The debate over the war on drugs' is becoming increasingly heated.
On the one hand are those who argue that current prohibition policies have failed, and merely hand control of a lucrative trade over to criminals. Others argue that the potential social costs in terms of rising addiction are too high simply to legalise drugs outright.
It's not clear which side is winning. In the US, Colorado has become the first US state to fully legalise marijuana. But at the same time, The Netherlands is moving in the opposite direction, cracking down on its notorious coffee shops that sell the drug.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
However, there is a way for smart investors to profit from America's increased willingness to discuss medical uses for otherwise illegal drugs such as cannabis.
It's all about one very specific British company
The risks of experimenting on illegal drugs
However, the legal status of cannabis has meant that getting approval for proper research has been hard. Governments don't want any crops produced to fall into the wrong hands. They are also wary of being seen to be giving ground to those who want to legalise it more generally.
On their part, companies have been unwilling to invest in trials without cast-iron promises that they won't be shut down or landed in jail. They also worry about the potential implication of a relaxation in drug laws. There's not much point in spending a fortune on research and development only to see sales collapse as patients get the green light to grow their own supply.
Because of this, the only drug to get approval up until recently Marinol, created by Solvay in the 1980s was based on synthetic versions of the chemicals found in marijuana. While it remains on the market, it is only approved for a narrow range of conditions, such as eating disorders caused by AIDS.
The lack of success made both companies and the authorities, especially in the US, even less willing to allow future experiments.
How GW Pharmaceuticals turned marijuana into medicine
And in the end, GW came up trumps. Its cannabis-based drug, Sativex, is able to reduce pain for cancer patients and help with some of the symptoms of multiple sclerosis (MS) in a way that both conventional drugs and illegal cannabis are unable to. Better yet, it has relatively few side effects.
Three years ago, Sativex gained approval for use in the UK for MS. It is currently being sold in six other countries: Spain, Germany, Denmark, Canada, Israel and Norway.
But Sativex could have a lot more to give. It is in late-stage (phase 3) clinical trials for use in the much larger cancer pain market. Results are expected in 2015.
On the strength of these trials so far, GW has negotiated licensing deals with Bayer, Otuska and Novartis. That means that if successful these pharma giants will throw their distribution and marketing might behind Sativex. GW will retain a large chunk of sales via royalty payments.
Meanwhile, the Holy Grail' of drug trials approval in the giant US market may be only a few years away. Late stage US trials begin next year.
Looking further ahead, GW also has a very interesting drug pipeline. Later this year, trials of a compound aimed at treating diabetes will begin their second stage. There are also drugs for colitis, schizophrenia, epilepsy and glioma (brain tumours) being developed.
Risky, but worth a punt
Like most small-cap drug companies GW Pharma (LSE: GWP) (NASDAQ: GWPH) is far from being a risk-free investment. Of course there is a chance that even these late-stage trials could fail. And funding all of these trials and further research is not cheap. As a result, GW is projected to make a loss for the next two years.
However, by small drug company standards, the downside risk looks relatively low. Given that Sativex has been approved in a wide range of countries so far, you would expect it to have a good chance of achieving approval in the States too.
The company also recently launched a secondary listing in the US. The money raised from this should help it fund trials and research without any further need to dilute shareholders.
Michael Aitkenhead of Edison Research reckons GW should be turning a significant profit by 2016, while revenue should nearly double. Even putting a conservative valuation on future revenue streams suggests that from today's price, the shares could eventually double.
This article is taken from the free investment email Money Morning. Sign up to Money Morning here.
Our recommended articles for today
You must make a friend of volatility
Three ways QE transfers your money to the rich
-
Lloyds, Halifax and Bank of Scotland to shut another 45 branchesLloyds Banking Group, which includes Halifax and Bank of Scotland, is set to close a further 45 branches in 2024 - find out if a branch near you is closing.
-
US stock trading app Robinhood launches in the UK
The low-cost trading platform has opened another waiting list for British investors - following two failed attempts to launch in this country - and is hoping to be fully operational next year.
