As a whole, marijuana stocks are on fire. Through about mid-July, the average marijuana stock was up over 300% on a trailing-12-month basis, albeit one stock with a 2,363% gain at the time had skewed the results. Even if this outlier were removed from the equation, the largest roughly one dozen weed stocks had jumped by nearly 150% over the trailing year.
Making sense out of the green rush
Understanding the optimism behind marijuana stocks requires nothing more than examining the support for legal cannabis and legal sales growth figures.
Gallup, which has been conducting polls on the public's favorability toward weed for nearly five decades, found that just 25% of the public wanted to see the drug legalized in 1995, the year before California became the first state to legalize its medical use. By comparison, 60% of Americans wanted to see cannabis legalized nationally in 2016, an all-time high. As support for pot creeps higher, the belief is that the pressure for politicians to act in Washington grows larger.
In terms of sales figures, the "Marijuana Business Factbook 2017" report from Marijuana Business Daily estimates roughly 30% legal sales growth in the U.S. this year to a range of $5.1 billion to $6.1 billion. By 2021, the U.S. legal market is estimated to be generating around $17 billion in annual sales. This strong double-digit compounded growth is a big reason why investors have flocked to pot stocks.
Unfortunately, that optimism turns out to be a bit premature sometimes. Last week, one marijuana stock wound up taking shareholders on a wild, and unwanted, ride.
Up in smoke
Clinical-stage cannabinoid-based drug developer Zynerba Pharmaceuticals (NASDAQ:ZYNE) had been one of the strongest-performing pot stocks over the trailing year prior to the start of this past week. However, its stock lost more than half its value (53%) on Monday, Aug. 7, after it announced top-line results from its phase 2 study involving investigative drug candidate ZYN002 in adult epilepsy patients with focal seizures.
The study, known as Star 1, examined ZYN002 as a transdermal cannabidiol (CBD)-based gel for epileptic patients versus a placebo. CBD is the non-psychoactive component of cannabis. The 188 randomized patients either received a high dose of ZYN002 (195 mg) every 12 hours, the low dose of ZYN002 (97.5 mg) every 12 hours, or the placebo gel every 12 hours, for a period of 12 weeks. The primary endpoint was a statistically significant reduction in seizure frequency compared to the eight-week baseline period.
The results showed that the low dose of ZYN002 led to an 18.4% median reduction in focal seizures, while the high dose produced a 14% median reduction. The placebo arm generated an 8.7% median reduction in focal seizures as well. These were not statistically significant results, ergo ZYN002 failed to reach its primary endpoint. What's more, the data was the inverse of what we'd expect, with the lower dose outperforming the higher dose in terms of seizure frequency reduction. Despite having a favorable safety profile, there seems to be little to no path forward for ZYN002 as a treatment for focal seizures in patients with adult epilepsy based on this study.
For those who may recall, this is precisely the concern this writer had heading into the Star 1 and Stop studies. Stop is a phase 2 study involving ZYN002 as a transdermal gel for the treatment of knee pain due to osteoarthritis. Its results are expected this month as well, along with an exploratory phase 2 study in Fragile X syndrome patients due out in September.
Investors had been pushing Zynerba's share price higher with the expectation that a CBD-based gel couldn't possibly fail. However, until this past week, we hadn't seen any clinical evidence that suggested Zynerba's CBD gel actually worked. Investors learned a rough lesson last week about what can happen if you buy blind in the biotech industry -- pot stock or not.
GW Pharmaceuticals' shareholders are smiling
On the other hand, investment firm Leerink Partners believes Zynerba's pain is GW Pharmaceuticals' (NASDAQ:GWPH) gain. The way Leerink sees it, GW Pharmaceuticals' success with Epidiolex in phase 3 clinical trials -- Epidiolex is a cannabidiol-based drug -- maintains it as the top dog in the cannabinoid-based drug development space. Epidiolex hit its primary endpoint in two pivotal late-stage studies for both Lennox-Gastaut syndrome and Dravet syndrome, potentially putting on track to hit more than $500 million in peak annual sales, if approved.
Of course, even the top dog has challenges to face. The Food and Drug Administration has never approved a drug derived from the cannabis plant for medical use, and last August the FDA's opinion on medical cannabis played a crucial role in the U.S. Drug Enforcement Agency's decision to hold firm on its stance that marijuana is a Schedule I substance. There simply aren't any guarantees that the FDA lets Epidiolex sail through to pharmacy shelves, in spite of its excellent clinical profile.
Thus we have the ongoing dilemma for pot stocks: Investors can see a path to strong growth and profits, but restrictive federal policies and regulations continually stand in the way. Investors are probably best off avoiding marijuana stocks altogether until we see meaningful changes at the federal level, but if you do decide to dip your toes in the water, keep in the back of your mind that weeks like Zynerba experienced are always a possibility with pot stocks.