The Biotech opportunity in cannabis is one of the most intriguing and significant investment opportunities in the entire cannabis sector. Biotech companies are looking to capitalize on the anticipated growth of the cannabis-derived pharmaceutical market by levering the mounting data on the therapeutic effects of cannabis and 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 have been initiated to investigate the potential effects of cannabinoids in the treatment of a wide array of ailments, including cancer, diabetes, and neuromuscular disorders. Recent evidence suggests benefits in the treatment of nausea, loss of appetite, pain relief, and muscle relaxation, making it suitable, for example, for cancer, HIV, multiple sclerosis, arthritis, et al.
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 Marijuana Business Factbook 2015, sales of legal medical marijuana grew from $1.6 billion in 2013 to $2.7 billion in 2014. We believe that between 6 and 13 additional states will legalize medical marijuana in 2016, increasing the size of the market to over $10 billion by 2018.
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, 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, with the rolling passage of state legalization, 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.
The Business Opportunity – a $20 Billion Market?
Biotechnology companies are looking to capitalize on the anticipated growth of the cannabis-derived pharmaceutical market 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, an April 2014 issue brief by the UnitedHealth Center for Health Reform & Modernization, spending on specialty drugs in 2012 in the U.S. was about $87 billion and is estimated to grow 2x – 4x by 2020 to $300 billion to $400 billion. A 2013 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 cancers, inflammatory diseases, HIV/AIDs, 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 that form 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.
Two Distinct Groups of Companies
The current regulatory landscape in the United States has given rise to two distinct groups of medical marijuana companies that aim to commercialize cannabis-based products.
The first group is what is commonly referred to as medical cannabis or nutraceutical companies that promote the medical properties of marijuana through dietary supplements. Products from these companies are generally botanical extracts and plant materials derived from specific strains that can be smoked, vaporized, ingested, or topically applied. Patients may be required to obtain a prescription from a licensed physician for these products that can be used only in states that allow medical marijuana consumption. However, many of these products are also sold in retail locations as phytotherapy medicines and dietary supplements that do not require prescriptions.
The second group of companies are the bio-pharmaceutical companies in the industry that are committed to 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 and is well characterized 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 required for regulatory approval of these products is much greater than those required for nutraceutical medical cannabis products. As such, nutraceuticals will be commercialized first and will likely capture early majority share of the emerging medical cannabis market.
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 and 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, while the FDA has signaled a willingness to review new drug applications for cannabis-derived therapeutics, the agency has yet to issue definitive guidance for regulatory approval. As a result, the prospect for cannabinoid therapeutics to be approved through the FDA approval is vague at this point.
The Capital Markets in the Cannabis Biotech Market
Today, there are over 15 publicly traded companies that can be classified as biotech plays 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, led by GW Pharmaceuticals, 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 and has only recently gained substantial attention within the scientific and medical communities. However, the recent discovery and growing understanding of the endocannabinoid system, combined with improvements in technology, has acted as 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-based medications dates back centuries 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 that 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 and tinctures for various medical conditions. However, since cannabinoids are lipid-soluble (they do not absorb readily into the body) and sensitive to degradation by heat and light, the delivery method for these extracts and tinctures proved to be inefficient. As a result of the combination of these cannabinoids’ characteristics 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 and remain so in many developing countries. By the end of the 19th century, this all started to change as many of these botanical mixtures and preparations being replaced by “modern” medications that 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.
The current model for medical cannabis is not consistent with the integral characteristics of the modern medicine model: it lacks quality control and standardization, 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, and 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 that 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 and even that 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 in the body 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 considered to be among the most widely expressed G protein-coupled receptors in the brain and 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.
Cannabidiol (CBD) at the Center of the Medical Marijuana Universe
Initial academic research in the field of cannabinoid science focused almost exclusively on delta-9-tetrahydrocannabinol (?9-THC or THC). It has been widely published in scientific literature that THC has pain suppression, anti-spasmodic, 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 has focused particularly on CBD, which has been shown, through preclinical testing conducted and supported by publications in scientific literature, to have anti-inflammatory, anti-convulsant, anti-psychotic, 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 recognized as safe” (GRAS) and their claims had not been validated and approved by the FDA, the companies were engaging in illegal interstate commerce. Although, at the time the warnings were issued, 23 states allowed medical marijuana and about a dozen others allowed just CBD oil to be used as a therapeutic remedy, the FDA had not approved any CBD medicines for the treatment of health conditions.
FDA spokesperson Jeff Ventura commented, “To date, the FDA has not 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 intended 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.
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 that applied only to cannabis research, with no other controlled substances listed as Schedule I under the Controlled Substances Act subjected to the same process. As a result, the review process had been criticized by researchers and lawmakers alike as deliberately stymieing the progress of cannabinoid research.
The PHS review was established in 1999 to ensure that all studies were scientifically valid. However, the system often created barriers for new studies. One needed to submit a request package that included, among other things, the name and quantity of substances being requested 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 were required to have all the appropriate DEA registrations before they could receive cannabis from NIDA. In addition, if their research involved clinical trials in humans, the scientific proposal was required to be authorized by the FDA and approved based on the “scientific validity and ethical soundness” of the project.
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 be required to pass through four separate government organizations for approval on future marijuana research studies.
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