'Gold Rush': Cannabidiol Industry Booms Amid Uncertain Regulation

Enlarge this image toggle caption Liam Niemeyer/Ohio Valley ReSource Liam Niemeyer/Ohio Valley ReSource

Shea Castleberry works in a time capsule of sorts. He walks through the aisles of the Family Video store he manages in Murray, Ky., a small city surrounded by rolling farmland about two hours north of Nashville.

Next to the movies and popcorn, there's a new addition to his store that surprises some of his regulars.

"A lot of people are like 'a video store selling CBD?' But it really does tie into our values. Which is, we're here for the community," Castleberry said.

Cannabidiol, also known as CBD, is a compound that is increasingly becoming popular because of the alleged health benefits users report, ranging from better sleep, reduced anxiety and pain relief. Yet clinical studies are lacking for most claims.

It's derived from a type of cannabis called hemp, and the latest Farm Bill signed by President Trump in December legalized the cultivation of the crop at the federal level.

Retailers across the country, including Walgreens and CVS, have invested in the CBD industry since that point. Castleberry said his Family Video store began carrying CBD oil, lotion, gummies, lip balm and water, in April. But he stressed Family Video isn't just selling CBD just to get extra profit.

While the video rental giant Blockbuster went bankrupt almost a decade ago because of competition from online streaming companies like Netflix, hundreds of Family Video stores remain across the country, still renting out DVD copies of movies and TV shows that line the walls of each store.

"I love digital stuff, but there's still this kind of quality — it's like vinyl," Castleberry said, cracking an empty DVD case. "I'll be honest with people. I'll tell them that hasn't gotten really good reviews. Or 'I didn't like it, it wasn't for me.'"

Castleberry claims the company's CEO became inspired to sell CBD in Family Video stores after the substance helped with the CEO's elbow pain, and that the company now wants to now help others with the substance while making a profit.

"Forty-one years in the same business, in a quote-on-quote 'dying business,' says something about the people that own this company. They're not afraid to try things. If they don't work out, they don't work out. And we move onto the next thing."

Castleberry said CBD sales added about an extra $1,000 in revenue the past month. Yet these sales just represent a small fraction of the overall sales being made.

New Frontier Data, a Denver-based analytics firm that studies the cannabis industry, estimates CBD product sales were worth $390 million in 2018. That could triple to more than $1.2 billion dollars by 2022.

Newly formed companies that extract and process CBD and farmers who grow the hemp are also betting millions of dollars on this industry, but uncertainty in federal regulation, particularly whether CBD should be in food, is creating doubts of how far this industry can go.

The CBD boom

About an hour farther north of Murray is the even smaller town of Kevil, Ky., where millions of dollars are being invested inside an unremarkable warehouse.

"Actually on Thanksgiving Day, this was an empty shell. Construction didn't begin until after Thanksgiving, so we've come along way pretty quick," Aerosource-H co-founder Nathaniel Pape, said. "It's pretty exciting to be in the hot market right now, you know?"

The warehouse that makes up Aerosource-H is now full of bags filled with pungent hemp. The cannabis is then moved into a bleach white laboratory, where $3 million worth of whirring machines and freezers turn the crop into purified CBD. Pape thinks it looks somewhat like flour.

"I think you'll eventually see CBD everywhere. From your lotions, to your beverages, to your food, to whatever. And that's a good thing," Pape said.

Like Family Video, Pape says Aerosource-H primarily wants to help people with CBD while also making creating revenue. And they make a lot of it: a kilogram of purified CBD sells for around $6,000.

"We're one of the small people, actually. There are a lot of larger entities coming online. You know, our focus is on being the best we can be, containing the highest quality, the highest consistency, basically finding our niche in a gold rush," Pape said. "But it's also a little scary. Because you know in gold rushes, a lot of the people lose."

Some of that fear comes from the uncertainty of how the Food and Drug Administration will regulate certain aspects of CBD, potentially restricting the market for the compound.

Prescription or food product?

The FDA currently bans CBD in food products; under the Federal Food, Drug and Cosmetic Act, it's illegal to add FDA-regulated drugs into food.

The agency is taking comments Friday in a public hearing on how CBD should be regulated. It's the agency's first step toward deciding whether CBD should be regulated as a dietary supplement that can be added in food products, or a prescription-required drug — or both.

Kentucky Agriculture Commissioner Ryan Quarles said he wants CBD to be considered a dietary supplement because of the boost it could give to hemp farmers.

"We acknowledge the FDA has a wide range of possibilities with what they can do with these products. But we ask them not to regulate this growing industry to death," Quarles said.

And a lot of money is at stake. New Frontier Data Chief Knowledge Officer John Kagia believes the over $1 billion in sales predicted by his firm is largely dependent on if the FDA is lenient on regulation.

"While in the U.S., federal policy may be slow to move around marijuana, the clear kind of interest in advancing a national CBD policy means that there's an opportunity here for the U.S. to be a participant in this emerging global market," Kagia said. "The CBD market has clearly grown dramatically over the past 12 months. But we think this is still just the tip of a very large iceberg."

After the public hearing, the FDA plans to use the public comments to inform a federal working group looking "to explore potential pathways for dietary supplements and/or conventional foods containing CBD to be lawfully marketed."