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Why This Marijuana Stock Imploded 42% in October

What happened

Medical marijuana upstart Insys Therapeutics (NASDAQ: INSY) had a ferociously frightening month, highlighted by the arrest of its founder, the setting aside of $150 million for lawsuits, and slumping sales. All this was behind a 42% crash in October, according to S&P Global Market Intelligence.

So what

Insys Therapeutics' troubles stem from Subsys, a powerful fentanyl spray approved to treat breakthrough pain in cancer patients.

IMAGE SOURCE: GETTY IMAGES.

Subsys sales built steadily following its approval in 2012, eclipsing $200 million at its height. However, revelations of kickbacks for off-label prescribing have led to the arrest of key executives including former CEO Michael Babich, investigations by the Department of Justice and state Attorneys General, and a massive decline in Subsys demand has caused investors to shun this marijuana stock this year.

The news didn't get any better for the company last month. On October 26, founder John Kapoor was taken into custody and charged with RICO conspiracy, conspiracy to commit mail and wire fraud, and conspiracy to violate the Anti-Kickback Law. All of the charges stem from past marketing practices for Subsys. At the same time, previously arrested executives were charged with conspiring to bribe healthcare providers and mislead and defraud health payers, including insurers.

Only a few days later, Insys Therapeutics announced that it's set aside $150 million to cover what it expects would be the minimum it would need over the next five years to settle the Department of Justice's investigation -- minimum being the operant word.

Now what

Insys Therapeutics installed a new CEO earlier this year to shepherd the company's second drug, Syndros, to market, resolve the outstanding investigations, and kick-start the company's research into the use of cannabidiol for illness. Setting aside money to prepare for a potential settlement suggests headway is being made, but the size of the settlement is eye-popping, given the decline in the company's revenue and financial flexibility.

Management had been hoping to see cash flow pick up following the launch of Syndros, a liquid formulation of the long-standing THC-based marijuana drug Marinol, but on November 2, Insys Therapeutics reported only $700,000 in Syndros sales in Q3. Overall, the company's third-quarter sales tumbled 47%, to $30.7 million, which translated into a non-GAAP loss per share of $0.21. For comparison, the company earned $0.12 per share in the same quarter last year.

It isn't all doom and gloom for Insys Therapeutics, though. The company filed for Food and Drug Administration approval last quarter for its third product candidate, buprenorphine sublingual spray. It also made headway toward creating a spray formulation of naloxone for the treatment of opioid overdose. Additionally, management worked out contracts with healthcare payers that it thinks should lead to Subsys sales leveling off next year.

Nevertheless, there's a lot of questions still to be answered by this company, and that makes buying this marijuana stock too risky.

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Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.