Can This Struggling Biotech Become the Next Great Marijuana Stock?

Pardon the pun, but legal marijuana sales are growing like a weed, and marijuana stock gains aren't too far behind.

Last year we saw five states approve the use of medical cannabis, bringing the total number of legal medical cannabis states to 28, and the number of states that allow the sale of recreational marijuana to adults ages 21 and up doubled from four to eight. In recent weeks, we've also seen Mexico advance a medical marijuana bill and Canada introduce legislation that would legalize recreational pot by as early as next year. With such momentum, it's probably not shocking to find out that legal pot sales (medical and recreational combined) in North America soared 34% last year to $6.9 billion per ArcView.

Image source: Getty Images.

This consistently strong growth has been the catalyst behind some outstanding performance among marijuana stocks. Canada's three largest medical cannabis producers and retailers, Canopy Growth, Aphria, and Aurora Cannabis, have gained a respective 208%, 292%, and 400% over the trailing 12-month period, while AXIM Biotechnologieshas rocketed higher by more than 3,100% over the same period.

The exception to the rule: a poorly performing marijuana stock

You could practically have thrown a dart at a pot stock over the past year and walked away with a lot more money than where you started -- but there's always an exception to the rule. If your dart landed on Arena Pharmaceuticals (NASDAQ: ARNA), then you've seen your investment decline by 23% over the trailing year.

Scratching your head a bit? I know I was when Arena Pharmaceuticals was first lumped in as a "marijuana stock."

Arena, which was a household name a few years back among biotech enthusiasts and day-traders because of its obesity-fighting drug Belviq, has fallen flat on its face. Belviq, which had blockbuster sales aspirations given the obesity epidemic in the United States, has been a dud, and that's putting things nicely. After being approved in June 2012, sales of the drug in Q1 2017 totaled just $2.7 million. Meanwhile, Arena lost $22.5 million in the first quarter. Insurer coverage of the drug has always been subpar, and physicians have avoided weight-loss pills in general without clear long-term evidence that they're safe.

Image source: Getty Images.

Arena has other experimental therapies in the works beyond its lone approved drug. For instance, etrasimod, an S1P receptor modulator, is being primarily targeted at ulcerative colitis in an ongoing phase 2 trial with an expected fourth-quarter 2017 readout. Ralinepag, an IP receptor agonist, is also being studied in midstage trials as a treatment for pulmonary arterial hypertension. Data is due out from this study around mid-year.

But the company's long-term hopes may really wind up residing with the fate of APD371, which is where Arena gets its "marijuana stock" moniker.

Can Arena Pharmaceuticals become the next great marijuana stock?

APD371 is an oral agonist of cannabinoid receptor 2 (CB2), which is a part of the natural cannabinoid receptor system found in our bodies. The drug is designed to treat pain associated with Crohn's disease.

The reason for targeting CB2 is simple: it provides pain relief without the normal psychoactive side effects seen with using marijuana or targeting the CB1 receptor. With opioid overdoses and deaths from opioid overdoses becoming a serious problem, cannabinoid-based solutions to treat pain could become an intriguing pathway to fight opioid dependence. APD371 is one of many experimental therapies that could make this fight a reality.

Image source: Getty Images.

The allure of treating pain with cannabinoid medicines, or those that target the CB2 receptor, is readily apparent. FierceBiotech has estimated that 100 million Americans suffer from chronic pain, and that this market was worth $29 billion back in 2010. With Americans living longer and prescription medicine pricing power handily outpacing the rate of inflation, there's a clear market opportunity for Arena and APD371.

Safety has not been an issue in clinical trials thus far. A placebo-controlled phase 1b dose-escalating study found only low-grade adverse events. More importantly, all doses tested were deemed well above the level needed to stimulate the CB2 receptor and achieve the desired biologic effect.

In terms of efficacy, preclinical animal studies have suggested that targeting CB2 can block mesenteric nerve firing and thus reduce intestinal pain. With about 1 in 8 Crohn's sufferers being prescribed opioids to manage their pain, Arena believes it has a pretty substantive patient pool to work with if APD371 is successful. The next step is to move to proof-of-concept midstage studies.

A note of caution

While there's hope that Arena Pharmaceuticals can join other marijuana stocks and move significantly higher, there are a number of challenges that lie ahead.

Image source: Getty Images.

Funding has almost always been a concern for Arena. Recently, the company completed a common stock sale that raised $75.5 million in net proceeds, which is on top of the $79.5 million it ended the first quarter with. However, if it's losing an extrapolated $90 million annually, and it's ramping up its earlier clinical studies into larger phase 2 trials, these costs aren't going to go down anytime soon. In other words, even with the company having enough cash to perhaps make it through 2018, it'll likely need more capital, and perhaps another dilutive offering, at some point in the not-so-distant future.

Another factor investors have to keep in mind is that just because a company is in some way linked as a "marijuana stock," it doesn't mean it'll be successful, or that its top- and bottom-lines correlate reasonably with its valuation. Aside from preclinical studies and early stage safety data, we don't have a lot to go on with regard to APD371's efficacy as of yet. The only thing we can definitively say about Arena at this point is that its obesity drug has been a massive disappointment.

Arena has a chance to be the next great marijuana stock, but it has a long list of questions that'll need to be addressed first. Keep your toes out of the water in the meantime, but feel free to add Arena to your watchlist in order to keep abreast on the latest with APD371.

10 stocks we like better than Arena PharmaceuticalsWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Arena Pharmaceuticals wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of May 1, 2017

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.