Is This the Next "Big Thing" in Marijuana?

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Medical marijuana is legal throughout Canada and in most U.S. states, but a lack of clinical trial data is crimping medical marijuana sales industrywide. Despite anecdotal evidence of marijuana's benefits, doctors are hesitant to prescribe it, and insurers are unwilling to cover it. That's unlikely to change until clinical evidence of marijuana's efficacy and safety passes muster with agencies such as the Health Products and Food Branch (HPFB) of Health Canada and the U.S. Food and Drug Administration (FDA).

Fortunately, efforts are under way at marijuana companies, including Canada's Canopy Growth (NASDAQOTH: TWMJF) and GW Pharmaceuticals (NASDAQ: GWPH), that could lead to patent-protected and scientifically proven cannabis drugs with the potential to generate billions of dollars in global sales.

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Overcoming obstacles

In the past, prohibition made conducting large-scale clinical trials of marijuana difficult, but it's getting easier to study marijuana now that pro-pot laws are being passed.

For example, Canadian companies are increasingly enrolling patients in studies that may validate cannabis in various indications. MedReleaf Corp. (NASDAQOTH: MEDFF) is evaluating marijuana's potential in cancer and post-traumatic stress disorder, and Canopy Growth subsidiary Canopy Health Innovations is studying cannabinoids in sleep disorders. Last quarter alone, Canopy Health Innovations filed 27 patents for cannabinoid combinations and delivery mechanisms in sleep.

If these cannabis studies pan out, it could benefit these marijuana companies in a few ways.

First, trial data proving the efficacy and safety of medicines are required to obtain the distinct drug codes that can encourage doctors to prescribe marijuana and force insurers to negotiate reimbursement and cover it.

Secondly, scientific evidence of marijuana's benefits can expand the addressable patient population by winning over skeptical patients that might otherwise opt for other treatments.

Thirdly, national drug approvals based on marijuana studies in highly regulated countries like Canada and the U.S. may help clear the path to access in countries without medical marijuana or recreational marijuana laws, creating entirely new revenue streams for these companies.

Furthermore, drugs that pass the gauntlet of rigorous testing typically command higher prices and until patents expire, regulatory-approved medicines are insulated from margin-busting competition. These advantages could be incredibly important in the marijuana marketplace if ramping marijuana production oversupplies demand, causing marijuana prices to tumble at dispensaries.

A big decision on deck

Recognizing the value of scientifically validated medical marijuana, GW Pharmaceuticals has been studying marijuana cannabinoids in controlled trials since the 1990s.

It's already secured approval in several European markets for its THC-based drug Sativex, which treats muscle spasms in multiple sclerosis patients, and soon, the FDA is expected to weigh in on Epidiolex, GW Pharmaceuticals' cannabidiol for rare forms of epilepsy.

In placebo-controlled clinical trials, Epidiolex reduced drop seizures in patients with Lennox-Gastaut syndrome, a rare childhood-onset epilepsy, by about 40%. It also successfully reduced seizures in patients with Dravet syndrome, another rare type of epilepsy. That's impressive because both conditions are highly resistant to existing FDA-approved antiepileptics.

Based on these results, GW Pharmaceuticals filed for FDA approval in December. The FDA plans on conducting an advisory committee meeting in the second quarter to discuss Epidiolex's efficacy and safety, and while the FDA doesn't have to follow the committee's advice, it usually does. Therefore, marijuana stock investors should pay close attention to this meeting. If the committee recommends Epidiolex's approval and the FDA grants a green light, it could validate research that's being done by other cannabis companies, including Canopy Growth. The FDA's official Epidiolex decision date is June 27.

What's next

Winning regulatory approval worldwide for marijuana medicines could open up a market that's worth billions of dollars in additional revenue. For instance, antiepileptic drug Onfi, which can be used to treat rare forms of epilepsy, generated over $400 million in sales last year.

Nevertheless, investors ought to keep some of their optimism in check. Clinical studies are costly, and there's no guarantee these marijuana trials will succeed. For example, in 2015, trials evaluating GW Pharmaceuticals Sativex in thousands of cancer pain patients failed to outperform placebo. Therefore, investors might want to wait until clinical trial results are reported by these companies before going all-in.

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Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.