Growth in the legal marijuana industry has left practically all other sectors and industries in the dust over the past couple of years, which is a big reason why it has the full and undivided attention of investors.
According to cannabis research firm ArcView, some $6.9 billion worth of legal weed was sold in North America last year (this includes recreational and medical marijuana). By 2021, ArcView believes this figure could surge to more than $22 billion in North America. Mind you, more than $46 billion in sales last year were conducted under the table, so there's a massive market opportunity at hand for pot-based businesses to transfer illegal sales to legal channels. If they're even mildly successful in doing so, the legal pot industry could grow by more than 20% annually for years to come.
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The dangers of investing in marijuana stocks
Unfortunately, investing in marijuana stocks also comes with a laundry list of risks. Topping the list is the fact that marijuana is still a Schedule I substance, meaning it's illegal at the federal level and deemed to have no medical benefits. This scheduling makes it extremely difficult to run clinical testing on cannabis, and it makes turning a profit especially hard for marijuana-based businesses.
Also, corporate-income tax deductions can't be taken by businesses that sell a federally illegal substance, causing them to pay tax on their gross profits instead of net profits. And financial institutions largely avoid the industry for fear of being slapped with a fine or criminal charges for money laundering under a strict interpretation of federal law.
But what could arguably be the most dangerous aspect of investing in marijuana is that emotions are still running high, meaning fundamentals and common sense aren't always in charge. Allowing your emotions to guide your investing habits usually leads to trouble. This past week, a combination of heightened emotions ransacked two marijuana stocks.
Insys Therapeutics: Down 19%
Of the roughly one dozen marijuana stocks with a market cap above $200 million, none had a worse week than Insys Therapeutics (INSY +0.00%), which fell 19%.
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Why such a miserable performance, you ask? Most of the pain translates to a late-week announcement from the U.S. Food and Drug Administration that it was requesting Endo Pharmaceuticals (ENDP +0.00%) to pull opioid painkiller Opana ER from market. According to the FDA, concern over abuse potential from Endo's injectable painkiller has built to the point that regulators now believe the risks outweigh the benefits of the medication, with injections of the drug associated with outbreaks of HIV and hepatitis C. It's the first time the FDA has requested a drugmaker remove a medicine from pharmacy shelves for such a reason.
The reason this matters for Insys is because of what's going on right now with Subsys, the company's sublingual breakthrough cancer pain medication (Subsys is not cannabinoid-based). Lawsuits have been filed and allegations slung that suggest up to 80% of Subsys' prescriptions were being filled in off-label indications, and that Insys had been doing a less-than-honest job of marketing Subsys. As a result, Subsys sales are expected to at least be halved in 2017 from what they were in 2015, and there's now concern that the FDA may take a closer look at the risk-versus-benefit profile of a drug like Subsys. That's concerning for Insys and its shareholders.
The wild card here is Syndros, the company's only other FDA-approved drug. Syndros is an oral dronabinol solution (essentially a synthetic version of tetrahydrocannabinol, or THC) designed to treat chemotherapy-induced nausea and vomiting and anorexia associated with AIDS. It's slated for launch in August after a long delay while awaiting scheduling from the U.S. Drug Enforcement Agency. While estimates vary, peak annual sales of Syndros could top $300 million, which would pretty much replace every cent in revenue Subsys was once bringing in. However, most investors were expecting a solid one-two punch from Subsys and Syndros, and not Syndros to simply replace Subsys.
Insys' ability to effectively price and launch Syndros, as well as walk on eggshells with Subsys, will be telling over the next couple of quarters.
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Corbus Pharmaceuticals: Down 13%
Another marijuana stock that had a week to forget was Corbus Pharmaceuticals (CRBP +4.25%), which is currently developing anabasum, a endocannabinoid-mimetic drug that targets the CB2 receptor to treat inflammatory and fibrotic diseases. Shares of Corbus tumbled 13% on the week.
Like Insys, Corbus' drop can certainly be attributed to emotional swings from investors. But it, too, ran into a news release brick wall. Late in the week, Corbus announced a phase 2 data presentation at the European Cystic Fibrosis Society 2017 conference. While anabasum is being examined in four indications, cystic fibrosis (CF) is unquestionably the one that could bear the most fruit for Corbus and its shareholders.
The data presented by Corbus provided more detail on its earlier-year announcement that anabasum had met its midstage endpoint of providing a statistically significant reduction in pulmonary exacerbations in CF patients. However, it also shed light on one of the drug's biggest potential problems: a lack of real improvement in lung function as measured by forced expiratory volume in one second (FEV1).
Typically, FDA-approved medications demonstrate an FEV1 approval compared to the placebo, but that's not what we saw from anabasum in phase 2 studies. Mind you, this doesn't preclude Corbus' lead drug from moving onto phase 3 studies, nor will it necessarily stop it from being approved by the FDA at a later date. However, it's a knock against a drug that has an opportunity to be a global CF treatment as opposed to one geared at a specific CF mutation.
Investors considering Corbus need to understand that much of its valuation is tied to its CF trial, and that it has nothing else close to pharmacy shelves beyond anabasum, which is an inherently risky bet.
