The Best Stocks to Invest in Marijuana

By Markets Fool.com

The 2014 elections created a lot of excitement among marijuana supporters, as voters in Oregon, Alaska, and the District of Columbia expanded the number of jurisdictions allowing recreational marijuana use.

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This has policy makers thinking 2016 could yield a flurry of additional ballot measures that further expand the legal marijuana market. If so, much of the debate would center on the medical benefits of marijuana in key indications such as cancer pain, diabetes, mental health, and epilepsy. As such, investors hoping to benefit from medical marijuana are focusing on drug companies that seek to profit from developing marijuana-derived medicines.The two drugmakers that seem best positioned to capitalize on that opportunity are GW Pharmaceuticals Plc and Insys Therapeutics , so let's learn more about them.

Plentiful pipeline
GW Pharmaceuticals has the most robust pipeline of potential marijuana drugs. The company is researching the use of therapies created from the marijuana cannabinoids THC and CBD, and it has already won European approval for its THC drug Sativex for use in treating multiple sclerosis spasticity.

Although Sativex has yet to become a commercial success in Europe, the company hopes to expand its use to include treatment of cancer pain.

GW Pharmaceuticals is conducting late-stage trials evaluating Sativex's ability to improve pain treatment in patients whose cancer pain isn't adequately controlled by opioid medications. Earlier in 2015, one trial posted disappointing results showing Sativex was statistically no better than a placebo; however, the company this year should announce data from two other ongoing studies.

GW Pharmaceuticals is also conducting late-stage studies of its CBD drug Epidiolex. Epidiolex is being studied for use in Dravet syndrome and Lennox-Gastaut syndrome, two rare forms of epilepsy. The company should release results from those trials within the coming year or so.

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Outside of cancer pain and epilepsy, GW Pharmaceuticals is conducting early and midstage research on therapies that address diabetes and schizophrenia. Those are two huge indications that could be significant markets for marijuana-derived medicine.

Source: GW Pharmaceuticals Plc.

A revenue-friendly biotech, with a marijuana kicker
While GW Pharmaceuticals is firmly focused on marijuana research, Insys Therapeutics has the benefit of being more diversified.

Insys already markets Subsys, a spray formulation of the opioid fentanyl, which is used in treating cancer pain. Subsys is delivering significant sales and profit that the company is using to fund its research programs, including evaluating CBD in epilepsy and brain cancer.

Thanks to Subsys, Insys Therapeutics' revenue totaled $222.1 million in 2014, up 122.8% from 2013. Importantly, Subsys' sales growth is fueling profitability. Last year, a 90% gross margin allowed the company to deliver adjusted net income of $78.7 million, or $2.15 per share, which was up substantially from the $1.33 per share earned the year before.

As a result, despite spending on research and development surging from $8.5 million in 2013 to $33.1 million in 2014,Insys Therapeutics remains debt free.

Much of that increase in research spending is tied to its expanding marijuana programs, which include an oral formulation of the THC drug Marinol. Marinol was originally approved for use in the 1980s, and the market for generic variations of the drug is worth $150 million per year, and growing. Insys has already completed its phase 3 studies of its oral Marinol and hopes to file for FDA approval this year.

Insys is also launching phase 3 studies of its CBD drug for Dravet syndrome and Lennox-Gastaut syndrome this year. If those trials go well, then it could either beat or compete with GW Pharmaceuticals in this important space.

Source: Insys Therapeutics.

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 pink sheets, which makes them incredibly risky.

For that reason, marijuana investors are likely better served by concentrating on GW Pharmaceuticals and Insys Therapeutics. Both of these companies have market capitalizations that are greater than $1.5 billion, and both have proven they can develop drugs that will reach the market.

Of the two, I believe Insys Therapeutics is the better option, though it can only partially be considered a marijuana stock. Insys is more diversified than GW Pharmaceuticals, already generates substantial sales and profit, and has an arguably better balance sheet. For that reason, I view it as the top marijuana stock that investors can buy.

The article The Best Stocks to Invest in Marijuana originally appeared on Fool.com.

Todd Campbell owns shares of Insys. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may 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.