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Opinion: Medical Marijuana Is a Terrible Investment

By Sean Williams – Jun 20, 2019 at 1:36AM

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Medical marijuana drug developers are often smothered in hype and rarely deliver any reward.

If investors have learned anything over the past couple of years, it's that the marijuana industry, when taken as a whole, is a big-money business. Tens of billions of dollars in transactions is being conducted annually on the black market around the world, and if legalizations continue, a good chunk of these sales can be moved into legal channels, creating one of the fastest-growing industries on the planet.

Although recreational marijuana offers the greatest dollar-based sales potential for cannabis stocks, it's actually the medical side of the equation that usually generates the best margins. That's because medical marijuana patients tend to use cannabis more often, buy product more frequently, and purchase high-margin derivatives (e.g., oils, edibles, infused beverages, topicals, vapes, and concentrates) relative to adult-use weed consumers. They've really become the bread and butter for high operating margins in the cannabis industry.

That's what makes what I'm about to tell you so hard to believe: Medical marijuana is a terrible investment opportunity.

A physician with a stethoscope around his neck holding a cannabis leaf between his hands.

Image source: Getty Images.

Now, let me clarify this statement a bit. I'm not saying the companies that retail or grow cannabis for medical purposes are necessarily bad investments. That's determined on a case-by-case basis.

Rather, I'm explicitly suggesting that companies developing experimental cannabis-derived or cannabis-like medicines, or those which already have marijuana medicines on pharmacy shelves, are poor investments.

Here's why medical marijuana stocks are a poor investment opportunity

Think about this for a moment: Despite numerous university-level studies showing positive correlations for cannabis in treating chronic pain, glaucoma, anxiety, intestinal disorders, anorexia, epilepsy, and a host of other ailments, you can count on one hand how many ailments the U.S. Food and Drug Administration (FDA) has approved cannabis, its cannabinoids, and synthetic cannabinoids to treat.

GW Pharmaceuticals' (GWPH) lead drug Epidiolex, an oral cannabidiol (CBD)-based solution and the only cannabis-derived drug to get the OK from the FDA, is approved to treat two rare types of childhood-onset epilepsy (Dravet syndrome and Lennox-Gastaut syndrome). Beyond Epidiolex, a small number of synthetic compounds aid in treating chemotherapy-induced nausea and vomiting (CINV) and anorexia associated with AIDS. The point being that the scope of proof that cannabis or its cannabinoids can treat a broad spectrum of ailments simply isn't there in the eyes of the FDA. University-level studies, or any study for that matter that wasn't directly approved by the FDA, aren't considered by the regulatory body as valid evidence of efficacy.

Two lab researchers in white coats examining vials and making notes.

Image source: Getty Images.

To build on that point, not all cannabis and synthetic compound trials deliver results as expected. As an example, even though cannabis and its cannabinoids have long been considered an effective treatment for chronic pain, GW Pharmaceuticals' Sativex, a CBD- and tetrahydrocannabinol (THC)-containing oromucosal spray that's approved in more than a dozen countries outside the U.S. (but not in the U.S.), badly failed a phase 3 trial in the U.S. as a treatment for cancer pain.

Further, GW Pharmaceuticals' experimental cannabidivarin (CBDV)-based drug GWP42006 flunked a phase 2a proof-of-concept study in February 2018 as a treatment for patients with focal seizures. In other words, cannabis and its cannabinoids aren't a cure-all, and as we see with most medicines, efficacy really depends on the ailment and the chemical makeup of the compound(s) being tested.

Medical marijuana therapies have struggled to sell

If this isn't enough evidence that medical marijuana just isn't a good investment opportunity, let's take a closer look at some real-world examples of therapies that actually made it to market, both in the U.S. and abroad.

Within the U.S., one of the more high-profile examples was the FDA approval of oral dronabinol solution Syndros in July 2016. Dronabinol is a synthetic version of THC, the cannabinoid that gets users high. Developed by Insys Therapeutics (INSY), Syndros demonstrated solid efficacy in late-stage trials as an alternative treatment for CINV and anorexia associated with AIDS. When it officially hit pharmacy shelves at the end of July 2017 -- it took a year to get the drug's labeling approved and for scheduling by the Drug Enforcement Agency to occur -- there was the expectation of $200 million to $300 million in peak annual sales for what could become Insys Therapeutics' crown jewel. However, after its first full year of sales in 2018, Syndros delivered merely $3.3 million in sales. Inclusive of its five months on the market in 2017, Insys' synthetic THC drug hadn't even generated $5 million in net lifetime sales.

A mature man using a magnifying glass to get a closer look at dollar signs on the table in front of him.

Image source: Getty Images.

And Insys isn't alone. If we go into the way-back machine, we can find Cesamet, which was approved by the FDA in 1985. Developed and sold by Eli Lilly (LLY 0.80%), this synthetic cannabinoid treats CINV by binding with cannabinoid receptor-1 in the body, thereby reducing nausea. Unfortunately, Eli Lilly's drug came with a host of unpleasant side effects, including noted effects on the central nervous system, changes in mood, confusion, and hallucinations. Not surprisingly, just four years after its approval, Eli Lilly took Cesamet off the market for commercial reasons, which is fancy terminology that likely means it was costing the company more than it was worth to try and market the drug. Cesamet was sold in 2004 to Bausch Health Companies (formerly Valeant Pharmaceuticals), which doesn't break out the sales figures for every established drug it owns.

Even GW Pharmaceuticals, a company entirely devoted to cannabinoid compounds, has been bitten by high expectations with little actual reward. The aforementioned Sativex, a treatment for spasticity associated with multiple sclerosis, managed only $6.6 million in sales in 2016 and $7.8 million in 2017, despite being approved in more than a dozen markets.

The track record for synthetic and cannabis-derived medical marijuana products just isn't that encouraging, despite the hype. That makes pure-play medical marijuana drug developers a potential liability for your investment portfolio.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Bausch Health Companies. The Motley Fool has a disclosure policy.

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