Few industries in the U.S. are growing at a quicker pace than legal marijuana. According to a fairly recent report from Marijuana Business Daily, entitled "Marijuana Business Factbook 2017," legal pot sales in the U.S. are expected to rise by about 30% in 2017 to a range of $5.1 billion to $6.1 billion, with the total U.S. market expected to expand to around $17 billion by 2021.
The public's perception of cannabis has also seen a pretty discernable shift since the mid-1990s. Gallup, which has been conducting surveys on the public's opinion of marijuana since the late 1960s, found just 25% support for a national legalization effort in 1995. As of 2016, support for legalizing the drug was up to 60%, which represents an all-time high since Gallup began its polling.
The result of these growth statistics and the public's rapidly changing perception of pot is that investors can't get enough of marijuana stocks. A majority of the largest pot stocks (those with a market cap of $200 million, or higher) have risen by 100% or more over the trailing year. You'd struggle to duplicate such returns in any other industry.
This pot stock is one clinical trial away from a possible $1 billion market cap
The big question on investors' minds is what marijuana stock could be the next to move higher? While there's no way of knowing with any certainty, one of the industry's worst-performing stocks of late could actually turn out to be one of its best performers in the months to come. If just a single clinical trial works in favor of Cara Therapeutics (CARA 2.76%), it could regain everything it's recently lost and possibly hit a $1 billion market cap.
Cara was actually on track to hit a $1 billion valuation in late June, coming within $73 million of the elusive mark that few marijuana stocks have hit. Unfortunately, poor results from one of its ongoing studies pulled the rug out from under investors in a hurry.
What went wrong for Cara
In late June, Cara Therapeutics released much-anticipated phase 2b data for oral experimental kappa opioid receptor agonist CR845 as a treatment for patients with osteoarthritis (OA) of the hip or knee. CR845 is being tested in a number of studies involving chronic pain and pruritus (itching), and in different formulations (oral and intravenous).
The phase 2b data release showed that two of the three oral doses (1 mg and 2.5 mg) failed to reach statistical significance, while the highest dose (5 mg) reached statistical significance in only one portion of the study -- OA of the hip, where a 39% reduction in mean joint pain score was observed. The 5 mg dose for all patients, inclusive of OA of the hip or knee, failed to reach statistical significance because of a high p-value of 0.111. The p-value measures the role "chance" plays in a clinical study, suggesting in this case that 11.1% of the results could be due to chance and not the actual medicine at work. The Food and Drug Administration (FDA) typically caps acceptable significance in clinical studies at 0.05, or 5%.
This was a major disappointment for shareholders for one key reason: chronic pain is a much larger and more profitable indication than pruritus. If the market for CR845 in pain isn't as large as once suspected, Wall Street and investors may have to cut their peak sales and profit estimates for Cara Therapeutics as a result of these mixed results.
One study that could quickly redeem Cara Therapeutics' stock
However, there could be a silver lining in this story.
On June 21, Cara announced that the independent data monitoring committee (IDMC) had suggested that its phase 3 trial involving two doses of an intravenous version of CR845 as a treatment for postoperative pain be continued following an interim assessment. The trial, known as Clin3001, is examining up to 450 patients prior to and following abdominal surgery across the 30 clinical sites.
It's important to note that the IDMC's recommendation doesn't equate to success for I.V. CR845. However, the mere fact that both doses of I.V. 845 are continuing in pivotal-stage studies signifies that the IDMC sees an opportunity for Cara's experimental therapy to hit its primary endpoint. If I.V. CR845 winds up meeting its primary endpoint of a change in pain intensity over the 24-hour postoperative period, it would legitimize CR845 as a pain treatment and give credence to Cara's drug-development platform. It could also, in this Fool's opinion, bring in around $250 million in peak annual sales as a postoperative pain treatment. These peak sales, along with some renewed vigor throughout the remainder of Cara's pipeline, could push its valuation up to $1 billion.
But wait, there's more
And that's not nearly the end of it, either. Cara wound up announcing positive top-line data from Part A of its phase 2/3 trial involving I.V. CR845 for patients with chronic kidney disease (CKD)-associated pruritus. The data showed that Cara's experimental drug met the primary endpoint with a 68% reduction in worst itching score versus the placebo after an eight-week treatment period. CKD-associated pruritus has no FDA-approved therapies in the U.S., so a successful Part B of this study could open the door for steady recurring revenue for the company.
Furthermore, it's possible that Cara could take a mulligan of sorts on its recently failed OA study by focusing on higher doses and strictly OA of the hip. Yes, this means Cara will need to spend more money and time developing CR845 for OA of the hip than expected, but it could translate into hundreds of millions in peak annual sales if the study is successful. This is a step back, not a step back to the drawing board, for the company.
Lastly, don't forget about CR701, which is how Cara Therapeutics gets its association with marijuana stocks. CR701 is a CB-receptor agonist that was shown in preclinical rodent models to have reduced hyperalgesia and allodynia. The thinking here is that CR701 may offer promise as a treatment for neuropathic pain, and more important, it could be a potential replacement for opioids. Opioids are a commonly prescribed class of medicine for chronic pain treatment, but in 2015 they also led to 20,101 overdose-related deaths, per the American Society of Addiction Medicine. With so much emphasis being placed on the growth of pot stocks, investors are patiently waiting for Cara to advance this CB-receptor agonist into clinical studies.
While Cara is far from a sure thing, if Clin3001 goes its way, it could quickly find its market cap knocking on the door of $1 billion.