Prioritizing Medical Cannabis Access in Times of Crisis: Q&A With Brian Vicenteg Medical Cannabis Access in Times of Crisis: Q&A With Brian Vicente

Marijuana companies have been grappling with falling stock prices as of late, and CV Sciences, a California-based cannabidiol (CBD) supplier and manufacturer, is no exception. While its stock was trading at about $5 per share this time last year, that has since toppled to a mere $0.34 per share as of March 19.

It’s a trend that will likely continue as companies in every industry grapple with the fallout that will come from the outbreak of COVID-19. But with the CBD market estimated to be valued at $23.7 billion by 2023, eyes are still on major industry players to see just how the market will shake out.

Joseph Dowling, the CEO of CV Sciences, and Joerg Grasser, the company’s CFO, recently joined a conference call to discuss the company’s year, as well as the challenges they’ll be facing in 2020.

CV Sciences had bright points in 2019. The company overhauled its executive team and expanded into national retailers like CVS, Kroger, and Vitamin Shop, growing its retail distribution by over 148% from 2018 to 2019.

The company has also rolled out a new e-commerce site, pluscbd.com, and was selected as the first-ever CBD sponsor of major PGA TOUR event, the Farmers Insurance Open at Torrey Pines, which took place in January 2020.

But difficulties pervaded 2019 as well, and additional obstacles have arisen this year that will likely present even more challenges. 

Highlights for the year include:

• $53.7 million in revenue in FY 2019 compared to $48.2 million in FY 2018, representing an 11% increase year-over-year. Grasser says this was driven by strong growth in e-commerce revenue and new distribution in the food/drug/mass (FDM) channel.

• Revenue decreased 34% year-over-year in the fourth quarter of FY 2019 due to increased competition in the natural product channel and ongoing regulatory challenges.

• Distribution increased to more than 5,500 retail stores nationwide, up from about 2,200 at the end of FY 2018.

• Adjusted EBITDA for FY 2019 was $0.2 million compared to $14 million in FY 2018, reflecting a lower gross margin and increased selling, general and administrative (SG&A) expenses and research and development (R&D) expenses. 

• The company had an operating loss of $17.2 million in 2019, compared to an operating income of $10.2 million in the prior year. The decline is related to additional stock-based compensation and payroll expense associated with the separation of the company’s founders of $11.1 million, and additional investment in sales, marketing and R&D activities.

“2019 was not without its challenges,” Dowling says. “The absence of an interim or final regulatory framework from the FDA [U.S. Food and Drug Administration] has been a significant challenge industry-wide. This has perpetuated a very low barrier to entry into the CBD product category. This has led to significantly increased competition, especially in the natural product retail channel. These pressures increased as the year progressed and continue to be a significant headwind today.”

Seeking Clarity

Like all companies in the CBD space, CV Sciences says it has grappled with a lack of regulatory framework from the FDA. The FDA currently does not allow CBD in food or dietary supplements, and it has so far only approved one form of CBD in any product—Epidiolex, a seizure medication.

Last year, the FDA raised concerns over CBD’s safety, which Dowling said had a severe negative impact on the company.

To that end, Dowling says CV Sciences has been working with the FDA to support its efforts to regulate CBD. Dowling says he believes the collaboration has been beneficial and that “progress has been made.”

That was perhaps reflected in the FDA’s latest update to Congress, where it indicated it was looking into regulating CBD in dietary supplements. “We are very encouraged by FDA’s report to Congress, as it appears to validate our business model with a focus on dietary supplements,” Dowling says. “We believe the FDA clearly signaled a regulatory pathway for dietary supplements, which is fully aligned with our business model and strategy. We are also encouraged by the FDA’s use of the phrase in the coming months when they refer to evaluating the issuance of a risk-based enforcement policy.”

Updates on Retail Channels

Dowling says CV Sciences primarily sells its products through three channels: natural product retail, FDM and e-commerce. 

The natural product retail channel remains the company’s largest in terms of sales. However, the channel experienced significant pressures in 2019, one of which includes an over-saturation of CBD products, Dowling says.

“These pressures include not only the increased competition and competitive promotion, but during the fourth quarter, two leading regional chains, Earthfare and Lucky’s, each announced they were closing the majority of their stores in bankruptcy filings,” Dowling says. “Both of these retailers were material customers in our natural product retail channel.”

The FDM channel, meanwhile, is more selective with its brands and products, Dowling says, giving CV Sciences an advantage in that category. However, the channel is also more cautious and tends to focus only on topical products, as ingestible CBD products are still unregulated. 

“The absence of FDA regulations remains a major catalyst for expansion of the FDM opportunity,” Dowling says. “We believe that once FDA regulations are established, FDM retailers will expand their offering of CBD products to include a variety of ingestible products. In addition to our work with the FDA to promote a regulatory framework, we will continue to add new stores and build long-term relationships in the FDM channel to be well-positioned for when the broader CBD opportunity in FDM materializes.”

The company significantly expanded its e-commerce channel in 2019, which paid off for the company throughout the year.

“We increased e-commerce to 19% of total sales during 2019, up from 14% in 2018, and we believe we have significant runway for further growth,” Dowling says. “In Q1 of 2020, we launched our updated and enhanced e-commerce site, which is designed to support future growth.”

Coronavirus and the Future

As the company prepares for the future, one major obstacle has arisen that will touch nearly every industry in the U.S. and, likely, globally: an outbreak of COVID-19. 

“We are closely evaluating all spending across the organization, including exiting planned capacity additions,” Dowling says. “Also, we have decided to temporarily slowdown our drug development efforts, while we wait for certainty in terms of the breadth and scope of the patent protection we expect to obtain. We still continue to prosecute our patent. We are confident that we can reduce near-term costs to reflect an anticipated lower-level of revenue, as we navigate the near-term industry headwinds.”

The company has lowered its anticipated first-quarter earnings to prepare for the fallout that is likely to come as cities across the globe temporarily halt business operations.

“We expect first quarter revenue to be between $6 million and $8 million. The duration of near-term pressures facing our business are difficult to predict. And as a result, we will be managing our business conservatively and not predicting when sales may reaccelerate,” Grasser says. “Just a couple of weeks ago, concerns over the coronavirus outbreak caused the cancellation of the natural products Expo West Trade Show in Southern California. This was an important event for both the natural product industry and CV Sciences, with nearly 100,000 attendees annually. … While it is difficult to measure the impact of this outbreak, we as well as every other company are impacted by these ongoing challenges from this unfortunate global health situation.”

However, the company still plans to proceed with other plans for 2020, like entering into the pet CBD market in the second half of 2020 and developing relationships overseas to begin international distribution.

“We are investing in a pipeline of high-quality CBD products that are supported by science and safety data and that provide a clear benefit to the consumer. These innovative products will include minor cannabinoids and other ingredients, where safety data, regulations and science support their introduction,” Dowling says.

“While today’s environment reflects the ongoing regulatory ambiguity, a proliferation of new market entrants and external forces, which now include potential COVID-19 impact, the industry is developing and maturing,” Dowling concluded. “As the industry develops and a regulatory framework is established, we expect there will be an industry-wide shakeout of market participants and a flight to quality to trusted companies, such as CV Sciences, who will lead the way in the growth of our industry.”