Better Know a Marijuana Stock: Corbus Pharmaceuticals

Marijuana stocks are practically unstoppable of late, and growth in the legal cannabis industry is catching the attention of investors.

Last year, according to cannabis research firm ArcView, sales of legal marijuana (both medical and recreational) surged 34% in North America to $6.9 billion. While that might sound like a lot, ArcView also points out that $46.4 billion in sales were conducted on the black market. This leaves an ample opportunity for companies to attract a mountain of currently under-the-table sales to the legal side of the equation in the years to come.

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However, there are dozens of marijuana stocks for investors to choose from. With emotions running high throughout the industry, investors may be buying into pot stocks for all the wrong reasons, or worst of all, without understanding the risks and volatility they could face by purchasing weed stocks.

With this in mind, we're going to take the time to dissect one marijuana stock each week until we've hit all of the bigger legal cannabis players (i.e., those with $200 million market caps, or larger). Here are the companies we've discussed so far:

Today, we're going to take a closer look at Corbus Pharmaceuticals.

What Corbus Pharmaceuticals does

After three consecutive weeks of looking at Canadian-based medical marijuana and cannabis-oil producers and retailers, we're switching gears back to not-so-traditional drug developers this week with clinical-stage company, Corbus Pharmaceuticals (NASDAQ: CRBP).

Corbus has a focus on researching therapies that can treat inflammatory and fibrotic diseases. It currently has only one drug in the clinical stages of development, anabasum, but this therapy is being targeted at four indications: systemic sclerosis, cystic fibrosis, dermatomyositis, and systemic lupus erythematosus.

Anabasum is a synthetic oral endocannabinoid-mimetic drug that binds with the naturally occurring CB2 receptors expressed on immune cells and fibroblasts. This focus on utilizing the cannabinoid receptor system is why Corbus is often lumped in with marijuana stocks.

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Promise and opportunities

Why the buzz surrounding Corbus, which has seen its share price vault higher by 166% over the trailing 12 months? The easy answer is we've witnessed encouraging phase 2 data regarding anabasum as a treatment for systemic sclerosis and cystic fibrosis.

In November, Corbus announced positive top-line results from its phase 2 study for systemic sclerosis. Anabasum was shown to have handily outperformed the placebo based on the American College of Rheumatology Combined Response Index in diffuse cutaneous Systemic Sclerosis (ACR CRISS). CRISS scores that demonstrate an improvement of 20% are considered medically meaningful.

Of the 26 patients that were administered anabasum, there was a median CRISS Score reduction of 33% by week 16 compared to 0% for the 15 patients in the placebo. Given the strong results, Corbus is working with the Food and Drug Administration (FDA) to finalize its phase 3 study design for systemic sclerosis. If all goes well, it could begin enrollment by the fourth quarter.

The other arguably more intriguing study is Corbus' focus on cystic fibrosis (CF). Most cystic fibrosis drugs (and there aren't many on pharmacy shelves) target specific mutations of the disease. Anabasum could be more of a universal CF treatment given its broad focus on reducing inflammation. Because CF is a specialty indication, anabasum, if approved, could command a very high price point in CF. This ongoing study is where a majority of Corbus' current valuation is likely derived.

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The phase 2 trials results, which were released a little more than a month ago, showed a 75% reduction in the pulmonary exacerbation event rate compared to the placebo with the 20 mg anabasum dose. This clinically significant improvement gives Corbus the evidence it feels it needs to meet with the FDA to design a phase 3 trial.

Based on a recent presentation, Corbus also announced that it has enough cash on hand to fund its operations through 2018. That provides more than enough time to commence its systemic sclerosis and CF studies, as well as report phase 2 data for its dermatomyosistis study in the second-half of this year.

Risks and concerns

However, all marijuana stocks have risks, and Corbus is no exception.

Perhaps the biggest concern for Corbus Pharmaceuticals and investors is the CF trial. Although Corbus touted the reduction in the pulmonary exacerbation rate from baseline, what stuck out like a sore thumb was the fact that there was no statistical improvement over the placebo in terms of forced expiratory volume in the first second (FEV1). Usually successful CF drugs tend to improve lung function, but that's not what was seen based on the data presented by Corbus. This casts a shadow of doubt over the efficacy of anabasum in CF.

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Another concern? How about the entire pipeline being tied to a single drug. If anabasum fails to meet its primary endpoint in the systemic sclerosis and CF phase 3 studies, the wind could quickly come out of this stocks' sails. Relying on one drug exposes Corbus and its investors to sales and profit risks that diversified drug developers don't face, such as legal risks and competitive concerns.

Corbus is also a good few years away from generating recurring revenue, and even further away from turning a recurring profit, assuming approval of anabasum in one or more indications. Though Corbus has suggested it has enough cash on hand to make it through 2018, its funding outlook is cloudy beyond that point. This could mean dilutive stock offerings may be needed to fund Corbus' research in 2019 and beyond -- especially if it needs to ramp up marketing costs if one or more of its therapies is approved by the FDA.

Lastly, Corbus can't discount political concerns. As long as the U.S. government categorizes cannabis as a schedule I drug (meaning it has no recognized medical benefits and is illega)l, there will be added hurdles and disadvantages that Corbus could deal (scheduling delays, for instance) with which non-pot biotech stocks don't deal with.

Should you buy Corbus Pharmaceuticals?

Now for the biggest question of all: Should you buy Corbus Pharmaceuticals?

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On one hand, Corbus could be deemed as substantially undervalued if its phase 3 CF trial finds the mark. Along with systemic sclerosis, there's a reasonable chance that an approval in both indications could lend to a drug with $1 billion in peak annual sales potential. Since most drug developers are valued at three times the peak annual sales of their lead drug, on average, it could mean Corbus' stock increasing in value many times over.

On the other hand, Corbus' valuation is heavily weighted toward its CF trial, and its CF study didn't lead to an all-important FEV1 improvement. The lack of improvement in lung function could hamper anabasum's sales if the drug is approved, or it could preclude the drug from succeeding in late-stage trials. A failure in CF would be a major setback for Corbus.

My opinion? I'd suggest watching Corbus Pharmaceuticals safely from the sidelines given the risks associated with its CF trial and being tied to a single drug. Until phase 3 data in both systemic sclerosis and CF is released, this is the epitome of a watch-and-wait stock.

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Sean Williams has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.