Cannabusiness Advisory

Over the past few months we have posted a number of articles regarding the 2018 Farm Bill and its effective “legalization” of non-psychoactive, cannabis-derived, cannabidiol (“CBD”). While CBD has indeed been removed from Schedule I of the U.S. Federal Controlled Substances Act (the “CSA”), there remains a large degree of ambiguity regarding the ability of companies to commercially sell CBD products to consumers. Recently, the Food and Drug Administration (the “FDA”), one of the Federal agencies regulating CBD, established some bright line rules regarding such products (e.g. “it is unlawful to introduce food containing added CBD… into interstate commerce, or to market CBD or THC products as dietary supplements [absent prior approval from the FDA]”[1]). However, despite this guidance, a grey area remains with respect to topical products, which include creams, sprays, roll-ons, lotions, and salves.

Over the past few weeks, CVS and other big-name retailers have announced that they will begin selling CBD topical products. While CVS is limiting sales to only those stores located in states that have approved the sale of CBD, those sales remain subject to the FDA. In formulating its regulatory framework for the CBD industry, the FDA has announced that it will be holding a public hearing on May 31^st, to help better understand the products and the industry.

By not waiting for the FDA to act first, CVS is throwing caution to the wind, in an effort to be a first mover in the industry. Recently, local law enforcement officials have been raiding and shutting down CBD retailers in certain states, confiscating their CBD products. If the FDA finds that topical CBD products are also subject to their approval, there is no indication that they will not also direct enforcement action against those in violation of their regulations. This is particularly concerning for large companies like CVS, which the FDA will likely target first, before going after smaller mom-and-pop operations.

CVS is seemingly taking the view that, while orally ingested CBD products are restricted by the FDA, topical products will not be. While that may ultimately be the case, it is far from a certainty and there are indications to the contrary. The FDA could require that each CBD product be first reviewed and approved by them, prior to authorizing sales. Those products that are in fact approved, will likely be subject to strict labeling requirements. In addition, products with concentrations of CBD above a certain level may require medical prescriptions, as is the case with many non-CBD topicals, such as cortisone cream. Indications of this heightened scrutiny can be seen in the currently ongoing testing and approval process that the FDA is already conducting for certain topical CBD drugs, such as Zygel, which is being developed by Zynerba Pharmaceuticals.

The scope of liability that CVS is opening itself up to may be larger than just FDA regulation and enforcement. Recent developments concerning Zogenix, Inc. serve as a cautionary tale, particularly for public companies seeking to enter the CBD industry. The FDA recently issued a Refusal to File letter for Zogenix’s drug FINTEPLA, stalling its approval process. Since then, a class action lawsuit has been filed against Zogenix on behalf of those who acquired Zogenix securities between February 6, 2019 (the date the application to the FDA was announced) and April 8, 2019 (the date the FDA issued the Refusal to File letter). If CVS is subject to similar legal action, the damages arising from such could dwarf any costs associated with FDA enforcement actions.

Finally, the DEA may still purport to have regulatory authority over CBD products under the CSA, at least until directed otherwise. Although the 2018 Farm Bill effectively removed cannabis with concentrations of less than 0.3% tetrahydrocannabinol (“THC”) from Schedule I of the CSA, Schedule V still has language stating that only FDA approved cannabis drugs with concentrations of less than 0.1% THC are lawful. While this apparent mismatch could simply be the result of poor legislative drafting, the continued affirmative listing of cannabis-related drugs with low levels of THC in Schedule V (of which, only one such drug, GW Pharmaceuticals’ Epidiolex, as thus far been approved) could be indicative of a heightened regulatory scheme with respect to CBD products, topical or otherwise.

Given the uncertainty of the current laws and the potential for liability, the move by CVS and other companies comes with a disproportionately high level of risk for seemingly meager rewards. However, it is not all too surprising, given recent trends in the industry associated with the ongoing “fear of missing out” that is rampant in the budding cannabis industry.

[1] https://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm635048.htm