers such as Charlotte’s Web have been working to create vertically integrated
channels from seed to sale. In cultivation and manufacturing, companies use proprietary genetics
and extraction systems to create their desired product, backed up by step-by-step testing.
Distribution continues to be varied, with companies like Charlotte’s Web getting 55% of sales from
? Cultivation: The planting, growing and harvesting of the raw plant materials used to produce CBD,
whether from the cannabis plant or hemp. Cultivation methods vary based on regulations, the cost of
local resources, weather, and desired predictability and yield of plant.
? Extraction: The process of CBD’s removal from the plant raw material.
? Formulation: Transforming extracted CBD into a consumable product.
? Retail and distribution: The marketing and sale of CBD-derived products in a store setting, and
their direct delivery to the end-consumer.
Hemp production already flourishes on a global scale
Hemp can be refined for use in a variety of products including textiles, clothing, food,
biodegradable plastics, and other industrial products. It follows that there are many
established markets for hemp worldwide. China is the largest market, accounting for
over $1B in hemp sales or 1/3 of the global hemp market, according to Hemp
Business Journal. Most production in China is focused on textiles, while roughly 20%
is for other industrial products and personal care, with under 10% for CBD. China is a
unique market as only Chinese companies can growl and sell hemp domestically as
part of the country’s five-year plan to establish hemp as a crucial infrastructure crop.
Thailand is also a producer in Asia, with a legalized sector that defines hemp as
having levels of THC at 1% or lower, rather than the 0.3% level found in other
countries. This law could become telling as the industry continues to evolve and
producers around the globe push regulators to relax the THC limit.
In Europe, France is the largest producer, growing over 35,000 acres of hemp, with
the next, Estonia, growing 8,500 acres, and the Netherlands growing 6,000 acres.
Prior to passage of the Farm Bill in 2018, some US CBD suppliers sourced their hemp
from Europe. The European hemp market has expanded dramatically, with 20,000
acres of production in 2011 increasing to 80,000 in 2017, according to the Hemp
Canada’s hemp production has grown rapidly since 2008, when it only grew 20,000
acres, to 2017 when it grew 138,000 acres, according to the Hemp Business Journal.
Given the now-legal status of cannabis, the market has continued to grow, and
Canada has now established a position as a hemp exporter. As example, hemp
exports to South Korea grew from $235,000 in 2015 to $31.7 million in 2017,
according to the Canadian Seed Trade Association. While China is dominant, Canada
does have certain advantages, due to open markets and a clearer regulatory
environment. For example, the requirement of 0.3% THC content is taken on an
average of ten years of crop harvest, rather than a single plant, allowing producers a
bit of leeway. Canada also has the designation of Generally Recognized as Safe
(GRAS) which removes regulatory restrictions for hemp-based consumables such as
US hemp production on the rise
Since passage of the Farm Bill in 2018, independent farmers and industrial hemp
producers have expanded their production. In addition, 16,877 state cultivation
licenses have been issued this year, which compares with 3546 in 2018 according to
the 2019 US Hemp License Report from Vote Hemp. In 2018, 78 thousand acres of
hemp were planted across 23 states, and 41 states enacted hemp legislation. This
production level was a roughly 300% increase over 2017, and an approximate 800%
increase over 2016, according to Vote Hemp, a national nonprofit advocacy group for
the industrial hemp industry. Colorado, Kentucky, Montana and Oregon are currently
leading in state hemp production for hemp-derived CBD.
US hemp production by state
While hemp production occurs across dozens of US states, the following overview
focusses on what we believe are some of the key state hemp markets for CBD going
? Colorado: Based on available statistics from Hemp Industry Daily in 2019,
Colorado is currently the market leader with 80,000 licensed acres for production,
as well as 9 million square feet worth of indoor growth capacity. The state
currently has active 2,300 registered growers with economics of $200-$500 per
pound for hemp flower, and $25-$60 per pound of whole plant biomass. Given
the adoption of hemp-based CBD, this growth is expected to continue.
? Montana: The largest producing state in 2018, Montana continues to grow with
over 40,000 acres of production in 2019 and more than 250 growers according
to Hemp Industry Daily. Montana has a state hemp program that sets guidelines
for all production, establishing safety and labeling standards to give the state
industry a stamp of approval.
? Kentucky: With its long standing as a large grower of hemp, Kentucky is expected
to roughly triple its 2018 output of 16,000 acres, growing 50,000 acres in 2019
according to a CNBC report. Furthermore, the number of active licensed growers
has increased at the same pace to a little over 1,000. Given the large number of
CBD-focused companies in the states, and their extract capabilities, it can be
expected that the hemp production and extraction industries will continue to grow
in Kentucky in the coming years. Senator Mitch McConnell of Kentucky helped
push the Farm Bill in 2018 and hopes for hemp to become a new staple
agriculture product and cash crop for the state moving forward.
? Oregon: Building on the legal cannabis business that already exists in the state,
Oregon has been a growth area in hemp production. In 2019, 46,219 acres of
hemp were planted by 1,342 active licensed growers according to the state’s
Department of Agriculture. A cause for concern is Oregon’s history with general
cannabis, as overproduction caused a glut of product, depressing pricing and
hurting business. Hemp however has the advantage of exportation to different
states, so it is possible that high-quality hemp and CBD can be exported to new
markets, like operations in Colorado and Washington.
9 September 2019 31
? New York: While currently an active market in the cultivation and extraction of
hemp and hemp-based CBD, New York has not made its figures public at this time
in terms of acres, licenses, and in state-economics. It should be noted that New
York has been a major area for hemp and CBD investment with Canopy Growth
investing $150 million to create a 48-acre, 308,000 square foot facility to enter
the US hemp and CBD market.
? Florida: As of July 2019, hemp is legal in the state of Florida, but regulator
frameworks for grow permits, seed use, and extraction will not be set until fall
2019. An interesting market opportunity, Florida’s citrus farms have been in
decline following the outbreak of greening disease, and hemp could help to
replace the agricultural and revenue loss in the coming months and years.
? Ohio: On July 30 of this year, the state legislature voted to allow farmers and
researchers to grow industrial hemp, while also legalizing the sale of hempderived
CBD. The bill is now law, taking immediate effect, though actual hemp
production will not actually commence until the 2020 growing season.
Figure 22: Acres licensed for hemp by state
Source: Public disclosure
Hemp state certification programs attempt to normalize supply chain
Given the growth in CBD demand and federal scrutiny, a hemp trade group announced
a voluntary certification program that sets safety and quality controls for CBD. These
certifications are then issued by the U.S. Hemp Authority, all in an effort to
demonstrate a clear path to regulating hemp CBD. So far, a dozen or so companies
have received certification, including CV Sciences, HempMeds, and Medterra CBD in
California; Charlotte's Web in Colorado; MetaCan in Florida; Balanced Health
Botanicals, HD Distribution, Bluebird Botanicals, GenCanna, and Shell Farms in
Kentucky; Hempworx in Nevada; and Barlean's in Washington. Only three of the
companies receiving certification are based in states without meaningful hemp
Extraction capacity is on the rise
CBD must be derived through an extraction and distillation process. First, hemp is
combined with a CO2 solvent that separates and extracts the oil found in the plant,
which is rich in cannabinoids. To separate this oil into individual cannabinoid
compounds, it will need to go through the distillation process, beginning with
winterization. Winterization works to remove impurities in the oil such as waxes and
fats, due to plant residue. The extracted raw oil is mixed with 200-proof ethanol
alcohol and left in a freezer for a period of time ranging from 12 hours to several days.
Following the freeze, the resulting mixture is run through a filter paper into an
extraction jar, before heat is used to boil off the alcohol. At this point, what is left is a
CBD-infused oil that can be consumed when baked into food or in the form of smoke.
Given there are no standards for defining a CBD-rich oil, concentration can vary from
below 50% to above 75%. An additional step can also be taken to create CBD isolate,
a dry power that consists of pure CBD. This process, known as short path distillation,
takes the already refined oil and continues to boil it in order to create the CBD isolate.
According to industry statistics, the average extraction rate is 45kg/day, distillation is
3kg/day, and crystallization for distillate is 2kg/day.
The thee forms of CBD concentrate – extract, distillate, and isolate – have increasing
degrees of CBD content and are used in a range of end products. Extract is primarily
used in wellness and holistic products, contains a CBD concentration typically ranging
from 50% to 70%, and is paste-like at room temperate and dark brown in color.
Distillate has an average CBD concentration of around 85% and is the main active
ingredient in recreational and medicinal products such as vapes. This compound is
usually a dull yellow and malleable crystal at room temperature. Finally, isolate
contains 99% CBD and is a white powder used in pharmaceuticals and high-end
Currently, the largest extractors are integrated CBD companies with large upstream
operations that control the production of raw product, as well as proprietary extraction
facilities. Extraction relies upon scale to keep costs down, and utilizes a variety of
propriety methods, each marketed as the most efficient. The largest US player in
extraction, working from extract to distillate, is Mile High Labs in Colorado which can
produce 120,000 kg of extract annually.
Figure 23: Distillation process
Source: Stillcanna Company report
Nano emulsification could drive CBD beverages boom
Recent strides in nano emulsification may enable formulations that transform the
edibles and beverage markets. Since cannabinoids are fat soluble and hydrophobic, in
their infusible form they tend to have an oily texture as well as a flavor that is difficult
to disguise – hence, all of the sugary edibles lining dispensary shelves.
While cannabinoids aren’t technically water soluble, there has been progress in
making them “water compatible,” using nanoemulsions. Droplets of the nanoemulsion
variety can be smaller than 100nm, be optically translucent, and exhibit several
characteristics that are attractive to edibles cannabinoid formulations, including low
viscosity and kinetic stability. Nanoemulsions are created with shear force using
ultrasonic cavitation, which is essentially a mechanical process whereby sound is
used to break down oil droplets to nanometer size. A nanoemulsion concentrate
(majority water with carrier oil, surfactant, and nanometer cannabinoid droplets) can
then be formulated with varying degrees of cannabinoid content, and ultimately added
to a beverage or edible without detectability by the consumer. This is not the only
approach to flavorless and textureless cannabinoids, and we see water-compatible
cannabinoids as an important source for edibles and beverages in the future.
Formulation and brands remain fragmented
While brands from Charlotte’s Web, CV Sciences, and Green Roads occupy the top
three slots in for market share. We believe consolidation, as well as new and recent
entrants with substantial resources, could challenge the status quo. Curaleaf and
Select CBD come to mind, as do Canadian LPs that have set their sights on the US
hemp-based CBD market since passage of the Farm Bill.
Broad spectrum of popular CBD products
As previously mentioned, we expect product categories for hemp CBD to evolve
similarly to what has been witnessed in the cannabis dispensary channel. With that in
mind, edibles and vape are likely to drive meaningful revenue longer term. In the nearterm,
constraints on retail distribution have made topicals a much larger category
when compared to the broader cannabis market. Another key difference is likely to be
seen in the beverage category, where we expect CBD beverages to grow meaningfully
while their THC counterparts remain a small piece of the overall cannabis market.
Innovation is flourishing in the edible’s category, driving the introduction of a wide
range of CBD edibles. Popular products include gummies and chocolates, with the
hemp CBD variety often marketed as having better taste compared to their marijuana
derived brethren. According to a Vape360 ranking, CBDfx has the top ranked hemp
CBD edible line with their gummy products. According to Tuck, the sleep information
provider, CBDistillery was labeled as the “editor’s pick” for CBD products. Finally, in an
online review done by Mashable, Green Roads CBD edibles were designated the top
variety, while CBDistillery was given best value.
Figure 25: CBD edibles
Source: Company reports
We see CBD beverages as one of the biggest potential winners post passage of the
Farm Bill and subsequent likely broadening of retail distribution (still awaiting FDA
regulations for hemp CBD in food, beverage and supplements). The trend toward
functional beverages has put CBD in the cross-hairs of global CPG players, and this
category is poised to grow faster than most in our view. With the variety of beverage
types there is no clear winner, but according to Remedy review, Kickback CBD cold
brew, Sprig sparkling soda, and Aurora Elixirs are all well reviewed by customers.
Part of the broader indigestibles category, tinctures currently account for more CBD
sales than any other product type (we believe greater than 30%), although topicals are
a close second. We expect topicals sales to soon surpass sales for tinctures given
expanded distribution, and other product types to gain ground as the CBD industry
evolves. According to the site RaveReviews, Lazarus Naturals was ranked first by
customers, while Vape360 gave that title to CBDfx. Also, Tuck named Medterra the
best hemp-derived CBD oil in their own study.
Similar to what we see in legal state cannabis markets, consumers often prefer to
vape CBD oils rather than smoke CBD flower or other formats. We believe vape
hardware is innovating to address design challenges peculiar to CBD isolate (less
viscosity), and consumers are beginning to favor certain brands of CBD vape oil.
According to CannaInsider, Social CBD has the top reviewed vape pen, while Vape
360 gives the top vape oil spot to CBDfx.
Topicals are driving demand for CBD in 2019. With the CBD supplements and CBD
additives in food/beverages not yet permitted by the FDA, (waiting on update from
FDA on regulatory framework), branded products manufacturers and retails have
focused on lotions, ointments, and other products applied to the skin to sooth and
relieve localized pain. According to CBDHacker, the top topical product is Lazarus
Naturals cedar citrus balm. Remedy Review also published a list of hemp CBD
products, placing Charlotte’s Web and CBDistillery in the top ten of topicals.
Large retailers could transform distribution
We believe current retail distribution of hemp CBD is largely through online channels (Charlotte’s
Web does roughly 55% of its sales online), followed by specialty health and wellness stores,
vitamin and supplement stores, and convenience and grocery stores. As mentioned previously in this
report, we estimate mass retail will drive the majority of CBD sales by 2023, and large retailers
are starting to enter the fray.
Kroger, the largest supermarket chain in America, recently announced plans to offer CBD products in
945 stores covering 17 states according to a company newswire. Kroger is focusing on the topical
applications of hemp-derived CBD, offering lotions, oils, and creams across its stores. Kroger also
has an existing partnership agreement with Walgreens, anther CBD carrier, in which the two
cross-sell items. To date, Kroger has partnered with Charlotte’s Web for this venture and has
expanded its store count to 1,350 locations across 22 states. Meanwhile, Amazon through its core
e-commerce channel and Whole Foods stores offers a wide range of CBD products.
Many large clothing retailers have also announced plans to carry CBD products as they attempt to
attract a younger demographic and increase foot traffic. American Eagle will soon offer CBD
products in 500 stores across the country with Abercrombie having offerings in 160 stores, DSW
carrying CBD in 96 stores. Both of these companies are supplied by Green Growth Brands. Meanwhile
Saks Fifth Avenue and other top cosmetics retailers have recently begun selling select cosmetic
products infused with CBD, and some of the world’s leading spas including those at hotel chains
such as Ritz Charlton, Four Seasons and St. Regis began offering CBD-based treatments.
One of the more consequential entrants to this space will be large pharmaceutical and wellness
chains. CVS has already brought CBD to 800 stores in eight states (although, as we mentioned, it
recently pulled Curaleaf product), while its main competitor, Walgreens, is introducing CBD to
1,500 stores across nine states.
CBD pricing likely to follow trend experienced by THC products
Following the passage of the Farm Bill, large amounts of legal production capacity
were able to come online, and with continued investment in extraction technology and
capacity, the price of CBD in the US has begun to fall. Since Hemp Benchmarks began
publishing wholesale CBD prices in April 2019, the price of concentrate has fallen
50%, with distillate and isolate falling 24% and 26% respectively. These declines have
reflected improvements in the efficiency of extraction systems and the evolution of
The price of hemp biomass and flower has not experienced this same degree of
decline thus far, as states have been slow to implement cultivation growth initiatives
and approve licenses. The price of hemp flower had risen 8% through July from April
and jumped another 18% in August. The price of biomass has also been solid, falling
11% through July from April before rebounding 16% in August.
Longer term, we believe the prices for bulk hemp flower and other biomass used for
CBD extraction are likely to follow trends exhibited for THC products. While prices have
varied widely between states, based on supply constraints overall as the legal
cannabis market has expanded, prices for wholesale flower have declined. As of
August 30, the wholesale price of flower in the US per pound was just over $1,400
which is down from roughly $1,500 last year. Furthermore, we believe retail pricing
trends for cannabis products sold through dispensaries could be telling for future CBD
pricing. Across product categories, the price per gram of product sold in June in
Arizona, California, Colorado and Oregon increased by 2% as the price of edibles and
pre-rolls increased by 4% and 7%, respectively, over June 2018 levels, according to
BDS Analytics Point of Sale data. The ASP for all other categories declined in June with
flower pricing down 11% Y/Y, concentrates down 3% Y/Y and beverages down 1%.
ASP results for the month reflect a continued trend from prior periods, particularly with
edibles pricing defying broader price declines. One takeaway from the data is potential
for margin expansion in edibles and pre-rolls in the face of healthy pricing and
potentially lower raw material costs.
Figure 30: June cannabis pricing ASP per gram Y/Y
Source: BDS Analytics
Public markets: CBD touches wide array of companies in
CG coverage universe
Many of the companies in the Canaccord Genuity coverage universe have meaningful
exposure to the US CBD market. Backgrounds can differ broadly, including companies
focused largely on marijuana and hemp-based consumer branded products,
traditional multi-state operators (MSOs) primarily intent on building out dispensary
networks, and Canadian LPs developing US-facing revenue streams. We also note that
historically non-plant touching companies Greenlane and Kush Co. are expanding
their CBD exposure.
A range of brand centric players
Within the brands category, Charlotte’s Web is a pure play on hemp-derived CBD,
commanding the greatest share of the market of any player. Other names with high
CBD revenue exposure include 1933 Industries and Green Growth Brands, through
their respective CannaHemp and Seventh Sense lines. We also note that cannabis
brand plays DionyMed, Indus Holdings, PLUS Products, and SLANG have been making
a push into hemp- and marijuana-based CBD to varying degrees, in certain cases
leveraging their hefty wholesale distribution footprints (DionyMed and Indus).
MSOs growing their CBD portfolios
While many of the MSOs under coverage have a CBD strategy in place, Curaleaf
stands out as the largest player, especially post acquisition of Select CBD. Other MSO
CBD brands include Cresco’s Well Beings, Harvest’s Colors and CBx Essentials, and
Ianthus’ CBD For Life. Although Planet 13 and Cansortium thus far have narrower
state exposure, their respective CBD brands appear to be gaining traction.
Canadian LPs seeing green
With federal legalization of hemp CBD, a rash of licensed cannabis producers out of
Canada, “Canadian LPs,” have begun to assertively move into the US CBD market.
Players include majors like Canopy Growth and Tilray, who are taking the direct
approach of acquiring processing licenses and IP (Canopy) or selling well established
Canadian hemp brands and CBD-infused products into the US (Tilray). Smaller
Canadian LPs entering the US hemp CBD market are pursuing joint ventures and
focusing on states with burgeoning cannabis markets. Village Farms, for example, is
focused on Texas and is converting greenhouses used for growing vegetables into
hemp facilities. Other LPs setting up US subsidiaries, partnerships, and JVs to tackle
the opportunity include HEXO, The Green Organic Dutchman, and CannTrust Holdings,
while Cronos, Aurora, and Organigram have all announced intentions to enter the US
CBD market. Ultimately, we believe these investments offer long term strategic value,
allowing Canadian LPs the ability to build operational footprints in the US based
initially on CBD, but eventually translatable to other cannabis products once full-blown
federal legalization occurs.
Ancillary players are also expanding CBD exposure
Traditionally non-plant-touching companies Greenlane and Kush are addressing the
CBD opportunity in different ways. In addition to packaging and hardware, Greenlane
has launched CBD products through distribution partnerships with Bloom Farms,
Bouquet, Cookies and others. Kush has remained focused on packaging and
hardware, although the company is ramping the sale of solvents for extraction and
has entered into a fee-sharing arrangement with C.A. Fortune for distribution services
to mass retail.
Notable transactions highlight CBD as attractive alternative to traditional cannabis
Based on the size of the market opportunity and the evolving consumer demand and
regulatory environment, public and private capital raises have been on the ascent for
companies with a focus on the CBD market, both hemp-derived and marijuana-derived
offerings. For companies, the early capital investment has been utilized to scale
operations ahead of a ramping market, while the federal de-regulation solidifies the
case for M&A from large verticals. We expect activity will increase once the US FDA
provides visibility into regulations.
Recent transactions have included a $161M Charlotte’s Web follow-on offering this
past spring, a $36M private placement for Hemp Fusion in August and a $30M followon
for Valens GroWorks. Importantly, we note that US companies focused on hempbased
CBD exclusively offer an alternative to cannabis investing, with easier sources
of capital and the ability to list on US exchanges and the Toronto Stock exchange. We
note that US -based cannabis companies are limited to secondary Canadian stock
exchanges (including the Canadian Stock Exchange and the Neo Exchange) and are
widely restricted from traditional banking relationships due to the overhanging federal
In terms of M&A, many companies in the cannabis market including Aurora, Canopy
Growth, Green Growth Brands, Pasha Brands, iAnthus Holdings, TerrAscend, Level
Brands, Indus Holdings, 1933 Holdings, Leviathon Cannabis and Tilray have all
recently made or are in the process of making significant CBD-focused investments in
acquiring companies with CBD branded products, cultivation or extraction expertise.
Acquisitions have included companies with both hemp- and marijuana-derived CBD
Valuation analysis for cannabis companies
Below is a valuation comparison for cannabis companies covered by Canaccord
Genuity, based on EV/EBITDA and EV/Revenue.
Key public and private CBD industry participants
The ecosystem of companies involved in hemp-derived CBD is vast, and the following
list in no way captures all the players. In the companies we have highlighted below we
also see varying degrees of scale and vertical integration with a handful of companies
touching the entire ecosystem and many focused-on brand and distribution. We
describe key CBD participants within the context of their supply chain participation.
1933 Industries is a vertically integrated cannabis brand operator. The company owns
the CannaHemp brand, its CBD line. The company sells a variety of extract products
as well as infused topicals, along with a mix of CBD and THC combined products.
1933 Industries has expanded its extraction capacity to enhance CBD isolate production.
Abacus Health Products
Abacus Health Products is a CBD company involved in the formulation and retail & distribution parts
of the sector’s value chain. The company sells business to consumer through its CBD Medic line and
business to business through CBD Clinic. It seeks to address the pain relief and skincare markets
with products present in 2,000 retail locations and 10,000 medical practitioner offices. Abacus
Health has also participating in the National Wellness Expo, Paleo f(x), and the National Products
Expo to continue to educate the public on CBD.
American Shaman is a CBD company involved in the formulation and retail & distribution segments of
the value chain. The company sells through retail locations which can be franchised, and through
wholesale, with the option to join in an affiliate program. The company also sells at a discount
through its Compassionate Care program, designed to help customers with chronic conditions.
Better Choice Co
The Better Choice Co is involved in the formulation and retail & distribution of CBD
products designed for animal consumption. The North American company operates in
direct to consumer fashion and specialty retail with a non-CBD line, Trupet, and a CBD
line, Bona Vida. Currently the company has 150,000 customers and 13,000 signed to
a subscription service, coupled with plans to expand to general retail, as well as
partnerships with veterinary distributors.
Figure 35: Supply chain position
Source: Company reports
CBDfx is CBD company involved in the extraction, formulation, and retail & distribution
of products. The company has a market leading brand and is also active selling
through its wholesale channel.
Figure 36: Supply chain position
Source: Company reports
CBDistillery is a CBD company involved in the extraction, formulation, and retail & distribution of
products. The company sells in retail locations across the country, along with an e-commerce option
as well as a wholesale channel.
Charlotte’s Web is the largest CBD company in North America, fully integrated across
the CBD value chain, active in cultivation, extraction, formulation, and retail &
distribution. The company operates farms in three states and is expanding into
177,000 square feet of production space for extraction and packaging. It is currently
expanding its distribution network, selling in 8,000 retail locations in the U.S. as well
as targeting partnerships with 5 national chains, and the company has a large
ecommerce presence with takes in 55% of total sales.
Charlotte’s Web is also a leader in agricultural science relating to hemp production. In
July 2019 the company signed a partnership with the Rodale Institute and Natural
Care to research regenerate hemp agriculture. This is part of a larger push into
sustainable agriculture as the company has shifted to regenerative means of hemp
production, from conventional forms, over the past five years.
Figure 38: Supply chain position
Source: Company reports
CV Sciences is one of the larger CBD brand operators in the U.S., operating in the
formulation and retailed & distribution channels. The company has two business lines
in consumer products and drug development. The consumer products section is built
around health and wellness with over fifty products and a focus on supplements and
topicals. CV Sciences is the only company to date to adopt the Generally Recognized
as Safe (GRAS) designation for its consumer products.
The medical side is focused on the development of a CBD based treatment for
smokeless tobacco, which causes 250,000 deaths per year in the U.S. To date, CV
Sciences has engaged with the FDA and is in the process of completing nonclinical
toxicology studies this year, along with the submission of the investigation new drug
application (IND). The company expects to begin clinical trials in late 2019.
EcoGen Labs is a fully integrated CBD company covering cultivation to retail &
distribution. The company has two main channels: selling distillate, isolate, flower, and
seeds at the wholesale level, while also running a white-label operation covering
almost all CBD produces from tinctures to dog food. The company has built a
reputation as a provider of superior genetics for its hemp seeds and is a large
manufacture and seller of proprietary extraction and processing machines.
Figure 40: Supply chain position
Source: Company reports
Elixinol is a global owner and operator of CBD consumer brands, working both
formulation and retail & distribution. The consumer products portfolio operates across
two segments, dietary supplements and hemp foods. The company gains 87% of its
revenues from the dietary supplements side, selling 45 products over the full
spectrum of CBD consumption methods. Within the consumer segment the company
sells through direct to consumer, wholesale, private label, and bulk channels. 12%
comes from hemp foods selling 43 products covering hemp seeds, flower, protein,
and topicals. Elixinol is a global operator, with operations in North America, Europe,
Japan, and Australia.
Elixinol is also planning to expand to the pharmaceutical space and submitted a
license application to the Office of Drug Control in 2018. To this end, the company has
also purchased and is holding 60 acres in Australia for continued development
Empower Clinics is a CBD company active through extraction, formulation, and retail & distribution.
The company operates across a clinic franchise model, tele-medicine, and CBD product sales in
clinics and at wholesale. In the main clinic business, the company has treated more than 165,000
patients and has a point of sale for its Sollievo CBD line. It also is HIPAA compliant, collecting
patient data to better serve its extraction operations and understand customer drivers.
Garden of Life
Garden of Life is a wellness company focused on the vitamin and supplement sectors.
The company owns a market leading CBD brand in Dr. Formulated. The company
maintains a fully integrated supply chain for its CBD line using U.S. hemp, clean
extraction, and formulation by board certified doctors.
Figure 43: Supply chain position
Source: Company reports
GenCanna is an integrated CBD company covering cultivation to retail & distribution. The company
operates the GenCanna Production Platform through family farmers in Kentucky, then works through a
property extraction and manufacturing process. The end product is tested and sold in a variety of
forms from tinctures to isolate and topicals, with isolate and oil being sold at bulk wholesale in
addition to distribution.
Green Growth Brands
Green Growth is a cannabis company that operates a large CBD personal care line in
the formulation and retail & distribution segments of the value chain. The company
sells its products through retail locations such as its innovative mall kiosks, at
wholesale, and through ecommerce. Green Growth Brands has also signed
agreements with retailers American Eagle, Abercrombie, and DWS to exclusively
supply CBD products to be sold in their stores
Green Roads is a U.S. based integrated CBD company covering cultivation to retail &
distribution in the value chain. The company produces pharmacist-formulated CBD
that is sold in over 10,000 locations in the U.S. in a variety of available forms. Green
Roads also operates a wholesale channel and has received numerous industry
awards for its formulation and testing standards, including a #1 privately held CBD
company ranking by Brightfield Research.
Figure 46: Supply chain position
Source: Company reports
GW Pharmaceuticals PLC
GW Pharmaceuticals is the market leader in regard to CBD-based medical treatment
operating in the formulation channel. The company was the first to have a CBD-based
drug, Epidiolex, be approved for sale in the U.S. as well as Europe. The London-based
company also has numerous other CBD-based drugs in the pipeline, including Sativex,
CBDV, GWP42002, and GWP 432003.
Figure 47: Supply chain position
Source: Company reports
HeavenlyRx is an integrated CBD company controlling cultivation through retail &
distribution. The company owns a number of CBD brands that cover the entirety of the
value chain, and also works to develop cannabinoids outside of CBD. The brands
Bluhen Botanicals, Envy Hemp, and Cause+Medic sell a full spectrum of CBD
Figure 48: Supply chain position
Source: Company reports
Company Cultivation Extraction Formulation
Green Roads ? ? ? ?
Company Cultivation Extraction Formulation
GW Pharmaceuticals ?
Company Cultivation Extraction Formulation
HeavenlyRx ? ? ? ?
Source: Company reports
Hemptown is a CBD company currently involved in cultivation, extraction, and the
formulation of CBD products. The company, a member of the U.S. Hemp Roundtable,
operates in Oregon, Colorado, and Kentucky with plans to expand to California in
2020. Extraction facilities are locating in Oregon and are both CGMP and ISO certified.
In June of 2019 Hemptown acquired Kirkman, giving the company more robust
formulation capabilities as well as future distribution channels.
Figure 49: Supply chain position
Source: Company reports
As the name suggests, Integrated CBD is a CBD company active across the entire
industry value chain. The vertically integrated. company controls over 10,00 acres of farmland for
industrial hemp and employs GMP standards in extraction and formulation. Integrated CBD sells at
bulk, offering both CBD isolate and distillate, with an option for bespoke orders.
And the list goes on and on