MW Hemp-based THC revenue may make cannabis stocks more appealing-but there are risks
By Steve Gelsi
Some pot pros see it as a threat, others a potential $14 billion opportunity for a product that investors have been mostly avoiding
With cannabis stocks showing steep losses this year on stalled legalization on the U.S. federal level, some companies in the sector are turning to the more thinly-regulated business of THC derived from hemp as a way to potentially excite Wall Street with new revenue streams.
Publicly traded cannabis companies such as Green Thumb Industries (GTBIF), Tilray Brands Inc. $(TLRY)$, Curaleaf Holdings (CURLF) and Canopy Growth Corp. $(CGC.AU)$ have been introducing products with hemp -derived THC, which is the psychoactive part of marijuana that creates a high.
Green Thumb Industries' stock is down about 16% so far this year, while Curaleaf's stock has lost about half its value. Canopy Growths stock has declined about 24% and Tilray has fallen more than 40%.
The moves by these companies into hemp-based THC from hemp have caught the attention of Alliance Global Partners analyst Aaron Grey, who has estimated the hemp-derived THC market could reach $13.5 billion in the U.S.
"We continue to believe that hemp-derived beverages offer notable opportunity...assuming national distribution similar to alcohol," Grey said.
Here are some of the moves in recent months by cannabis companies into the hemp-derived THC market:
-- Curaleaf currently participates in the hemp-derived THC market through its Select brand.
-- Green Thumb Industries has teamed up with Magnolia Bakery to distribute hemp-based THC desserts. On Nov. 5, Green Thumb set plans to invest $20 million in Agrify Corp. AGFY, a cultivation and extraction specialist in the cannabis and hemp space.
-- Canopy Growth's Wana edibles brand launched the Wanderour marketplace to sell hemp-derived products.
-- Tilray Brands Inc. last month launched a portfolio of hemp-derived Delta-9 THC drinks, including seltzers, mocktails and sparkling drinks.
-- Organigram OGI has invested in Open Book Extracts, a specialist in hemp-based cannabinoid products.
How hemp-based THC is legal
The reason THC can be sold legally if it's made from hemp goes back to the 2018 Farm Bill, which legalized hemp as long as it contains less than 0.3% of THC. That in turn created a loophole for hemp processors to take that tiny bit of THC and concentrate it into a potent product that remains legal.
Drinks and other products containing hemp-derived THC are technically legal at the federal level.
But cannabis, which contains higher concentrations of THC, is currently classified as a Schedule I drug under the federal Controlled Substances Act along with heroin and LSD.
In most U.S. states, hemp-based THC has little or no regulations around it compared to cannabis, which has tight requirements for testing for mold and pesticides, as well as child-resistant packaging. Cannabis is sold only in dispensaries, which don't allow anyone under 21 to enter.
But not everything is running smoothly for hemp-derived THC products.
Both California and New Jersey have banned the products because they're often sold at convenience stores where kids shop and because the products are not tested for safety.
While some legal marijuana companies view hemp-derived THC as an opportunity, others deem it a threat to their cannabis business.
Steven Cohen, interim chief executive of multi-state cannabis operator Ayr Wellness (AYRWF), said his company has been studying hemp-based THC but avoiding it for now.
"It's an opportunistic play that has risks- it's operating at the whim of state legislation," Cohen told MarketWatch. "We're keeping an eye on it. It's not as if we're not looking at it-we are. But I don't believe in pivoting for a short-term opportunity when the long-term plan [for cannabis] is sound."
Robert Beasley, chief executive of Cansortium Inc. (CNTMF), said he's expecting more states to follow the lead by California and New Jersey to restrict hemp-based THC.
"Given the choice, a consumer will choose a legal product, and a proven safe, tested and supported product over an unregulated product," Beasley said. "The problem is you have a regulated industry against an unregulated industry. We can't compete because they have no regulations. It's a struggle for us. We deal with that in every state. Because their products are untested and they're processing it in backyards and barns-it's very risky."
Along with state bans, a lawsuit has been filed in Colorado that alleges that the chemical conversion process to produce hemp-derived THC violates state laws.
"A lot of people believe it's like a war between hemp and cannabis, and that's partly true," Jean Smith-Gonnell, a partner at Troutman Pepper who specializes in cannabis law, told MarketWatch. "It truly is about public safety."
Still, some companies that have specialized in products for cannabis dispensaries see an opportunity for hemp-based THC that has been tested and deemed safe.
The Coalition for Adult Beverage Alternatives $(CABA)$ was launched this year as an advocacy group for hemp-based THC product makers to "educate and influence federal legislation through a clear code of operating conduct and sensible product and marketing regulations promoting consumer safety," the group said.
Jake Bullock, co-founder of Cann Social Tonic, said the 40-employee beverage maker has benefited from its hemp-derived THC beverages since Minnesota started allowing these products to be sold in liquor stores two years ago. Cann's products did well in that state, so it decided to roll out in other states.
Cann Beverages is not aiming at customers seeking heavily-infused THC products sold in dispensaries.
Rather, the company makes lower THC drinks with as little as a 2 milligrams of THC in them. Its 5 milligram THC drink is also popular. It takes five cans of 2 milligram Cann to make the typical 10 milligram dose in a gummy. The low THC-drink is aimed at social drinkers seeking a mild effect, he said.
Since hemp is nationally legal, Cann's distribution potential is now about 40 states through online sales. Drinks with hemp-derived THC are also legally sold in liquor stores in 20 states.
Cann supports regulation of THC drinks by the Food and Drug Administration, which has not been involved with the industry, Bullock said. A bill sponsored by Sen. Ron Wyden, Democrat of Oregon, would instruct the FDA to regulate hemp.
Cann continues to eye more growth for its hemp-derived THC drinks and plans to distribute stores in new states in 2025 including Alabama, North Carolina and Florida.
"People want alternatives to alcohol and they weren't going into dispensaries," Bullock said. "Younger people are definitely drinking less beer."
-Steve Gelsi
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 29, 2024 10:05 ET (15:05 GMT)
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