There’s a sea change coming for the $1 billion marijuana-based industry you’ve never heard of

Change is coming for a small but blooming corner of the marijuana industry.

A compound in marijuana that's been linked to a range of potential health benefits — but doesn't cause a high — is increasingly being eyed for use in salves, oils, balms, and beverages. It's also the active ingredient in a new drug that's on the cusp of federal approval.

Cannabidiol, or CBD, is estimated to make up a roughly $1 billion industry. If and when the Food and Drug Administration approves the new CBD-based drug— a decision currently slated for the end of June— it will turn the compound into one that can be legally prescribed by a doctor.

That approval will also jump-start demand for products that have not been federally reviewed, opening up a huge opportunity for retailers and manufacturers to either work alongside the new regulations or take advantage of the legal grey area in which they're currently operating.

The move could unleash what Drug Enforcement Administration public affairs officer Barbara Carreno called a "sea change" for the existing market of less expensive but untested and potentially risky CBD products, such as those sold in convenience stores and marijuana dispensaries.

The drug that could revolutionize the CBD market

Since at least 2017, drug company GW Pharmaceuticals has been presenting strong research data to suggest that its CBD-based medicine, a syrup called Epidiolex, can treat the symptoms of two rare forms of childhood epilepsy that are characterized by violent seizures (known as drop seizures).

Although the Food and Drug Administration is not slated to make a final decision on the drug's potential approval until June 27, experts say an official green light is likely.

"This is clearly a breakthrough drug for an awful disease," John Mendelson, a panel member and senior scientist at the Friends Research Institute, said during a public pre-approval meeting to discuss the drug's scientific benefits in April.

Orrin Devinsky, a neurologist at New York University Langone Health and a lead author on some of the GW Pharmaceuticals studies, told Business Insider, "I'd personally be very surprised if this drug was not approved."

If Epidiolex is approved, the DEA has 90 days to shift the classification of marijuana-derived CBD from the current categorization as something with "no recognized medical use" to either a Schedule 2 or 3 drug, much like the popular ADHD medication Adderall.

Once that happens, "all the [CBD] manufacturers have to be registered with us," Carreno said. "That's going to make a huge difference to the industry."

A legal grey area with unregulated products that range from teas to dog treats

Shutterstock But for now, thousands of CBD products exist in legal limbo.

That's because there are two main sources of CBD: marijuana (which includes the leaves of the plant), and hemp (just the stalks and sterile seeds).

While marijuana-derived CBD is only legal in the 28 states plus Washington, DC where marijuana has been legalized (as well as the 15 states where CBD alone has been legalized), hemp-derived CBD falls under a sizeable legal loophole: it is exempted from DEA regulation according to a 2006 law.

But there's a lot of confusion in the space about which CBD products are legal or not. That's made some CBD manufactuers skittish about selling products outside of states where marijuana is legal.

Even so, plenty of other CBD companies are looking to expand across the country, reasoning that because their products are hemp-derived, they're legally in the clear.

Denver-based company Phoenix Tears recently signed an agreement with MarketHub Retail Services, a distributor that works with 7-Eleven franchisees, to get its hemp-derived CBD products in up to 4,500 stores by the end of this year.

"This agreement confirms our belief that CBD's status as a mainstream wellness option has arrived," Phoenix Tears founder Janet Rosendahl-Sweeney said in a recent statement.

Regardless of where the product comes from, there's another pressing issue facing the CBD industry. The products are poorly regulated, and so there is wide variation in content, safety, and price.

For a 2017 study published in the Journal of the American Medical Association, researchers tested 84 CBD products purchased from 31 different online retailers. Roughly seven out of 10 items had different levels of CBD than what was written on the label. Of all of the items tested, roughly half had more CBD than was indicated; a quarter had less. And 18 of the samples tested positive for THC, despite it not being listed on the label.

"I've seen a lot of dirty CBD manufacturing facilities," said Kevin Harlyall, the CEO of a company called the CBD Palace that audits CBD companies and creates a list of vendors it deems safe for customers. "It's tough to know what you're getting."

According to the DEA, the approval of Epidiolex could change all of that.

"This is going to be a sea change if they approve it," said Carreno.