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Morningstar | FDA Cracks Down on Curaleaf’s CBD Marketing but No Long-Term Impact; Shares Remain Undervalued

On July 22, the Food and Drug Administration sent a warning letter to Curaleaf regarding the marketing of its CBD products. The FDA stated that Curaleaf’s CBD products, including lotions, tinctures, pain-relief patches, and animal treatments are unapproved and misbranded drugs. Drugs can only be approved by the FDA, which it has not done for Curaleaf’s products. In addition, the FDA claimed Curaleaf is marketing with unsubstantiated therapeutic claims that the products can treat serious diseases and conditions, such as cancer or pain. In response to the news, shares dropped more than 14% before recovering to about 5% down, as we write.

Curaleaf has announced that it will work to adjust to the FDA letter and reiterated that the focus was on marketing of hemp-derived CBD products, not product quality or consistency. As such, we see little-to-no impact, especially in the long term or to non-hemp cannabis products. Demand will not be stifled by the FDA’s warning. Although the therapeutic claims on Curaleaf’s website were too bold for standard FDA compliance, we do not think the claims themselves drove significant sales. We expect the company will take the necessary action within the 15 mandated working days to address the FDA’s concerns.

With our outlook intact, we maintain our $11.50 and CAD 15 per share fair value estimates and no-moat rating. We continue to think Curaleaf is undervalued and view the current share price as a good entry point. Curaleaf still gives investors an opportunity for pure exposure to the U.S. cannabis market, which we believe faces a long runway for demand growth to become the biggest in the world.

The cannabis industry is in early growth stages, and as it continues to mature, it will face federal regulations that it previously has not encountered. The FDA has also not entirely determined how it will control CBD, but it has stated that it will regulate companies that claim to treat diseases with CBD products without FDA approval. However, we view the FDA’s regulatory goals for consumer safety and protection as good for the industry in the long term.

For more details on the cannabis industry and our market forecasts, please see our observer, “Green Rush: Cannabis Market Will Grow by 9 Times by 2030 Amid Widening Legalization.”