Both medical and recreational marijuana have been in the news over the past year, with changes in both social acceptance and legal status in different parts of the country. Tune in to learn what investors should know when looking at marijuana-related stocks.
This health care edition of Industry Focus looks at what it actually means to invest in marijuana stocks in today's market, what investors should keep in mind, and how the two leading medical marijuana companies stack up.
A full transcript follows the video.
Michael Douglass: Marijuana stocks in 2015. This is Industry Focus.
Hi Fools, health care analyst Michael Douglass here today. The topic of the day is going to be marijuana stocks. I've got Todd Campbell on hangouts with us, from New Hampshire. Todd, how are you doing?
Todd Campbell: I'm doing really well. I remembered to wear my green shirt today.
Douglass: That's important. We actually didn't match this time, which is a shame. We do about half the time. I guess my people will call your people. We'll make sure that happens more in the future, all right?
All right, sounds good. One of the things that biotech investors, health care investors -- heck, general retail investors -- are really interested in is marijuana stocks, particularly because we've got some marijuana stocks with some incoming catalysts in 2015 and 2016. We wanted to spend a little bit of time talking about them and looking at their opportunities, and what we think about them as stocks.
Let's start with the granddaddy in the field which is, I think we have to say, GW Pharma (NASDAQ:GWPH). They are the name that is always on the tip of somebody's tongue when we're talking about cannabidiol or marijuana stocks. Todd, what's your take?
Campbell: Marijuana stocks caught a lot of attention last year. I think part of that was because of the election cycle. There were some pretty key elections that were going on, that were addressing both expanding medical marijuana, and also there was some recreational marijuana legislation that was being voted on last fall as well.
Overall in the marijuana space, as you mention GW Pharma is one of only two that I would define as being investable marijuana stocks. By "investable" I mean that they're widely traded on major exchanges.
Anybody who watched "The Wolf on Wall Street" knows that you should probably avoid pink sheet stocks.
Campbell: That's where a lot of these marijuana stocks outside of GW Pharma and Insys Therapeutics (NASDAQ:INSY) tend to trade. We tend to focus here on more widely traded stocks. They're more proven than some of these others.
Last year you had GW Pharma and Insys, both of them returned about 64% on the year, a really big showing for those two companies. That excitement centered mainly around both of the companies' work on basically taking the chemical compounds that are found in marijuana, synthesizing those, and then delivering those to patients to try and help indications that really have an unmet need.
For example, GW Pharma has been studying its drug Sativex for use in cancer pain. It's also been studying CBD for use in epilepsy. In 2015, GW Pharma is going to roll out more data that investors will be able to dissect and digest, to see whether or not they want to be long the stock heading into the 2016 election year cycle.
Personally, I'm not a huge fan of GW Pharma for 2015 because I think that the stock run last year may have made it a little bit pricy.
Douglass: Yes, I think that's a fair concern. Traditional valuation is a little tough in health care because earnings per share, as shown by a number of stocks, those can quadruple one year on another.
But when you look at their price to sales, for example, for the trailing 12 months, it's 33 according to Yahoo! Finance. That is a pretty substantial ... that's priced to perfection, and I think that there are a couple of concerns there.
For me, one of the big ones is there's an election that says, "We're legalizing marijuana in X state," and immediately the so-called marijuana stocks get affected, even though these are really going through the FDA. It's a biotech cannabidiol. It's not really what you traditionally think of as marijuana, A.
Then B, there's also this recent Sativex Phase III trial in cancer pain, in which Sativex -- a GW drug -- basically failed to beat placebo. Now of course, this is the first of three Phase III trials there, but I think it's a little bit of a concern for investors who have just priced this stock so high.
Campbell: Michael, that's an awesome point because what it does is it really points to what it is that an investor is trying to accomplish with buying marijuana stocks. I think that a lot of people are looking at it and saying, "Look what happened to people who invested in alcohol after prohibition ended," or "Look at how big the market is for tobacco products. Could marijuana be that big someday?"
Unfortunately, right now there's no real companies that you can invest in, in the stock market, that are handling the legal cannabis side of things.
Campbell: GW Pharma and Insys, to your point, they're researching synthetic drugs that are based on the chemical components of marijuana. Those are going to have to go through FDA trials, prove themselves through those trials, and get approved.
In the case of Sativex, they were unable to beat placebo in the first of the three Phase III trials that are going to give us data readouts this year. That's not a ringing endorsement.
What it does is it reminds me of what happened 10-15 years ago with tobacco. There was a lot of interest in developing treatments or medicine based on tobacco, that ended up going nowhere because when push came to shove, clinical trials couldn't show the efficacy could outperform anything else.
Douglass: Right. When it comes down to any biotech stock data is key, and so far in this particular indication Sativex data hasn't been good. Now of course, could it have good data in this indication in these other Phase III trials? Could it have good data in other indications? Of course.
But when you have a stock that's priced this richly, I think you have to have perfect execution, just about, to justify that valuation. I think that's a very legitimate concern for Foolish, relatively risk-averse investors to have.
Now, let's turn the conversation over to Insys. This is a stock you're a little bit more bullish on than GW Pharma. What's your elevator pitch for it?
Campbell: Insys is an intriguing company. It's more intriguing to me than GW Pharma because it's already generating revenue. It already has a product on the market. It markets a drug called Subsys. Subsys is an opiate spray that's used to treat breakthrough cancer pain, and it's been a really big success.
Sales of the drug doubled in the most recently reported quarter, the third quarter, to about $58 million. It's a drug that's already doing about $230-240 million a year. Insys has the same market cap as GW Pharma, that doesn't have any revenue aside from Sativex is approved for MS spasticity in Europe, and maybe they get $5-6 million a year in sales from that.
I think Insys has proven itself. It has revenue that's giving it financial flexibility. That financial flexibility means that it's debt-free, there's less chance of dilution, and it has plenty of money that it can reinvest into its own marijuana research programs, which are studying CBD also for epilepsy.
Many GW Pharma investors would argue that epilepsy is the reason to own GW Pharma. I would say that Insys has the same opportunity, but it has better financials.
Douglass: Yes, and when you look at that revenue differential -- again, just quoting Yahoo! Finance -- GW Pharma's is under $50 million for the trailing 12 months, and Insys' is right around $200 million, so you have the same valuation on 4x the sales. Okay, that may be a better opportunity for folks.
You can see that difference in that price to sales ratio -- it's only 8, for instance -- which I know is still rich by most valuations, but in biotech it's not really that far off the beaten path.
Campbell: Yes. For full disclosure, I happen to long Insys, so I want to make sure that people are aware of that.
Campbell: One of the other things that I think investors need to be watching for in Insys is that the early stage research for epilepsy drugs is intriguing, but they have a much closer catalyst in their oral new formulation of the long-standing marijuana drug Marinol, which of course has been used for 20-some odd years to help reduce chemotherapy-induced nausea.
They have what they think is a better mousetrap for that marijuana drug. It's a $150 million market that's growing 4% a year. They think they can capture a lot of that market if they can win FDA approval.
They've had some hiccups as far as their filing of information with the FDA, but supposedly that's going to get filed this quarter, which could clear the way for an approval and have it go on market sometime early in '16.
Douglass: Sure. I'll say again, looking at it from a valuation perspective and from a potential growth perspective, Insys is not -- me personally -- my style of investing. But again, one of the nice things about The Motley Fool, we're motley!
We definitely have differing viewpoints on companies, and we believe that an open and free marketplace of ideas about them is going to make us all better investors, so I think it's really important for us to have disagreements.
For me, when I look at that market size and the potential growth, it looks too rich for me. I still worry about the association with marijuana bump, getting people unreasonably excited, catalysts that have nothing to do with the business -- like marijuana legalization in a certain state bumping the stock for no reason.
That's the sort of thing that always concerns me, and it's a worry for me going forward for the business. But I will say, if you're really interested in the space and you're putting your money somewhere, I would definitely prefer Insys to GW. I like their opportunities better.
Campbell: Yes, I think you make a great point as far as, investors generally speaking have not done well chasing fads or whatever's in the news for the moment.
You need to approach these things not through rose-colored lenses, but you need to do your homework, your due diligence, and you need to be willing to admit when you're wrong, especially when it comes to investing in biotechnology companies.
The reality is that 90% of drugs fail in clinical trials, so the odds are kind of stacked against you in that regard. You need to be willing to say, "I'm willing, after doing my homework, to take on the risk of being completely wrong."
Douglass: Yes, that is part of the deal. Certainly one thing we're all about here at The Motley Fool is educating people and making sure that they have the data they need to make smart decisions.
Todd, thank you for your thoughts on marijuana stocks today. I think this has been a really good conversation, and one that I think is going to be ongoing since we always seem to talk about them a little bit, on- and off-camera!
Let's definitely circle back up on this, especially once data is out from our friends at the J.P. Morgan conference this afternoon on Insys. That will be very interesting. Until then folks, stay tuned to Fool.com and the Industry Focus podcast for all of your investing needs, and Fool on!
Todd Campbell has no position in any stocks mentioned. The Motley Fool owns shares of JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.