A Fresh Look At The U.S. Medical Marijuana Market

by: Amod Saul

Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

"It's been a very exciting month for Medical Marijuana, Inc. (OTCPK:MJNA), with two super-spikes in the price precipitated by industry-wide news..."

This was the opening salvo in Alan Brochstein's latest article on Medical Marijuana Inc. The article comes after a flood of good news related to the future of the industry ranging from governor Chris Christie signing off a bill easing medical marijuana restrictions for New Jersey Kids and Sanjay Gupta changing his position and admitting that Marijuana has beneficial medical properties and isn't as bad as he previously thought.

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Opinions on the use of marijuana, particularly for medical purposes, have shifted in recent years with a growing number of people saying that it should be made available by prescription. With such a reverse in sentiment I guess it's time to take a fresh look at current U.S. Medical Marijuana landscape and to re-examine its potential.

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Medical marijuana is more of a legal term rather than a specific product. The term refers to the parts of the herb cannabis that are used as physician-recommended forms of medicine (over-the-counter products or OTC ) or to physician prescribed synthetic forms of specific cannabinoids such as THC (ethical pharmaceutical product or Rx).

Based on above definition, the U.S. Medical Marijuana Market is estimated to have reached slightly over $1.1 billion dollars with synthetics accounting for close to 17% of the market and naturals accounting for the remaining 83%.

The market is extremely fragmented with AbbVie (NYSE:ABBV) leading with Marinol (dronabinol), a synthetic THC cannabinoid launched in 1985 for the treatment of loss of appetite and nausea in patients with AIDS or those receiving cancer chemotherapy.

Marinol realized peak sales of $100 in 2007, its last year under U.S. patent exclusivity protection. In June 2008, generic dronabinol products were launched by Actavis (ACT) and Par Pharmaceuticals. According to IMS, over $135 million were realized last year from the various dronabinol formulations marketed in the U.S., the latest of which, Dronabinol SG, was launched by Insys Therapeutics (NASDAQ:INSY) in December 2011.

Meda Pharmaceuticals occupies second place with Cesamet (nabilone), a synthetic canabinoid FDA approved in 2006 for nausea and vomiting caused by cancer chemotherapy. Compared to similar cannabinoid treatment options, Cesamet has a longer duration of action, which allows for less frequent dosing.

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For patients using Cesamet, the absence of tetrahydrocannabinol (THC) detection in urine testing avoids any issues with drug testing for employment or associated stigmas. Cesamet, which has psychoactive properties, has generated close to $40 million in U.S. sales in 2012.

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Medical Marijuana Inc., holds fifth position in the market with a portfolio of OTC and wellness products based on naturally occurring cannabinoids that includes gums, extracts and nutraceuticals.

However, the company is too busy financially engineering its balance sheets and income statements to actually take advantage of the many opportunities the current market presents. During the first half of 2013, its Q1 & Q2 income statements showed higher net income than revenue attributed to extraordinary items that included non-cash transactions related to licensing and inventory sales of its Phytosphere subsidiary.

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GW Pharmaceuticals - Sativex Sales Volume In Selected Countries

GW Pharmaceuticals (NASDAQ:GWPH), founded 1998 in the United Kingdom and listed on both the London AIM stock exchange and on the NASDAQ, has commercialized the world's first plant-derived cannabinoid prescription drug, Sativex (Nabiximols).

Sativex, is approved for the treatment of spasticity due to multiple sclerosis in 20 countries outside the United States and is currently being evaluated, in Phase 3 programs in the U.S. for cancer pain and the treatment of spasticity due to multiple sclerosis. GW and Otsuka Pharmaceuticals, its U.S. partner, expect results from two pivotal Phase 3 cancer pain trials to be finalized in 2014 paving the way for an FDA approval.

GW Pharmaceuticals realized $53 million in revenue in 2012 and a positive income of $4 million. The company focuses its activities on research and development and licenses marketing rights to multinational pharmaceutical companies. Bayer (OTCPK:BAYRY) markets Sativex in the U.K. and Canada, Almirall in Mexico and Europe excluding the U.K. and Novartis (NYSE:NVS) in the Middle East Africa.

The launch of Sativex in the U.S. could more than quadruple GW's revenue through ushering in a flood of milestone payments from Otsuka without causing GW any additional product launch or marketing expenses. Total committed upfront milestone payments from Otsuka is estimated at $272 million with only $22 million already paid to GW.

The U.S. market for medical marijuana is extremely fragmented. Currently, the top five U.S. companies control less than 18%. The rest of the market is composed of tiny dispensaries with the average dispensary bringing in an average of $2 million per year in revenue.

With the legalization trend taking hold, these dispensaries are now up for grab for consolidation into a publicly listed company that can source low cost capital and develop a solid national brand.

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I particularly like GW Pharmaceuticals' model in the ethical pharmaceutical segment of the market and used to like MJNA's approach in the OTC segment. However, my interest in MJNA evaporated due to the confusing information that the company has been disseminating since its inception.

I would like to see a freshly minted publicly listed company that takes a serious look at the OTC segment of the market and figures out a way to consolidate some of those tiny dispensaries into a respectable chain, if regulation allows.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.