There aren't many, if any, industries growing as quickly and consistently as legal marijuana. Marijuana Business Daily's newest annual report suggests that legal U.S. cannabis sales will have risen by 30% in 2017, and they could increase by another 45% in 2018. If their forecast of a quadrupling in U.S. weed sales between 2016 and 2021 holds true, the market would be generating $17 billion in sales four years from now. Given that type of growth, it's no wonder why marijuana stocks have skyrocketed.
We've also seen a pretty notable shift in the way the American public views marijuana. Once considered an off-table topic, cannabis is now as much a debate around the household as it is on the campaign trail. According to Gallup's October 2017 annual survey on cannabis, an all-time record 64% of respondents now want pot legalized. Comparatively, just 25% supported a nationwide legalization back in 1995, the year before California became the first state to legalize medical cannabis for compassionate-use cases.
Investing in marijuana stocks is risky business
Nevertheless, there are major risks that come with investing in marijuana. To be blunt (and throw in a pun), it's illegal all around the globe. With the exception of Uruguay, no other country has legalized cannabis for recreational use, although Canada could become the second country to do so in July 2018. Investing in an illegal business model is very risky.
In addition to being wholly illegal in the U.S., the amount of red tape created by its Schedule I categorization makes it almost impossible for researchers to run benefit-versus-risk analyses that lawmakers are seeking. Further, marijuana-based businesses have little or no access to basic banking services (yes, that includes something as simple as a checking account), and they can't take corporate income-tax deductions since they're selling a federally illegal substance. This leaves pot businesses to pay an effective tax rate of as much as 70% to 90% on their profits.
Introducing the all-or-nothing pot stock for 2018
It's this constant battle between rapid growth and federal law that makes marijuana stocks so volatile. But when it comes to volatility, no marijuana stock may have more on the line in 2018 than Insys Therapeutics (INSY). It's what I'd call the all-or-nothing marijuana stock for this coming year.
What could go wrong?
Things could completely fall apart for existing shareholders if the cards don't fall Insys' way. In fact, you could argue that they already have, with shares of the company collapsing nearly 90% between the summer of 2015 and the winter of 2017 amid a management scandal.
While there are plenty of issues for Insys currently, they all pretty much point back to Subsys, one of two Food and Drug Administration (FDA)-approved drugs. Subsys is a synthetic opioid containing fentanyl that the FDA approved to treat breakthrough cancer pain. However, it's been alleged that Insys' former CEO and founder, John Kapoor, along with numerous members of the company's management and marketing team, knowingly and willingly marketed Subsys at off-label indications to pump up sales.
In particular, the charges imply that Insys was essentially bribing physicians in the pain-management field to prescribe Subsys in return for "speaking engagement fees," even if there was no actual speaking being done. These payments were supposedly being made to doctors as a ruse to get insurers to cover Subsys prescriptions.
As a result of these arrests and pending lawsuits against the company, sales of Subsys have plunged. Excluding revenue from Syndros in the third quarter, net sales for Subsys fell to just $30 million from $57.8 million in the year-ago period. This drop-off in sales has also pushed a once-profitable Insys Therapeutics firmly into the red.
As announced during the third quarter, the company has assumed an accrued minimum liability of $150 million, payable over the next five years to the Department of Justice's ongoing investigation. But understand that this is a minimum expectation of its financial responsibility. Additional lawsuits and fines may follow, along with selling restrictions. In short, if Insys can't right the ship on Subsys or get clarity regarding its financial liability, this ship could sink.
The company also needs a strong showing from Syndros, its other FDA-approved drug that was launched in August. This oral dronabinol solution (a synthetic form of tetrahydrocannabinol (THC), the psychoactive component of cannabis) is where Insys derives its marijuana-stock ties. Unfortunately, it generated just $0.7 million in sales following its launch in the third quarter.
What could go right?
However, there's also a lot that could go right for Insys, possibly making it one of the best-performing marijuana stocks in 2018.
Again, a lot depends on Subsys. If the company can create a clear break from its previous management team and somehow regain the trust of Wall Street, patients, and physicians, it has a shot to stabilize Subsys' annual sales. Considering that Subsys was generating about $330 million annually at its peak, and allegations suggest that up to 80% of Subsys' sales were for off-label indications, flattening out around $70 million in annual sales is possible, albeit not ideal. If Subsys' sales decline ebbs a bit in 2018, shareholders could view it as a positive.
The uptake of Syndros might even play a bigger role. While it's important for a drug developer to diversify its product portfolio, scandal or not, Syndros offers the potential to replace most of the sales that were lost as a result of this scandal. There simply isn't a THC-based medicine on the market to treat chemotherapy-induced nausea and vomiting, and anorexia associated with AIDS, which could give Insys' drug an edge, along with pricing power. Though estimates vary, Syndros could peak around $200 million in annual sales. A strong year of sales and prescription growth in 2018 would go a long way toward calming investors' nerves.
Speaking of product portfolio expansion, Insys also filed for a new drug application (NDA) in late September for its buprenorphine sublingual spray. If approved, this treatment for moderate to severe acute pain would enter a crowded pain-management market, but it would nonetheless give Insys an opportunity to add a healthy dose of revenue each year. In fact, despite its scandal, Insys remains on track to file for an NDA once a year through 2020.
If all goes right for Insys, and it can manage to ebb its Subsys sales bleed, dissociate itself from its previous management team, and quickly grow Syndros, it could turn out to be an incredible bargain at its current price.
What's next for Insys is, at this point, anyone's guess.