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3 Things You Need to Know About Marijuana Stock Cara Therapeutics

Cara Therapeutics (NASDAQ: CARA) announced its second-quarter financial results after the market closed on Thursday. The next day, Cara stock soared. But it wasn't because of the financial numbers: Cara lost $9.3 million in the second quarter with no revenue whatsoever.

Instead, Cara Therapeutics' share price surged in large part because investors liked what they heard about the company's prospects in its conference call. Great expectations over those prospects have driven Cara stock up more than 60% so far this year.

In May, I wrote that investors were smart to buy Cara Therapeutics stock. Is that still true? Here are three things you need to know about Cara before jumping in. 

Image source: Getty Images.

1. Calling it a marijuana stock is a stretch

Cara Therapeutics is often referred to as a marijuana stock. However, using that term is a bit of a stretch.

Research on the effects of marijuana has led to the discovery of what are called cannabinoid (CB) receptors. These CB receptors are activated by, you probably guessed it, cannabinoids. CB receptors have been found to play a role in pain and inflammatory responses.

Several biopharmaceutical companies are researching CB receptors, including Cara Therapeutics. The company has an experimental drug, CR701, that selectively binds to CB receptors in peripheral tissues without targeting CB receptors in the central nervous system. CR701 is a cannabinoid, so that's how Cara gets the "marijuana stock" designation. However, the experimental drug is only in pre-clinical testing and isn't yet a big factor in the company's prospects. 

2. Its lead product could be a game changer

The most important key to Cara's future is lead candidate CR845. It's fair to say that CR845 could literally be a game changer in the way severe pain and chronic pruritis (itching) are treated.

Today, patients with severe pain are often prescribed opioid medications. These opioids, such as hydrocodone and morphine, are remarkably effective -- but they're also highly addictive. The U.S. and other countries face a serious crisis over opioid addiction.

Enter CR845. It's also an opioid, but a much different kind than the ones commonly used now. CR845 targets kappa opioid receptors in peripheral nerve cells outside of the central nervous system. This means that the drug doesn't enter the brain like morphine, hydrocodone, and other frequently prescribed opioids do. As a result, CR845 has the potential to alleviate pain without being addictive.

While plenty of medications are available for pruritis, there are several conditions (for example, uremic pruritus -- an itch that develops especially in patients on dialysis) for which current treatments aren't effective. In addition, some current medications have problematic side effects. CR845 has shown great promise in treating pruritis for dialysis patients.

3. The stock's incredibly volatile

Cara stock is up a lot in 2017. However, in just the last seven months, the stock has also experienced at least five drops of 20% or more. One of those drops wiped out over half of Cara's market cap. The issue for Cara is that expectations are so great that any bump in the road can send shares plunging. 

That huge decline in Cara stock came as a result of the company announcing underwhelming results from a phase 2 study of an oral version of CR845 in treating chronic pain for patients with osteoarthritis of the hip or knee. However, Cara saw some promise in that study with a higher dosage of oral CR845 and plans to move forward with a second part of the phase 2 trial.

Cara has several milestones coming up that could make the stock even more volatile -- either in a positive or negative way. The company meets with the Food and Drug Administration in the third quarter of 2017 to finalize a registrational study for an intravenous (IV) version of CR845 in treating uremic pruritis in patients on dialysis. Cara expects to complete enrollment in the fourth quarter for its late-stage study of IV CR845 in treating acute post-operative pain.

A smart pick?

There's no question that Cara Therapeutics stock is extremely volatile. However, I still think it's a smart pick for investors who aren't afraid of taking on a significant level of risk.

The opportunities if CR845 proves to be successful in treating the targeted indications are enormous. So far, results from previous studies involving the IV formulation of the drug have been encouraging. While Cara's phase 2 results from the oral version of CR845 weren't great, I suspect there is still potential for higher dosages of the CR845 tablets to be effective.

Could Cara's momentum fizzle out yet again? Sure. However, I think there's a decent chance that this stock will double within the next couple of years. This "marijuana stock" just might be smoking hot for a while to come. 

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Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.