GW Pharmaceuticals Exposes Risks of Investing in Medical Marijuana

Source: Flickr user Carlos Gracia.

The failure of GW Pharmaceuticals' promising marijuana-based drug for cancer pain in the first of three late-stage trials reminds investors of the significant risks tied to investing in emerging biotechnology companies that offer more promise than profit.

The backstoryRising awareness of the potential benefits of medical-grade marijuana, including the passage of legislation in 23 states allowing distribution and possession of the drug for medical purposes, prompted many investors to focus on GW Pharmaceuticals' marijuana-derived product portfolio pipeline in the past year.

GW Pharmaceuticals has been developing medicine based on the marijuana cannabinoids THC and CBD for more than a decade; the company has already won approval in Europe for Sativex, a THC therapy for multiple sclerosis spasticity. Investors, though, have been far more intrigued by Sativex's potential use in treating cancer pain that cannot be properly controlled by existing opiate-based medicines, such asMallinckrodt'soxycodone drug Xartemis.

Source: GW Pharmaceuticals

Rise and fallWhile Sativex has yet to gain significant sales in the MS spasticity indication (sales totaled just $6.5 million in the most recently completed fiscal year), investors bid GW Pharmaceuticals shares up 63% in 2014 on hopes that a phase 3 trial of the drug as a cancer pain treatment would significantly broaden Sativex's addressable patient pool and lead to significant revenue growth.

Forty percent of cancer patients do not get adequate relief of their pain using today's opiate-based medicines, according to the American Cancer Society. Given this situation, Japanese drugmaker Otsukain 2007 paid GW Pharmaceuticals $18 million up front and agreed to pay up to $273 million in milestone payments as part of a partnershipto develop Sativex for cancer pain.

As of today, that money doesn't appear to have been well spent. The two companies reported that Sativex failed to meet its endpoint of reducing cancer pain in the first of three trials to be reported.

This trial studied the effectiveness of Sativex use alongside opioid therapy in controlling pain in 399 patients. Unfortunately for the two companies, Sativex did not show it was statistically better at managing pain than a sugar pill placebo. The companies evaluated Sativex's performance on two different scales, and the drug failed to hit its target on both. In addition, 19% of patients withdrew from treatment because of adverse events tied to the use of Sativex, which was a bit above the 15% who withdrew from the placebo arm of the study.

More to comeThe trial results are disappointing, but GW Pharmaceuticals and Otsuka could still prove Sativex works. The two remaining trials shouldprovide additional insight in 2015.

The first of these two trials is expected to deliver public data in the second quarter of this year. However, investors might want to rein in expectations for any change in results given that the study's design is identical to this first failed effort.

That suggests the best chance for success could be the third phase 3 trial, which enrolled 540 patients and employs a two-part "enriched trial design" that differs from these other two trials. Data from that trial is expected by year's end.

Looking aheadWhether GW Pharmaceuticals can salvage its program for Sativex in cancer pain remains uncertain, but this high-profile failure is a stark reminder of the risks associated with investing in developing-stage biotech stocks. After all, more than 90% of drugs that enter phase 1 trials fail to make it to market, including 30% to 40% that fail in phase 3. Only the most risk-tolerant investors should traffic in companies like this, and those less willing to risk failure should remain focused on more proven peers.

The article GW Pharmaceuticals Exposes Risks of Investing in Medical Marijuana originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.