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This Marijuana Stock Has Lost More Than Half Its Value in 2 Weeks

If investors want to "see green," all they've had to do over the past year is follow marijuana stocks. In most instances, companies that have a market cap in excess of $200 million have seen their share prices double or triple in value, if not more.

The strong growth prospects of the legal weed industry is what's primarily responsible for this investor euphoria. For instance, investment firm Cowen & Co. predicts that legal U.S. pot sales could hit $50 billion by 2026, representing a compound annual growth rate of nearly 24% for a decade. You'd probably struggle to find a more consistently growing industry, assuming expansion continues at its current blistering pace.

Image source: Getty Images.

Perception of the marijuana industry has helped, too. Some U.S. states have been eager to expand with the idea that marijuana tax and licensing revenue could help fill some smaller budget holes. As for the public, polls from Gallup in 2016 and CBS News in 2017 show an all-time high percentage of respondents (60% and 61%, respectively) want to see weed legal across the country. 

But not all marijuana stocks are thriving. In fact, one pot stock has been taken to the woodshed over the past two weeks.

Ouch! This marijuana stock went up in smoke

On Tuesday, June 27, Cara Therapeutics (NASDAQ: CARA), a clinical-stage biotech company with a focus on treating chronic pain and pruritus (itching), surged to an all-time intraday high of $28.50 a share. Cara was just $73 million away (a little over $2 per share) from joining the $1 billon market cap ranks.

However, as of the closing bell on Friday, July 7, less than two weeks later, Cara's share price had crumbled to $13.62. From intraday peak to closing trough, Cara's stock has fallen by 52% and it's shed more than $480 million in market value.

What on earth happened to this burgeoning marijuana stock, you ask? Look no further than the company's press release concerning top-line results from its phase 2b study involving oral CR845. CR845 is a kappa opioid receptor agonist (which means it has nothing to do with cannabis) that in this instance was being examined as a treatment for chronic pain in patients with osteoarthritis (OA) of the hip or knee.

Image source: Getty Images.

The results showed that two out of three of Cara's dosing options (1 mg and 2.5 mg) were not statistically significant in terms of efficacy, which was a reduction in mean joint pain score, for either hip or knee pain. However, the highest dose (5 mg) did demonstrate encouraging results, with a catch.

When examining all patients with OA of the hip or knee, a 35% reduction in mean joint pain score was noted. Meanwhile, a 39% reduction in mean joint pain score was observed in patients with OA of the hip. However, the p-value for these studies -- a measure of chance or randomness -- was disappointing. The Food and Drug Administration (FDA) usually only accepts p-values below 0.05 as being statistically significant. The p-values of the OA hip and knee 5 mg dose and OA hip only 5 mg dose studies were 0.111 and 0.043, respectively. This means there was an 11.1% chance of randomness affecting the overall hip and knee results, and the OA of the hip study just squeaked by with a 95.7% chance that the positive effects were the result of CR845 and not randomness. 

The real reason Cara was pummeled is that chronic pain is seen as a far more profitable indication, and has a much larger patient pool, than does pruritus associated with chronic kidney disease. Even though CR845 has shown promise as a treatment for pruritus in clinical studies, treating chronic pain is where the big money is. The failure of two of three doses, and high p-values in the 5 mg dosing arm, was a big disappointment to Wall Street. This disappointment carried over into the shortened week that just passed and pushed Cara's share price down another 11.5%, which followed a 40% drubbing on Friday, June 30.

Image source: Getty Images.

Thankfully, there's also good news for Cara's shareholders

If there was a silver lining from the company's phase 2b trial, it's that oral CR845 hit statistical significance in the 5 mg dose for patients with OA of the hip. The trial itself wasn't designed with just OA of the hip in mind, but since that subset of patients experienced the best results, Cara is likely to run a new study specifically targeting OA of the hip with the 5 mg dose, if not a higher dose. It's pretty clear that the results showed a dose-dependent reduction in mean pain joint score, so a higher dose, assuming it can be safely tolerated, may also offer a solution.  Of course, the downside here is that a new trial means more money and a longer wait to establish efficacy of the drug.

Cara has plenty of other things going on in its pipeline as well beyond this phase 2b study. Just three weeks ago, the company announced that the independent data monitoring committee (IDMC) recommended the continuation of a phase 3 study involving intravenously administered CR845 as a treatment for postoperative pain. This doesn't mean that I.V. CR845 is going to necessarily hit its primary study endpoint, but the fact that the IDMC suggested the trial continue implies that it has a shot at reaching its goal. That in itself is good news, and postoperative pain could be a very strong and profitable indication for Cara.

Also about three weeks ago, Cara received the breakthrough therapy designation for I.V. CR845 as a treatment for chronic kidney disease-associated pruritus. Again, the breakthrough designation doesn't guarantee the success of CR845 or FDA approval, but it does give Cara Therapeutics easier access to work hand in hand with the FDA during development, as well as the opportunity to be given an expedited review of the drug by the FDA.

Image source: Getty Images.

Of course, we also can't forget CR701, a CB-receptor agonist that in preclinical trials reduced hyperalgesia and allodynia in rodent models, leading to the belief that it may offer promise as a treatment for neuropathic pain. CR701 is where Cara Therapeutics gets its link with "marijuana stocks." Considering how big the prescription opioid crisis has grown in America, cannabis-based medicines and therapies that target cannabinoid receptors, like CR701, may offer equal or better pain relief without the potential for overdose-related death that accompanies opioid use.

So, what are investors to make of Cara Therapeutics at this point? While I believe the near-term selling may be a bit overdone, I'd be hesitant to consider taking a position until we see tangible late-stage evidence of CR845's success in treating postoperative pain or we get new details about the development of CR701, which has seemingly stalled out.

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Sean Williams 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.