CFN Insider: Investor and Regulatory Impact from FDA Approval of GW Pharma’s Epidiolex

Ryan Allway

July 24th, 2018

News, Top News

Podcast Episode #6: The US Cannabis Market: New Promise, Persistent Constraints

Whether you’re new to the cannabis industry or a savvy investor or a business leader, CFN Insider uncovers the industry’s most current and critical insights – the very information you need to succeed. In each episode, you’ll hear straight from top insiders and thought leaders in the cannabis industry, brought to you by CFN Media – the leading digital media network dedicated to the world of cannabis business and finance since 2013.

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Here’s a transcript of the entire podcast:

Alexander Lawson:

Before we start, we want to welcome our launch sponsor, Koios Beverages, trading on the Canadian Securities Exchange under the symbol KBEV. Koios provides a tremendous natural boost to mental acuity. Now, Koios is gearing up to enter the cannabis infused beverage market. Order your investor kit online at mentaltitan.com/investors. Koios. Anything you can put your mind to. GW Pharmaceuticals gets FDA approval for its Epidiolex, a cannabis-based seizure drug.

Rod Kight:

It’s certainly something that is going to change the face of the industry.

Alexander Lawson:

That means the battle to take pot off the EPA schedule one is over? Not quite.

Rod Kight:

No one’s holding their breath.

Alexander Lawson:

If the entire cannabis plant isn’t rescheduled, where’s the best play?

Rod Kight:

You’d want to invest in a hemp extractor.

Alexander Lawson:

Coming up, implications of the GW Pharma approval and what investors can look forward to in the months to come. This is CFN Insider.

You’re listening to CFN Insider, your insider access to the business and financial world of marijuana. Whether you’re new to the cannabis industry or a savvy investor, or a business leader, CFN Insider uncovers the industry’s most current and critical insights. The very information you need to succeed. In each episode, you’ll hear straight from the top insiders and thought leaders in the cannabis industry. Brought to you by CFN Media, the leading digital media network dedicated to the world of cannabis business and finance since 2013. Visit us at cannabisfn.com. Now here’s your host, Alexander Lawson.

Alexander Lawson:

We’re in a unique moment for the cannabis industry right now. Here in the U.S., the Food and Drug Administration has given its approval to the nation’s first ever legally developed drug based on the cannabis plant. It’s called Epidiolex, made by a company called GW Pharmaceuticals. Now we’re in a 90-day window by which the Drug Enforcement Administration must decide whether, and how, to reschedule cannabis. Rod Kight is an attorney in Asheville, North Carolina who represents clients within the cannabis and hemp industries. He points out there are five different schedules. That’s another term for drug classifications.

Rod Kight:

Schedule one is for compounds that have no medical utility and are dangerous.

Alexander Lawson:

Other schedule one drugs are heroin, LSD, and ecstasy. Like schedule one, schedule two drugs have a high potential for abuse, but in small quantities, they do have redeeming medical value. Schedule two drugs include oxycodone, Dilaudid, fentanyl, and Ritalin. Then comes schedule three, where the drugs have a moderate to low potential for causing addictions. Drugs like codeine, steroids, and testosterone. Schedule four drugs have a low potential for addiction, and schedule five drugs contain only small doses of narcotics and are considered relatively safe. Kight and others say there’s no justification for keeping marijuana on schedule one.

Rod Kight:

The marijuana scheduling itself, it’s just a political piece. It’s not evidence driven at all. When we talk about CBD itself, cannabidiol, I think this is going to really change things over the next several years as to how it’s marketed, who has access to it, under what circumstances, who can make it, distribute it, sell it. Probably when we look back at a historical point five, 10 years from now, we will see that this was the beginning of whatever structure is in place then. This will be a ground zero.

Alexander Lawson:

But notice what Kight is saying here. He’s talking about cannabinoid isolate. That’s not to be confused with cannabis, the plant.

Rod Kight:

No one’s holding their breath. No one who’s followed the DEA’s actions is holding their breath at all. I don’t know what the DEA would say, but my guess is that it would say something like, this specific compound should be rescheduled, and I think the DEA probably will reschedule marijuana derived CBD, but whether or not it uses this as some sort of evidence to reschedule the entire cannabis plant, I don’t see that happening.

Alexander Lawson:

Let’s take a moment to check in with our CFN Insider, Matt Karnes, managing partner at Green Wave Advisors in New York. Matt has more than 25 years experience in accounting and finance, and senior financial analyst at firms like First Union Securities and SG Cowen. Matt, what’s your take on the DEA’s forthcoming action?

Matt Karnes:

It’s likely that this drug and the properties contained in this drug would be moved to a different schedule.

Alexander Lawson:

But that’s the CBD isolate. That’s the molecule that makes Epidiolex effective, right?

Matt Karnes:

Right, but then that begs the question, what about the rest of everything else that’s associated with the cannabis plant? I think the first step now is likely, and I think it’s a consensus view, that you just isolate this one particular compound and have that rescheduled. But where do we stand with other pharmaceutical companies, biotech companies, with their efforts in bringing another drug to market? Probably the same situation would hold true. Whatever is approved by the FDA, that compound, that would be isolated as well.

Alexander Lawson:

That brings up the question, what’s the play here for investors, Matt?

Matt Karnes:

Those pharmaceutical companies that are making strides in developing different medications to treat various conditions, I would go long on those stocks. I’d be bullish on those stocks that are continuing the R&D effort.

Alexander Lawson:

On this, attorney Rod Kight agrees.

Rod Kight:

If I was talking to an investor right now, I would say, the isolate market is important, and it has some very specific niches that you might want to get involved in, but in the long run, if you’re doing a long play, you’d want to invest in hemp extract.

Alexander Lawson:

Wait, wait. Hemp?

Rod Kight:

Yeah, sure. Right now, hemp is lawful under the industrial hemp provisions of the 2014 Farm Act. It was a one-and-a-half-page piece of the larger statute that was passed. That Farm Act is set to expire at the end of September. There has been a new 2018 act that’s been passed by the Senate and the House, but they’re a little bit different. When that happens, the Senate and the House have to come together, create a compromised bill, send it back to each of the chambers, and vote on it and then send it to the president. That’s kind of

where we are. Included within the 2018 is a provision that was spearheaded by Senator McConnell that makes hemp legal, and it expands the definition. It removes hemp from being required to be grown pursuant to the state’s pilot program, which is a big piece of the statute now. It also explicitly makes cannabinoids derived from hemp lawful. Right now, they’re lawful based on legal logical inferences, but with the new hemp act, it will actually specifically state that in the statute.

Alexander Lawson:

Kight, who advises a lot of clients in both the cannabis and hemp space, says hemp is the safer play right now, simply because of that. It’s legal, and now on its way to widespread acceptance with the anticipated adoption of the 2018 Farm Act later this summer. At the beginning of our podcast, I introduced you to Koios Beverages, an established company that makes drinks and supplements powered by natural ingredients to boost your brain. You’ll find Koios on the Canadian Securities Exchange trading under the symbol KBEV. With me now is CEO Chris Miller. Chris, your product is a safe, effective mental stimulant that’s far more sustained in coffee, and it even helps sleep at night. You’re our launch partner here at CFN Insider. Can you tell me why?

Chris Miller:

Customers across the U.S. and Canada clearly want products with non-psychoactive CBDs in them. As a result of this increased demand, buyers from big box retailers are requesting it. We already have these relationships, and it will be easy to introduce new variations of our products to them that contain CBDs, as they’re already familiar and comfortable with our company and brand.

Alexander Lawson:

With your extensive experience in brain-boosting drinks and supplements, what advantages does Koios bring to the cannabis market?

Chris Miller:

I think one of the advantages that we have at Koios Beverage Corp and through our subsidiary Cannavated is that while a lot of the growing CBD and cannabis market is aimed at producing psychoactive products that replace alcohol or that will replace alcohol, our mission is significantly different. We’re intensely focused and entrenched in the fitness world. Many people who live active lifestyles are going to want to drink CBDs and cannabis with added function for more focus at work, for a better workout, so they can stay hydrated while hiking. We feel like we really have an advantage in this space. Our existing infrastructure, distribution, IP, technology, flavor capabilities, formulation and passion for healthy alternatives will catapult us to gain rapid market share in this exploding industry.

Alexander Lawson:

Chris, if an investor wants to learn more about Koios, what’s the best way to go about it?

Chris Miller:

Clearly, the time to invest in Koios is now. Give us a call on our toll-free number, 844-255-6467, for a personal conversation about our mission and the part you can play in it. You can also go to our website at koiosbeveragecorp.com. Again, that’s koiosbeveragecorp.com, to the investor section or tab, and you can download an investor deck right from our website.

Alexander Lawson:

Learn more about Koios Beverages at koiosbeveragecorp.com. Koios is spelled K-O-I-O-S. koiosbeveragecorp.com. Koios. Anything you put your mind to. We’re now a year and a half into the administration of President Donald Trump, whose Justice Department is headed up by a self-professed foe of legalized cannabis, former Alabama Republican Senator Jeff Sessions. Sessions, as you recall, rescinded the Cole Memo adopted by Justice under President Barak Obama, outlining a federal policy of laissez-faire with regard to state experiments in legalizing marijuana for medical and recreational use. To review, let’s head over to our cannabis legal round table, where we find Silvia San Nicolas, CEO of New Game Compliance in Los Angeles, Justin Hobson from the Portland, Oregon firm of Lane Powell, and on the East Coast, Seth Goldberg from the firm of Duane Morris in Philadelphia. Welcome to all you. Appreciate you being here. Let’s take a walk down memory lane for just a moment, okay? Seth Goldberg. How has the American cannabis industry faired under the Trump administration?

Seth Goldberg:

In my view, the states that have already had legal marijuana on the books, whether it’s recreational or medical, have faired very well under the Trump administration. Really, the transition between Obama and Trump hasn’t had the kind of impact people thought it could have had on the market, even with the recent rescission of the Cole Memo, which is the Obama-era memo setting the federal enforcement priorities. Even with Sessions’ recent rescission of that memo in January, I don’t think has had a negative impact on the market to the extent people thought it might.

Most state programs seem to be flourishing. California rolled out its recreational program in December. That program is off to a great start and isn’t going to slow down. Nevada, Colorado, Washington, Portland, Oregon, all seem to be growing just as steadily as they were before Trump. On the East Coast, we’re seeing more markets. We’re seeing the expansion of markets. Pennsylvania is going to be expanding the number of licenses. New Jersey is going to be expanding its program, which is likely going to result in New York expanding its program. From a macro level, it doesn’t seem that the Trump administration has had much of an impact on the growth of the cannabis market.

Alexander Lawson:

Okay. To California. Silvia, there’s been no small amount of friction between the governor’s mansion and the White House. How do you think that’s spilled over into the cannabis market at a time when California’s rolling out its recreational marketplace?

Silvia San Nicolas:

California is already experiencing a little bit of pressure from the administration for other things. For example, the administration is suing the State of California for its immigration policies. That is causing a spotlight on some of the most active cannabis communities in the state, one of them being Oakland, because Oakland is pretty much telling the feds, we’re going to be a sanctuary city and we’re going to protect our immigrants. That does have a crossover when it comes to cannabis, because they’re very active. The focus from the feds when it comes to California has been almost like you’re starting to see a little bit of maneuvering going on.

For example, a prominent attorney who also has holding in cannabis businesses, so he is an owner. His name is Alan Herzberg and he has been a marijuana advocate for some time. He’s fairly prominent in the media and again, has some holdings and is a partner in CalCann Holdings. He was on an interstate flight going from LAX up to Sacramento to attend a cannabis conference, and he had his trusted traveler card pulled. The border and customs security told him, and this was in the register, that we take a hard line when it comes to involvement in marijuana of any kind, and it is not a right but a privilege to have security clearance. With the boots on the ground here in California, we’re seeing a little bit of maneuvering like that.

That is just the feds, I think, being able to go ahead and exercise some of their ability to make it a little bit more difficult for those that want to participate, but I do agree with that in that I don’t think the killing of the Cole Memo had much of an impact on the industry as a whole. If you are involved in this industry, you’ve pretty much I think made the commitment and made the decision that even though there are some lists at the federal level, that there’s enough protections and that there’s enough of a basis to participate in it as an attorney, as an entrepreneur, or as a service provider, and that as long as you are operating of the law, we should be fine. I do think that there is a little bit of pressure coming in from other angles that we have to be cognizant of that, which is why it’s important to do things right.

Alexander Lawson:

Let’s turn to Justin Hobson in Portland. Justin, do you see this having an effect on the pool of potential cannabis investors?

Justin Hobson:

The investors who are thinking about getting into this space, they see greater uncertainty with the rescission of the Cole Memo and the general guidance that’s out there from attorney generals, Sessions. The deal terms that we’re seeing, I think investors are expecting a little bit higher returns, just given the nature of the cannabis industry and how speculative it can be and how uncertain things could be. There’s also some significant concerns about access to banks. I anticipate that new banks will be reluctant to step into this market and serve the industry. I think that’s one of the impacts of the rescission of the Cole Memo. One thing I will say that I’ve seen here in Oregon is, our regulators, the Oregon Liquor Control Commission, they’ve taken a little bit tougher stance on some of their own interpretation of rules.

When they’re looking at new applicants, they’re scrutinizing the applicants in a little bit more detail, making sure that their past is clean and looking for things like fraud and deceit and other things that might make them an unacceptable candidate. Whereas in the past, we didn’t have that same level of scrutiny. The industry overall has substantial issues with product diversion. I think here in Oregon, again, we have what we call a seed-to-sale tracking system, but it’s not a true seed-to-sale. It’s really referred to as CTS, or cannabis tracking system. There’s significant holes in the level of detail and information coming in, and as a result of that, I think there’s a significant amount of product being diverted. If we do see action from the feds, it’s likely to be on participants that, they’re selling some product through the regulated market, but they’re diverting substantial amounts of product and then selling it in non-legal states.

Silvia San Nicolas:

It’s a big problem. Now we’ve got this pent-up, what are we going to do? The feds are very aware of it, California is very aware of it and operators are very aware of it. If that conduct is going to continue because there’s been a fast and loose approach to diversion, as a business practice historically, we are going to see people falling into the penal code versus the business and professions code in a multi-state or a multi-agency enforcement action. It’s a big problem, and if that becomes too much of a problem and too much of a spotlight is placed upon California or Oregon or even Washington or any other state where this is occurring, it’ll look like the states do not have the ability to regulate and control cannabis commercialization. That’s what we wrest, and that’s why it’s so important that we have to do this right and we have to do it in accordance with the law, so that we aren’t falling under a penal code. We’re falling under the business and professions code or its counterparts.

Alexander Lawson:

Seth Goldberg in Philadelphia. Seth, when you look at the possibility of diversion and the affect it might have on legalization, especially in states like Pennsylvania or New Jersey, where efforts to create a medical cannabis market are at an arguably critical junction, what do you see? Is this a threat to legalization efforts?

Seth Goldberg:

I do think this is exactly the kind of conduct that the Sessions DOJ would be targeting when it comes to state law for marijuana. It’s the industry shooting itself in the foot. By and large, it seems that most of the people in this industry, most of the entrepreneurs and the businesses, they want to have this industry be seen as legitimate. They want to be regulated. They want there to be transparency. Diversion of marijuana grown under a state system into the black market and the gray market really undermines the entire program. It undermines the creditability of the program and it is going to result in those who are diverting being brought within the penal code, but more importantly, it is going to really hinder the entire legalization effort because it’s going to demonstrate that the states are not sufficient regulators of legal marijuana.

Alexander Lawson:

What’s the solution? Does it come down to cannabis business operators ratting out those who toil in the black and gray markets? Silvia?

Silvia San Nicolas:

The state of California has a hotline. We call it the rat line. You actually can as an operator or anybody else, and I’m sure other states have the same thing, file a complaint against an unlawful operator. That’s a really big deal that we’re experiencing here. Not really from the diversion standpoint and complaining on that level, but it’s a distinction without a difference. It’s based on the you’re not licensed and you’re taking my business. I’m having to do things right under the licensing schema. Pay all the money it takes to get licensed, to get the proper location, and that can range millions of dollars. Then, down the street, somebody’s got a big sign up that says, hey, come in here. No taxes.

They’re diverting all the business there, and whether it’s that or whether it’s some other unlawful activity, they are hotlines that people have been using in California. There’s been 900 cease and desist orders issued since January 1, and I think 300 and some of those came from the hotline. What can you do? Please support your legal operators. You may be comfortable going to the dispensary down the street that is still not licensed because you’ve gone there for two years, but you’re really doing everybody a disservice, and you’re not necessarily even going to get clean product because they’re not complying with some rules and therefore, they’re probably not complying with a lot of rules.

The operators have to police themselves to some extent, but you’ve got, as you could imagine, a lot of competing personalities and interpersonal dynamics, and then a previous code. Before, people weren’t ratting everybody out. Now it looks like, if you want to be in the cannabis trade, then you’ve got an obligation to make sure that everybody’s doing things right. There’s a lot of committee meetings and hearings here in California that you see some of the participants coming and stating their stories about, I can’t compete with these guys. They don’t have to pay taxes. They don’t have to go ahead and pay their workers above board. Things like that. It’s a big problem.

Seth Goldberg:

The economics of the market right now are really presenting some challenges along the lines that may stimulate diversion. Justin mentioned that access to banking is difficult. Silvia mentioned taxation. It’s a capital-intensive industry. People spend a lot of money to get into this space and they want to sell their products. Their products are being taxed at a high rate, and they don’t have the access to banking and capital that could help them offset some of the expense. There’s a lot of reason to sell into the black or gray market, and in states like California where people have been used to buying cannabis for years from a local dispensary, consumers may not have any concern. I think on the East Coast, it’s a little bit different when it comes to something like diversion because we don’t have dispensaries that have been operating for years. We don’t have an old code. Anybody that’s opening their doors is doing so under real strict regulation in a new program, and the black and gray markets on the East Coast may look a lot different than they do on the West Coast.

Alexander Lawson:

The very fact that the cannabis industry in this country falls under a wide range of regulations doesn’t help the situation. Next time, Silvia, Seth, and Justin will take a look at some of the issues they face, along with their customers, and how they’ve learnt to cope. You can find Seth Goldberg at Duane Morris, LLP. On the web, that’s duanemorris.com. Duane is spelled D-U-A-N-E. Silvia’s website is newgamecompliance.com. And Justin Hobson’s website is lanepowell.com. Lane is spelled L-A-N-E. With that, you have the inside scoop on the worldwide cannabis industry. CFN Insider is brought to you by Koios Beverages, a recognized leader in drinks and supplements aimed at improving the way your mind works, and now creating new cannabis-infused products.

For more information and an investor kit, go to koiosbeveragecorp.com. Business support for CFN Insider comes from Frank Lane at CFN Media and John Carne at Human Factor Productions. Our music is composed by Britton Hayes. If you’d like more information on this program, if you’ve got a question or a suggestion, please contact us. Our email address is info@humanfactorproductions.com. You’ll find us on Apple’s iTunes, on Google Play, and at cannabisfn.com. Please subscribe to CFN Insider and don’t forget to rate us.

This article was published by CFN Enterprises Inc. (OTCQB: CNFN), owner and operator of CFN Media, the industry’s leading agency and digital financial media network dedicated to the burgeoning CBD and legal cannabis industries. Call +1 (833) 420-CNFN for more information.

About Ryan Allway

Mr. Allway has over a decade of experience in the financial markets as both a private investor and financial journalist. He has been actively involved in the cannabis industry since its inception, covering public and private companies.

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