Cultivating Real Profits from Fake Weed

Derek Williams was working as a trash-truck driver when his cousin told him about K2, a product made from plant materials and chemicals that provided a legal, marijuana-like high. Williams saw his ticket out of the rubbish business: Make a better blend. He studied compounds that mimic the effects of pot, and soon after created his own brand, Syn Incense, in his home in Kansas City, Mo. Williams, 29, says his startup, KC Incense, has sold more than $1.5 million worth of the stuff in at least 10 states in less than a year. He says that marketing the product as incense allows him to avoid federal regulations, though he says he knows most customers smoke it.

Williams's ability to stay a step ahead of federal and state authorities underscores the hurdles regulators face as they move to ban chemicals used in such products, which they say may pose serious and unknown dangers. Williams says that when his ingredients are restricted, he switches to similar ones. William E. Marbaker, director of the crime laboratory division of the Missouri State Highway Patrol, says that's typical of producers and makes it hard for law enforcement. "You're basically playing a game of whack-a-mole trying to keep ahead," he says.

Dozens of brands similar to Williams's product are sold in stores and online with names like Spice, Mr. Smiley, Voodoo Magic, and K2 Solid Sex. Demand for designer drugs, including what regulators call "fake pot," is growing so fast that a U.N. narcotics-control board on Mar. 2 urged governments to prevent their manufacture and trafficking. Use of fake pot has spurred more than 3,500 calls to poison control centers throughout the U.S. since the start of 2010. Some who indulge have suffered from racing heartbeats, high blood pressure, and nausea. Several teenagers have died in incidents after smoking compounds containing synthetic cannabinoids, authorities say.

Before marketing each of the different blends, Williams says he smoked various amounts to make sure they were safe, and had regular customers try new versions. "I wanted to know that I wasn't going to be hurting people," Williams says. The product isn't safe if it's abused, he says. "If it's an occasional use, I don't see safety issues."

The Drug Enforcement Administration on Mar. 1 temporarily banned five synthetic cannabinoids, and U.S. lawmakers are considering a permanent prohibition. Twenty-one states have banned some synthetic cannabinoids, says Alison Lawrence, a policy specialist at the National Conference of State Legislatures. Still, law enforcement is struggling to keep up. There are no field tests police can use to determine if products contain banned chemicals.

Products containing cannabinoids can induce euphoria and sensory enhancement in a way similar to THC, the main active chemical in marijuana. Some of the chemicals in fake pot have been around for decades and have been studied to treat pain and inflammation. Pfizer (PFE) synthesized one cannabinoid it never tested in humans as part of a program in the late-'70s to separate the psychotropic effects from the pain-killing properties of cannabis, says spokeswoman Lauren Starr. Marinol, a prescription drug containing a synthetic cannabinoid, has been approved in the U.S. It's marketed by Abbott Laboratories (ABT) to treat nausea and vomiting due to chemotherapy.

Bob Welsh, program manager for breath-alcohol instrument training at the University of Central Missouri, says there may be 30 cannabinoids commonly used in incense-type products, selling for about $40 for a 3-gram bag—more than the street price of pot. People are willing to pay a premium for a legal high that doesn't show up in most drug tests, he says. Williams's six-employee company sells Syn products wholesale to smoke shops, gas stations, and convenience stores at prices ranging from $3.25 to $25. He says the stores typically charge at least double that for blends with names like Chill, Ripped, and Lemonlime. Some websites charge more. "It became a money-making machine," says Williams. He says he hopes the business will fund his early retirement.

The bottom line: Attempts by states to bar sales of substances that induce a marijuana-like high have been thwarted by nimble entrepreneurs.

    Before it's here, it's on the Bloomberg Terminal.