This article was updated on February 8, 2017, to reflect changes in the marijuana marketplace. This article was originally published March 12, 2014.

The 2016 elections created a lot of excitement among marijuana supporters, as voters approved marijuana legalization in eight states, including four states (California, Maine, Massachusetts, and Nevada) that will allow recreational marijuana use.  

This has policy-makers thinking more approvals could be coming that further expand the legal marijuana market. As such, investors are increasingly looking for stocks that could benefit from growing marijuana use, including drug companies that are seeking to profit from developing marijuana-derived medicines. The two drugmakers best positioned to capitalize on this opportunity are GW Pharmaceuticals Plc (NASDAQ:GWPH) and Insys Therapeutics (NASDAQ:INSY), so let's learn more about them.

A large marijuana grow facility.

IMAGE SOURCE: GW PHARMACEUTICALS, PLC

Plentiful pipeline
GW Pharmaceuticals has the most robust pipeline of potential marijuana medicines. The company has already won European approval for its THC drug, Sativex, for treating multiple sclerosis-related muscle spasms, and it's researching therapies created from the marijuana cannabinoid CBD, too.

Sativex hasn't become a commercial success in Europe, and trials evaluating the use of Sativex in cancer pain failed to pan out in 2015, but late-stage studies of its CBD drug, Epidiolex, appear to be about to give the company its biggest win yet. Epidiolex is being studied to see if it can reduce seizures in Dravet syndrome and Lennox-Gastaut syndrome patients, and last year, management reported that Epidiolex is effective and safe in both of these rare forms of epilepsy. A filing for Epidiolex's FDA approval is scheduled for this year.

In the past, GW Pharmaceuticals has conducted research into the use of marijuana in diabetes, and currently, it's evaluating marijuana drugs in brain cancer and autism -- two important indications that could become significant markets for marijuana-derived medicine someday.

A chart showing the various marijuana research programs underway at GW Pharmaceuticals.

IMAGE SOURCE: GW PHARMACEUTICALS, PLC

A revenue-friendly biotech, with a marijuana kicker
While GW Pharmaceuticals is developing drugs based on its marijuana research, Insys Therapeutics already markets Subsys, a spray formulation of the opioid fentanyl for breakthrough cancer pain, and it's won FDA approval of Syndros, a reformulation of the long-used THC-based drug, Marinol.

Because Subsys sales are running at better than $200 million annually, the company's been turning a profit, and that's given management the financial flexibility to fund its research program without tapping debt markets.

Syndros' approval last year could be significant because the Marinol market is worth north of $200 million and growing. Although Syndros offers better dose titration and bioavailability than Marinol, the company hasn't launched it yet because it's awaiting DEA scheduling.

Meanwhile, management is evaluating CBD in epilepsy, anxiety, and post-traumatic stress disorder, but it hasn't yet released data yet that show how its drug works in these indications.

While Insys Therapeutics' marijuana research is intriguing, investors should know that the company's been under investigation for illegal marketing of Subsys and that former executives have been arrested on charges of providing illegal kickbacks to Subsys prescribers. The investigation is weighing heavily on Insys Therapeutics' shares because it's uncertain if the company will have to pay fines.

Looking ahead
There are other, much smaller marijuana companies that investors can invest in; however, they're tiny market-cap companies that typically trade on the unregulated pink sheets, which makes them incredibly risky stocks.

For that reason, marijuana investors might be better served by concentrating on GW Pharmaceuticals and Insys Therapeutics. Both have sizable market capitalizations and a proven track-record of developing marijuana drugs that can win over regulators.

Undeniably, these companies are high-risk bets, but, of the two, I think Insys Therapeutics could be the better option. Although it can only be considered partially a marijuana stock. Insys product portfolio is more diversified than GW Pharmaceuticals, and it already generates sales and is profitable. Furthermore, investor concerns over the Subsys investigations mean that its shares are cheaper than GW Pharmaceuticals. Assuming Insys can settle its Subsys investigations to put this risk behind it, it could be an undervalued marijuana stock.

 

Todd Campbell has no position in any stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.