The tech opportunity within cannabis companies is one of the most intriguing and significant investment opportunities in the entire cannabis sector. Cannabis bio-tech companies are looking to capitalize on the anticipated growth of the cannabis-derived pharmaceutical market. They do this by leveraging the mounting data on the therapeutic effects of cannabis. As well as deploying rigorous testing for quality, safety, and efficacy.
Cannabinoid research, historically led by scientists in Israel, has garnered much interest in the U.S. over the past five years. Numerous studies investigate the potential effects of cannabinoids in the treatment of a wide array of diseases. Including, for instance, cancer, diabetes, and neuromuscular disorders. Recent evidence suggests benefits in the treatment of nausea, loss of appetite, pain relief. As well as muscle relaxation. Making it suitable, for example, for cancer, HIV, multiple sclerosis, arthritis, et al.
Cannabis Tech Companies – State Legalization and R&D Efforts Drive Growth in Medical Marijuana Market
To date, 23 U.S. states and Washington, D.C. have legalized medical marijuana, and similar laws have been passed in Canada. According to the Marijuana Business Daily’s Factbook, sales of legal medical marijuana grew from $1.6 billion in 2013 to $2.7 billion in 2014. We believe that with more states will legalizing medical marijuana, the size of the market will grow even more.
As research has progressed, scientists have discovered that human beings have a special bodily system called the endocannabinoid system. Through this system, research has shown that cannabis has a significant role in the human body in many different areas. Including, but not limited to, memory, appetite, pain sensation, stress response. As well as energy balance and metabolism, anxiety, immune functions, thermoregulation, and sleep.
The medicinal benefits of the marijuana plant have been documented for thousands of years. The U.S. government’s classification of marijuana as a Schedule I drug in 1970 setback R&D efforts in the country for decades. However, there is a rolling passage of state legalization. Meaning, the recent lifting of U.S. government restrictions on cannabis research. And the overall progress in research results. The fundamentals supporting growth in the cannabis biotech sector are strong.
Cannabis Tech Companies Business Opportunity – a $20 Billion Market?
Biotechnology companies are looking to capitalize on the anticipated growth of the cannabis-derived pharmaceutical market. They plan to do this by leveraging the mounting data on the therapeutic effect of cannabis. By putting their candidates through rigorous testing for quality, safety, and efficacy. They can reach a broader market, including people in those states where medical marijuana has not been legalized. While natural plant extracts cannot be patented, U.S. Food and Drug Administration (FDA) approval guarantees seven years of market exclusivity for drugs that treat rare diseases. Regardless of origin. Regulatory approval of drugs also dramatically increases the chances that health insurance companies will pay for them.
We believe that the cannabis biotech market will ultimately be classified as part of the specialty pharmaceutical market. The fastest growing segment of the overall pharmaceutical industry. A greater incidence of chronic disease has resulted in the increasing need for specialty drugs.
According to The Growth of Specialty Pharmacy by the UnitedHealth Center for Health Reform & Modernization. Spending on specialty drugs in the U.S. was about $87 billion. It will grow 2x – 4x by 2020 to $300 billion to $400 billion.
A report on medicines in development by the Pharmaceutical Research and Manufacturers of America counts the specialty drugs currently in development at over 900. Most of which treat disease such as cancers, inflammatory diseases, HIV/AIDs. As well as epilepsy, Parkinson’s disease, multiple sclerosis, and other rare disorders. These are the same disease categories where cannabidiol (CBD) has shown the most compelling indications.
The diverse pharmacology of cannabinoids provides significant potential for therapeutics across many indications and disease areas as a form of the core of specialty pharmaceutical drugs. As such, it is a reasonable estimate that the revenues in the cannabis biotech/pharmaceutical sector could represent 10% of the overall specialty pharmaceutical market over the next five years. Suggesting a market size of at least $20 billion.
Cannabis Tech Companies – Two Distinct Groups
The current regulatory landscape in the United States has given rise to two distinct groups of medical marijuana companies. Both aim to commercialize cannabis-based products.
The first group is medical cannabis or nutraceutical companies. Those promote the medical properties of marijuana through dietary supplements. Products from these companies are generally botanical extracts as well as plant materials. They derive these from specific strains that people can smoke, vape, ingest, or topically apply. Patients might have to obtain a prescription from a licensed physician for these products. They can only use them in states that allow medical marijuana consumption. However, some retail locations sell many of these products. Such as phytotherapy medicines and dietary supplements that do not require prescriptions.
The second group of companies are the bio-pharmaceutical companies in the industry. They work on developing cannabis-driven pharmaceuticals using conventional FDA approved pathways. The general goal of these R&D companies is to offer patients medicine that has undergone a full regulatory review. In terms of efficacy, safety, and interactions with other drugs.
While the business case for developing pharmaceutical marijuana-based products is clear, the cost and time is the issues. They require regulatory approval of the products. And the process is much greater than the one for nutraceutical medical cannabis products. As such, nutraceuticals will be commercialized first. They will likely capture an early majority share of the emerging medical cannabis market.
What Are The Risks?
There are clear risks and challenges that the biotech/medical marijuana industry must overcome. Cannabis is classified by the U.S. Drug Enforcement Agency (DEA) as a Schedule I substance. Meaning that, under federal law, it has no established medicinal use. It may not be marketed or sold in the United States. This has created a discrepancy between the laws in states that permit the distribution and sale of medical and recreational marijuana. From federal law that prohibits any such activities.
It has also acted as a barrier to government funding to study the medical benefits of marijuana in the U.S. In addition, the FDA has signaled a willingness to review new drug applications for cannabis-derived therapeutics. The agency, however, has yet to issue definitive guidance for regulatory approval. As a result, the prospect for cannabinoid therapeutics approval through the FDA is vague at this point.
Cannabis Tech Companies – The Capital Markets in the Cannabis Biotech Market
Today, there are over 15 public trade companies that play in the cannabis sector. Of these, two companies trade with market caps of approximately $2 billion, including:
- Insys Therapeutics (INSY) with a market cap of $2.3 billion
- GW Pharmaceuticals (GWPH) with a market cap of $1.8 billion
The biotech cannabis sector saw the cannabis industry’s first true IPO. With Zynerba Pharmaceuticals (ZYNE) completing its IPO on August 10th of this year. Zynerba currently trades at a market cap of $122.0 million.
The biotech cannabis sector has also attracted the most funding out of all the cannabis sectors. GW Pharmaceuticals leading. Which closed a $210 million funding round in the second quarter of this year.
History of Medical Marijuana
During the past forty years, popular interest in the therapeutic potential of cannabis has significantly risen. Largely fueled by increasingly widespread media attention. Since research has been required to overcome some complex challenges regarding cannabinoid therapies. This field has lagged behind that of modern medicine. It has only recently gained substantial attention within the scientific and medical communities. However, there is a recent discovery and growing understanding of the endocannabinoid system. In combination with improvements in technology. A catalyst to spur analytical, pharmacological, and other preclinical research. Clinical research is also increasing, albeit at a much slower pace.
Civilizations have experimented with and documented the use of marijuana for medicinal purposes with some. Such as the Egyptians and Chinese, going back thousands of years. In the more modern era, the medical community’s awareness of the therapeutic potential of cannabis medications dates back centuries. All before the implementation of the current cannabis prohibition.
In the early 19th century, Dr. William O’Shaughnessy, an Irish physician, conducted clinical and nonclinical work in India. He focused on cannabis preparations. With the results of his studies becoming widely known upon his return to England.
Across Europe and North America, interest increased in the therapeutic potential of these materials.
As a result of this rapidly growing interest, pharmacists and early pharmaceutical companies developed oral cannabis extracts. As well as tinctures for various medical conditions. However, cannabinoids are lipid-soluble (they do not absorb readily into the body) and sensitive to degradation by heat and light. So the delivery method for these extracts and tinctures proved to be inefficient. And as a result of the combination of cannabinoids’ and the limited technology available at the time, the active ingredients in cannabis preparations remained unknown. The preparations lacked standardization, and their users experienced varied effects.
In the earlier days of Western medicine, herbs and other botanical products were common treatment options. They still remain so in many developing countries. By the end of the 19th century, this all started to change. Because many of these botanical mixtures and preparations were replaced by “modern” medications. Those were characterized by standardized, purified products whose active ingredients were often of synthetic origin. Dosages and delivery methods were carefully tested to deliver a discrete, reproducible dose. This trend was more pronounced with the ever-increasing sophistication and rigor of the FDA approval process.
Cannabis Tech Companies – Current Times
The current model for medical cannabis is not consistent with the integral characteristics of the modern medicine model. It lacks quality control and standardization. It can be contaminated with pesticides and does not assure patients a reliable and reproducible dose. Increased cannabis potency adds additional risks of adverse events. Especially among cannabis-naïve patients as well as the dangers of dependence and addiction.
The future of medical marijuana lies in classical pharmacological drug development. Indeed, there has been a resurgence of scientific, as well as public, interest in the therapeutic applications of cannabinoids.
Following an initial spike in the 1970s, today’s renewed interest in scientific research has been fueled by major breakthroughs. Such as the identification and cloning of endocannabinoid receptors. The discovery of endogenous substances that bind to these receptors. And the development of synthetic cannabinoids.
These accomplishments have propelled interest in developing new drugs. These drugs can treat more effectively or more safely the many ailments for which cannabinoids might have therapeutic benefit. Through the process of rational drug design, scientists manipulate the chemical structures of known cannabinoids to design more effective agents. Several new cannabinoids are being developed for human use. However, none have reached human testing stage in the United States.
Breakthrough in Understanding the Human Body’s Receptiveness to Cannabis
As research has progressed, scientists have discovered some of the ways cannabinoids affect the human body. All mammals have a special bodily system called the endocannabinoid system that is activated by cannabinoids. The discovery of the endocannabinoid system and the study of its functions was pioneered by Professor Raphael Mechoulam from the Hebrew University of Jerusalem. Professor Mechoulam’s research has aided in opening up a new area in biochemistry. Relating to the body, brain, and cannabis.
Cannabinoid receptors have been discovered throughout the body and are believed to be more numerous than any other receptor type. The stimulation of cannabinoid receptors causes a variety of effects on numerous physiologic processes. Researchers have identified at least two types of cannabinoid receptors, CB1 and CB2, in the human endocannabinoid system.
CB1 receptors are among the G protein-couple receptors in the brain. They are particularly abundant in areas of the brain concerned with movement and postural control, pain and sensory perception, memory, cognition, emotion, and autonomic and endocrine function.
CB1 receptors are also found in peripheral tissues including peripheral nerves and non-neuronal tissues such as muscle, liver tissues, and fat. CB2 receptors are expressed almost exclusively in cells and organs connected with the immune system and cardiovascular system, their highest concentration being found in the spleen. Many parts of the body contain both CB1 and CB2 receptors.
Initial academic research in the field of cannabinoid science focused almost exclusively on delta-9-tetrahydrocannabinol (?9-THC or THC). According to scientific literature THC has pain suppression, antispasmodic, anti-tremor, anti-inflammatory, appetite stimulating, and anti-nausea properties.
Recent R&D, however, has focused primarily on exploring cannabinoids other than THC and identifying their potential therapeutic applications. The new research is particularly about CBD. Through preclinical testing that many publications in scientific literature support, to have anti-inflammatory, anti-convulsant, antipsychotic, anti-oxidant, neuroprotective, and immunomodulatory effects.
CBD is not intoxicating as evidenced by its distinct pharmacology from THC as well as evidence from clinical trials. In particular, the intoxicating effects of THC result from its activity as a partial agonist at the CB1 receptor; CBD does not exhibit this same activity. There is a significant body of scientific literature on the properties of CBD that consistently describes CBD as a cannabinoid without psychotropic effects.
In late February 2015, the FDA sent letters to seven companies marketing CBD products, five of them for humans and two of them for pets, to treat various health conditions. The FDA stated that, as the ingredients in the CBD products were not “generally safe” (GRAS) and their claims were not valid because the FDA never gave approval, the companies were engaging in illegal interstate commerce. Although, at the time they issued warnings. 23 states allowed medical marijuana and about a dozen others allowed just CBD oil as a therapeutic remedy. The FDA never approved any CBD medicines for the treatment of health conditions.
FDA spokesperson Jeff Ventura commented:
“To date, the FDA Never approved any drug product containing cannabidiol for any indication. meaning, none of these products have been determined by FDA to be safe or effective for their intended indications.”
He added, “The FDA has grown concerned at the proliferation of therapeutic claims being made about an increasing number of products, for sale in all 50 states, purporting to contain cannabidiol. The marketing and promotional materials for many of these products indicate they are Only for the use in the diagnosis. cure, mitigation, treatment, or prevention of diseases. including, for example: cancer, various infections, psychiatric disorders, multiple sclerosis, arthritis, and diabetes.”
Mr. Ventura concluded,
“The reason they got warning letters is not what is or isn’t in the product; It’s because they made therapeutic claims.”
Many proponents for the legalization of cannabis are in support of the FDA’s warnings, stating that such errant claims promote a poor image of the industry; Rather than misrepresenting their products’ known capabilities, companies should wait until they have proven data before making claims regarding therapeutic efficacy.
Cannabis Tech Companies – Their Response
While the FDA continues to monitor companies’ claims regarding their ability to treat or cure various ailments, other government agencies have been slowly shifting towards more accepting mindsets regarding cannabinoids, specifically CBD, as medicines. On July 23, 2015, Nora Volkow, Director of the NIDA, released an article on Huffington Post entitled “Researching Marijuana for Therapeutic Purposes: The Potential Promise of Cannabidiol (CBD)”.
Volkow finished the article saying, “CBD appears to be a safe drug with no addictive effects, and the preliminary data suggest that it may have therapeutic value for a number of medical conditions. Addressing barriers that slow clinical research with CBD would accelerate progress. The NIDA will do what we can to address such barriers and expedite the study of this potentially valuable compound, as well as other components of the marijuana plant.”
U.S. Government Lifts Restrictions on Cannabis Testing and Research
The United States took a major step forward on June 22, 2015 to support research into the therapeutic properties of cannabis, lifting the restrictions that have been holding back scientific research for years. Until then, all cannabis research that was not funded by the government needed to go through a Public Health Service (PHS) review. A requirement only for cannabis research. With no other Schedule I substances under the Control Substances Act. As a result, many researchers and lawyers criticized the review process as deliberately stymieing the progress of cannabinoid research.
The PHS review in 1999 ensured that all studies were scientifically valid. However, the system often created barriers for new studies. One needed to submit a request package that, among other things, had to have the name and quantity of substances and a detailed research proposal. Research proposals underwent an interdisciplinary review process administered by the PHS.
If researchers satisfied the review and other criteria established by PHS, they became eligible to receive cannabis at cost from the National Institute on Drug Abuse (NIDA), which controls the only federally-legal cannabis growing operation in the United States for research purposes. After mounting this hurdle, researchers had to have all the appropriate DEA registrations before they could receive cannabis from NIDA. In addition, if their research was about the clinical trials in humans, the scientific proposal had to go through authorization by the FDA. They had to have an approval on the “scientific validity and ethical soundness” of the project.
Cannabis tech companies continue to research.
By lifting the Public Health Service review requirement, the U.S. Department of Health and Human Services (HHS) has given marijuana research a much greater degree of freedom and has allowed research parameters to expand and truly consider the positive benefits of cannabis instead of focusing mainly on its harmful effects. In addition, researchers will no longer require passing through four separate government organizations for approval on future marijuana research studies.
DISCLOSURE: The views and opinions in this article are those of the authors. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.