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Cannabis and Big Pharma Join Hands in Jerusalem

By Cory Renauer – Updated Sep 17, 2019 at 3:27PM

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The world's largest manufacturer of prescription drugs has officially entered the medical marijuana industry.

Ever wondered what would happen if the pharmaceutical industry and the cannabis industry joined hands?

You might not have to wait very long to find out. The world's largest manufacturer of prescription drugs, Teva Pharmaceutical Industries (TEVA 2.84%) recently signed an agreement with Cannadoc to distribute medical marijuana to every pharmacy in Israel.

Doctor holding capsules in one hand and a bag of cannabis in the other.

Image source: Getty Images.

Are Teva's big pharma peers about to follow suit? What about marijuana stocks connected to U.S. pharmaceutical companies? Here are four things investors need to understand first about Teva and its place in the rapidly changing market for medical marijuana.

1. Teva's really big

Despite trailing sales that have fallen around 25% since reaching a peak in 2017, Teva Pharmaceutical reported $17.7 billion in top-line revenue over the past year. To put that in perspective, Pfizer recorded $53.7 billion during the same period.

Pfizer and a handful of big pharma companies generate more sales than Teva, but they don't derive most of their top-line revenue from low-priced generics. If you look at the sheer volume of prescription drugs that Teva ships, the generic giant has them all beat.

2. Hard to say no

Several years ago, Teva borrowed heavily to become the world's largest generic-drug company, and then the bottom fell out from under generic-drug prices. Around the same time, Teva's branded multiple sclerosis blockbuster Copaxone lost patent-protected market exclusivity and more than $3 billion in annual revenue.

Canndoc is an Israeli medical cannabis producer run by former general and prime minister Ehud Barak. Teva's hardly in a financial position to turn down any potential business, especially when it's coming from a public figure like Barak.

Stack of cash under marijuana.

Image source: Getty Images.

3. It's just dipping a toe in the water

Teva Pharmaceuticals is the world's largest manufacturer of prescription drugs, but the company won't be making any cannabis-related products. Instead, Salomon, Levin, and Ellstein (SLE), a wholly owned subsidiary of Teva, will distribute Cannadoc's medical-marijuana products to all the places SLE can distribute other prescription drugs.

Teva's SLE subsidiary is the leading distributor of medical products in Israel and has all the licenses necessary to transport prescription drugs to all the nation's pharmacies. With 45,000 registered medical marijuana patients, Israel's a significant market, but this distribution agreement probably won't lead to a noticeable difference on Teva's bottom line.

4. Teva's not starting a trend

Teva Pharmaceuticals didn't issue a press release to mark the occasion, and you probably won't hear management talking about its SLE subsidiary and medical marijuana distribution during the next investor presentation. The marijuana industry is gaining customers and recognition, but Teva and the rest of its big pharma peers are not interested in becoming cannabis producers. 

Big pharma doesn't concern itself with a molecule's social stigma once there's evidence it safely provides a significant medical benefit. For example, Johnson & Johnson (JNJ 0.86%) recently launched Spravato, which is a purified isomer of ketamine, a commonly abused party drug that was most popular in the 1990s. Johnson & Johnson's Spravato made a measurable difference for people with treatment-resistant depression in clinical trials, which is what the FDA needed to give it a green light.

Ketamine might not be an innovative new drug, but most people don't have the means to produce their own supply. This is how J&J can charge around $5,500 per month for Spravato treatment. Since practically anyone can grow all the pharmaceutical-grade cannabis they need in a spare closet, trying to maintain a pharmaceutical-grade profit margin selling cannabis-based drugs seems like an uphill slog. 

A marijuana plant closeup.

Image source: Getty Images.

What to look out for

The near-complete lack of profits for Canada's licensed cannabis producers in the past year wasn't much of a surprise to pharmaceutical companies that are fully versed in market exclusivity issues. That doesn't mean this is the end for cannabis and big pharma, though.

Right now everyone's eyes are on GW Pharmaceuticals (GWPH) and Epidiolex, a marijuana-derived cannabidiol (CBD) tincture the FDA approved in 2018 for the treatment of two forms of severe early onset epilepsy. If you haven't heard, CBD's the component of cannabis that appears to help people sleep and relieves different aches and pains without intoxicating effects.

The FDA approved Epidiolex because the evidence of a seizure-reducing benefit among patients taking it in a clinical trial was undeniable, and GW Pharmaceuticals jumped through a lot of hoops in the development process. Despite the availability of less expensive CBD tinctures made in facilities that haven't undergone a great deal of scrutiny from the FDA, Epidiolex recently reported accelerating sales that reached an annualized $286 million during the second quarter of 2019.

GW Pharmaceuticals hasn't even received rumors of a potential buyout offer from a big pharma company, but a continued acceleration of Epidiolex sales could spark the industry's interest.

Cory Renauer owns shares of Johnson & Johnson. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Teva Pharmaceutical Industries Limited Stock Quote
Teva Pharmaceutical Industries Limited
TEVA
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Johnson & Johnson
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Pfizer Inc.
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$44.43 (0.77%) $0.34
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GW Pharmaceuticals plc
GWPH

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