Should Big Pharma Buy Into the Medical Marijuana Industry?

Source: Flickr user Mark

Few stories were as captivating to investors as medical marijuana in 2014. The promise of using marijuana to treat common conditions like cancer pain and uncommon indications like epilepsy created a flurry of investor interest that sent shares in marijuana stocks soaring.

However, just because medical marijuana’s use is intriguing doesn’t mean that these companies will deliver on investor’s optimism. Most marijuana drugmakers are small companies that may struggle to come up with the financing necessary to usher treatments through expensive clinical trials. That could suggest that they need to ink licensing deals or be acquired by big pharmaceutical or biotechnology companies. Whether or not big drugmakers would be interested in pursuing such opportunities is an important question, so we asked two Motley Fool analysts for their opinion. Read on to learn whether they think big cap companies should buy into the medical marijuana industry.

Brian Orelli: Should big pharma get into the medical Pacific yew tree industry? How about medical poppy business?

Trick question. They already are.

Bristol-Myers Squibb‘s (NYSE: BMY  ) cancer drug Taxol was discovered in the Pacific yew tree. Opiate pain killers such as morphine and codeine are found in opium poppy. There are plenty of other examples of useful drugs that were derived from plants as well.

It’s pretty clear there are useful chemicals — cannabinoids called CBD and THC — in marijuana. GW Pharmaceuticals‘ (NASDAQ: GWPH  )  Sativex, which is a mixture of CBD and THC, is approved in a few countries to treat spasticity in patients with multiple sclerosis and cancer and its CBD-based drug candidate Epdiolex appears to be helping pediatric epilepsy patients without any other options.

There are certainly risks associated with cannabinoids, but for indications where there’s a high risk of death and no other options, the risks become secondary to the benefits.

I don’t see any inherent reason why big pharma shouldn’t be trying to study the same pathways except for the stigma of marijuana. Companies could get around the issue by synthesizing the active compound directly rather than deriving it from the plant. AbbVie‘s (NYSE: ABBV  ) Marinol, for instance, is synthetic THC, which is FDA approved to increase appetites of patients with AIDS and is also used off-label for cancer patients.

Leo Sun: Investing in medical marijuana doesn’t make sense for the biggest pharma companies because it’s simply not that profitable.

For example, GW Pharmaceuticals‘ (NASDAQ: GWPH  ) flagship cannabinoid medicine, Sativex, has been approved or recommended for approval in 24 countries as a treatment for severe spasticity caused by multiple sclerosis. Despite that impressive geographic reach, Sativex only generated £3.4 million ($5.3 million) in revenues in the first nine months of fiscal 2014.

GW’s pipeline of treatments includes drugs targeting potential type 2 diabetes and schizophrenia indications. While there are a number of interesting opportunities in its pipeline, it’s still too early and unproven for me to feel confident in its pricey valuation — over 20x trailing-12 month revenue.

And with cannabinoid drugs like Sativex not selling well, combined with pricey valuations for current so-called ‘marijuana stocks’, I don’t see a compelling reason for big pharma to throw money into acquiring these drugs or their developers. Big pharma needs, well, big revenue streams to move the needle — and these cannabinoid drugs just haven’t provided that, at least not yet.

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