Investors in cannabis companies had an eventful 2016 with the approval of recreational marijuana usage in the states of California, Massachusetts, Maine, and Nevada providing a boost to all sorts of marijuana stocks. Of particular note, shares of Corbus Pharmaceuticals (NASDAQ:CRBP) posted a whopping 600% gain in 2016 following positive phase 2 data. Corbus Pharmaceuticals, interestingly, is not at all engaged in medical or recreational marijuana sales -- instead, it's focused on the development of a nonpsychoactive synthetic drug that mimics the body's reaction to THC. Still, that hasn't stopped the company's stock from being swept upward along with other more traditional marijuana stocks.

After a dramatic rise, can shares of this company continue to rally? It's time for a deeper dive.

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Resunab

Corbus Pharmaceuticals is a clinical-stage pharmaceutical company focused on the development and potential commercialization of novel therapeutics to treat a variety of inflammatory and fibrotic diseases. Currently, Corbus' only product under development is Resunab (JBT-101), a first-in-class, synthetic oral endocannabinoid-mimetic drug. Resunab is currently undergoing trials in systemic sclerosis, cystic fibrosis, dermatomyositis, and systemic lupus erythematosus. Resunab functions by preferentially binding to the CB2 receptor expressed on activated immune cells and fibroblasts. By binding to this receptor, Resunab is able to trigger CB2 activation, which in turn results in the activation of endogenous pathways that have the potential to reduce inflammation and fibrosis.

Currently, inflammatory and fibrotic diseases are treated with either non-steroidal anti-inflammatory drugs (NSAIDS), systemic corticosteroids, or anti-malarial/immunosuppressive agents. While currently available therapies are effective, they each have their own limitations. For example, NSAIDs are oftentimes too limited in potency to control disease activity, and anti-malarials are ineffective in controlling serious inflammation. Finally, while corticosteroids are better at controlling serious inflammation, they are also associated with a variety of toxicities. Resunab's mechanism of action is distinct from all currently available therapies in treating inflammatory conditions. By triggering endogenous pathways that resolve inflammation and halt fibrosis without immunosuppression, Resunab has the potential to be extremely potent in combatting inflammatory disease while at the same time not suppressing the immune system.

Systemic sclerosis

In terms of development, Resunab has progressed furthest in the indication of systemic sclerosis. Systemic sclerosis is a rare, chronic autoimmune disease which affects an estimated 90,000 people across both the U.S. and Europe. The disease is characterized by immune abnormalities and a diffuse fibrosis of the skin and internal organs. Currently, there is no approved treatment for this disease.

In November of last year, Corbus released positive top-line data from a phase 2 study of Resunab in systemic sclerosis. The primary endpoint of this study was an improvement in the combined response index in cutaneous systemic sclerosis (CRISS) score at week 16 versus placebo. Resunab outperformed, with a CRISS score of 33%, while the placebo attained a score of 0%. While a CRISS score of greater than 20% is considered a medically meaningful improvement, it should be noted that in this study Resunab only achieved a p-value of .044. For reference, a p-value of .05 is generally considered the upper boundary cutoff for statistical significance, and the closer to 0 the more significant. Resunab's positive data, therefore, should be taken with a grain of salt.

Caution ahead

While Resunab was granted orphan drug designation and fast track status by the FDA in 2015, this does not mean that the stock is a safe bet. Resunab will still have to prove its efficacy in phase 3 studies. However, an approval in systemic sclerosis could be huge for this company which is currently trading under a $400 million market cap.

Another risk investors have to bear with all small-cap biotechs is the risk of dilution. As per Corbus' latest filing, the company has $19 million in cash and cash equivalents and generated a net loss of $5.3 million for the quarter. Phase 3 trials are both long and expensive, so it is likely that Corbus will need to raise money through the issuance of common stock in order to fund future operations.

Finally, it is also key to note that while Resunab is a synthetic cannabinoid, the success or failure of this company has nothing to do with the legalization of recreational marijuana. For all intents and purposes, Corbus can be considered a traditional biotech and should not be assigned a higher growth multiple due to the emerging marijuana industry. For myself, I see Corbus as a risky play and believe there are safer investments elsewhere in the biotech world.

 

David Liang has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.