Images
Source: Flickr user Matthew Kenwrick.

Marijuana's influence, both medically and recreationally, is (pardon the pun) growing like a weed. There are currently 23 states (plus Washington, D.C.) that have legalized marijuana for medicinal purposes, while another four states (along with Washington, D.C.) have allowed the federally-illegal drug to be purchased by consumers for recreational purposes.

Although the recreational side of the business offers the most intrigue for states looking to boost their tax revenue and fill budget gaps, medical marijuana is a very close second as it offers the potential to treat a number of chronic and often times terminal conditions.

Medical marijuana takes center stage
One pharmaceutical company leading the charge in marijuana-based research is GW Pharmaceuticals (NASDAQ:GWPH). GW has discovered five dozen cannabinoids from the cannabis plant that it hopes to use to effect positive biological change in patients.

GW Pharmaceuticals' most promising experimental therapy is Epidiolex, a cannabidiol (CBD)-based liquid formulation designed to treat two rare forms of childhood-onset epilepsy (Dravet syndrome and Lennox-Gastaut syndrome). Initial study results demonstrated a 56% reduction in seizure frequency for Dravet syndrome patients and a 52% decline in drop-seizure frequency, which is associated with Lennox-Gastaut syndrome.

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Source: GW Pharmaceuticals.

In addition to epilepsy, GW Pharmaceuticals has eight other indications it's tackling with its cannabinoid-based compounds, including gliomas, type 2 diabetes, and schizophrenia.

But, what if medical marijuana turns out not to be the wonder drug it's been advertised as by some researchers and activist proponents?

This study is potentially bad news for the medical marijuana industry
According to a study released in late June by two researchers at the Yale University School of Medicine and published in the Journal of the American Medical Association, medical marijuana's benefits may not be as broad in scope as currently believed.

The researchers examined 79 previous studies that involved close to 6,500 people and determined that medical marijuana isn't a particularly effective solution compared to a placebo or no treatment at all for select indications. Researchers note that medical marijuana appeared to show effectiveness in treating long-lasting pain, muscle spasms, and stiffness associated with multiple sclerosis. But, on the flip side, medical marijuana demonstrated less effectiveness than expected in treating nausea caused by chemotherapy, anxiety, sleep disruption, HIB-related weight loss, and Tourette's syndrome.

Cdc Fb
Source: Centers for Disease Control and Prevention.

The lead author of the study, Dr. Deepak Cyril D'Souza, went so far as to question the thesis by which medical marijuana was legalized in 23 states. D'Souza notes,

If the primary process by which medications are approved for 'medical' use in the U.S. is the (Food and Drug Administration) approval process, then the evidence for many conditions does not meet the existing threshold of evidence.

In short, the researchers' primary claim is that while medical marijuana does offer promise in some indications, it's been inaccurately labeled as a cure-all drug when compared to previous study data.

Bigger concerns for the medical marijuana industry
On top of concerns that the aforementioned study from Yale could hold water, medical marijuana businesses are facing what could be even more crippling concerns.

For starters, lawmakers don't seem to be in any rush to change the scheduling of marijuana despite public opinion of medical marijuana vastly favoring its approval (at least recently in a handful of swing states). With 2016 elections around the corner, lawmakers are not in hurry to upset an established federal law or take a potentially controversial position that could hurt their political career. Also, with more mature benefits data needed to be compared next to decades of adverse marijuana data, lawmakers are not making a potentially hasty decision concerning the rescheduling or decriminalization of medical marijuana.

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Source: Cannabis Culture via Flickr.

Financing has been another issue for legal dispensaries. Because marijuana remains an illicit drug at the federal level, financial services have been largely closed off for marijuana-based businesses. This isn't the case for pharmaceutical companies like GW Pharmaceuticals, but it has been a problem for legal dispensaries that could struggle to gain access to basic checking functions and lines of credit. Having to deal strictly in cash or money orders can restrict their ability to buy product or in some cases even serve their customers.

Taxes are another huge concern for legal dispensaries. Even if states legalize medical marijuana, U.S. federal tax code continues to supersede state law. What this means is marijuana businesses are often unable to deduct business expenses that non-marijuana businesses could. In effect, marijuana shops are paying taxes on their gross profits instead of their net profits, and are thus being left with minimal (or no) profits once all is said and done.

The bigger picture
Looking at the bigger picture, this analysis out of Yale University School of Medicine serves as a great reminder that the dynamics of the marijuana industry are still being established, and any proposed investment in marijuana may be extremely risky.

Even GW Pharmaceuticals, which doesn't have the financing or tax concerns associated with legal dispensaries, offers no guarantees of profits or the ability to survive over the long run.

For example, Sativex, an oral spray comprised of CBD and tetrahydrocannabinol, or THC, the psychoactive component of marijuana, failed in the first of three late-stage studies examining the drug as a treatment for cancer pain in the United States. Just because marijuana is prescribed for cancer patients in many of the 23 legal states doesn't mean it's a sure win for clinical success, as GW's first phase 3 study showed.

Long story short, until the outlook for the medical marijuana industry is more certain and we have more mature efficacy data to sift through, investing in this sector is akin to playing with fire.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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