Cannabidiol (CBD) is a molecule that can be obtained from hemp, cannabis and synthetic sources and delivered as an isolate or part of an intricate array of bio-active compounds. Despite CBD from hemp being identical on a molecular level to CBD from cannabis, the plant of origin remains highly relevant to consumers and investors alike. While cannabis-derived CBD continues to experience enviable growth even by broader cannabis industry standards, the 2018 classification of ‘Epidiolex’ as a Schedule V substance along with the passage of the 2018 Farm Bill have opened additional channels and driven this molecule squarely into the conversation and consumption mainstream across the globe.
Understanding where your CBD comes from and the company it keeps can be the difference between experiencing a miraculous cure and predictable frustration. This kaleidoscope of outcomes is influenced by the regulatory landscape, testing requirements, labeling transparency, entourage effects and general consumer education with important implications for the entrepreneur and investor alike. In order to understand hemp-derived CBD and cannabis-derived CBD, it is important to first understand hemp and cannabis.
Hemp and marijuana are often defined by history and use, by legality and by botany.
History & use: Hemp has traditionally been used to describe plants grown for industrial use, plants that won’t get you ‘high’ but can be used to make clothing, rope and sails. Marijuana is used to describe what many also call weed or reefer and has traditionally been smoked or eaten to get ‘high’.
Legality: If a cannabis plant has THC content below a specific percentage on a dry-weight basis, it is considered hemp and is therefore legal. This line is 0.2% in the European Union, 0.3% in the U.S., Canada and China; and 1% in Switzerland and parts of Australia. This definition is thus arbitrary and socially constructed rather than being scientifically accurate.
Botany: Hemp and marijuana share the same genus and species within the Cannabaceae plant family. Botanically speaking, there is more debate than there are conclusions on what is hemp vs. marijuana with scientific and genomic research conclusions resting on both sides of the biological similarity debate.
While there are thus plenty of opinions on the definitions of hemp and marijuana, the legal definition supersedes botanic as well as historic definitions and is pragmatic for investors to heed. We thus use the terms ‘Hemp’ and ‘Non-Hemp Cannabis’ (NHC) to accommodate similarities while simultaneously recognizing currently accepted legal differences.
While CBD is a molecule and thus identical regardless of origin, it behooves consumers as well as investors to understand the differences in supply chain and resultant efficacy, purity and environmental impact.
Yield: Hemp yields 5-8% CBD while NHC can yield 18-20% CBD. Thus, while there are certainly exceptional strains that challenge these generalities, one must grow far more hemp to get the same amount of CBD as non-hemp cannabis.
Input costs: A 6% CBD hemp crop will utilize three times as much water and other nutrients as an 18% CBD NHC crop, a cost differential that will increasingly matter as prices continue their steep decline and margin focus becomes paramount.
Testing: Cannabis is a bio-accumulator plant that absorbs heavy metals, pesticides and biological contaminants from its surroundings. While NHC-derived CBD undergoes stringent ‘seed-to-sale’ tracking and testing, hemp-derived CBD generally doesn’t have the same third-party state-mandated testing requirements and manufacturers may choose to save the added testing costs. Human health considerations move to the forefront when the absence of unbiased and standardized testing may result in people with compromised immune systems consuming bioaccumulated toxins, phosphates and other adulterants from the soil.
Labeling: In aggregate, NHC products have far more stringent labeling and transparency requirements with a mandate to show third-party testing outcomes. Hemp products don’t have the same hurdles and are therefore often misleading and may not deliver the amount and purity that an educated patient would demand.
Presence of THC: NHC-derived CBD can be sold with more than trace amounts of THC, leading to respective cannabinoid ratios in the 25:1 to 1:1 range. Small amounts of THC have been shown to have substantial impact on CBD efficacy.
Plant origin: Stringent U.S. domestic trade barriers mean that NHC used to produce CBD has to be grown within the borders of the state in which it is sold. Hemp does not have these barriers and is often imported from China, leading to questions about its growing conditions and use of chemicals. Fuel and transportation costs with associated environmental impact are an additional consideration when making purchase decisions.
While the NHC-derived CBD ‘dispensary’ channel is exhibiting high growth within the branded space, the hemp-derived CBD ‘supplemental and wellness’ channel is expected to grow even faster over the next several years. The pharmaceutical channel, and Epidiolex in particular, has an addressable market of 10,000,000 epileptic patients just in the U.S. and Europe, with channel sales expected to exceed US$600 million by 2022.
CBD remains best accompanied by the other cannabinoids, terpenes and bio-active compounds rather than isolated to then be sold with false expectations of minimal efficacy compromise.
True market potential will be realized as we understand ways to use cannabinoids as platform components rather than isolated destinations. The next stage of growth for this market will be defined by combinations of cannabinoids, terpenes, flavonoids and other bioactive compounds working with vitamins, minerals, herbs and roots to produce desirable human health outcomes. Investors remain well served to understand nuances, addressable market, margin differential and educated consumer demand when making capital allocation decisions.