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2 Marijuana Stocks That Have Imploded Since August Began

In many ways, the legal marijuana industry could be described as the greatest thing since sliced bread for investors. Over the trailing one-year period, the average marijuana stock has increased in value by more than 100%, making pot-stock investors some green in the process.

Why such bullishness on cannabis? Look no further than favorability toward the drug for those answers. According to both Gallup's 2016 poll and CBS News' April 2017 poll, a record number of respondents want to see weed legalized nationally (60% and 61%, respectively). The thesis here being that as favorability improves, lawmakers in Washington will have little choice but to change their stance on pot or face the consequence of possibly being voted out of office by their constituents.

Image source: Getty Images.

Legal sales figures have also been a source of budding hype. Cannabis research firm ArcView has estimated that legal sales growth in North America between 2016 and 2021 should be 26% per year, working its way to $21.6 billion by 2021. It's very difficult to find any industry that could deliver 26% compound annual growth over a five-year period.

These marijuana stocks have lost their high

Unfortunately, marijuana remains very much an illegal substance at the federal level, and with both Donald Trump as President and Jeff Sessions as Attorney General, change does not appear to be in the cards anytime soon. This push-pull dynamic of growth from individual states, Canada, and Mexico, with a firm glass ceiling in place from the U.S. federal government, creates some wild volatility in pot stocks.

Over the past three weeks since the calendar changed over to August, two marijuana stocks have absolutely imploded. Let's have a look at what's behind these recent moves.

Zynerba Pharmaceuticals

Clinical-stage cannabinoid-based drug developer Zynerba Pharmaceuticals (NASDAQ: ZYNE) has been an absolute train wreck since it closed at $15.06 a share on Aug. 4. In the two-week span between Aug. 4 and Aug. 18, Zynerba's share price declined by 58.5%. Including its intraday low point, hit on Aug. 14, its share price had declined by as much as 64% in a matter of days.

What went wrong? Look no further than two disappointing studies involving its leading drug candidate ZYN002, a cannabidiol (CBD)-based transdermal gel. CBD is the non-psychoactive component of cannabis.

Image source: Getty Images.

A little over two weeks ago, Zynerba announced the results of its midstage Star 1 study in adult patients with epilepsy. The goal of the study was to provide a statistically significant reduction in focal seizures compared to a placebo, with two doses of ZYN002 being tested. The results showed that the low dose reduced seizure frequency by a median of 18.4%, the high dose by a median of 14%, and the placebo by 8.7% at the median. In other words, ZYN002 didn't deliver a statistically significant reduction in focal seizures, nor did the results make a lot of sense with the higher dose performing worse than the lower dose. There's likely little to no path forward for ZYN002 as a treatment for focal seizures in epileptic patients based on this study.

Then, just last week, Zynerba reported data from its midstage Stop trial involving ZYN002 as a treatment for patients with knee pain due to osteoarthritis. Once again, two doses of ZYN002 were tested, and like the Star 1 study, both failed to reach their primary endpoint, which in this case was a reduction from baseline in the weekly mean of the 24-hour average worst pain score at week 12. The saving grace, if you will, was ZYN002 hitting a handful of secondary endpoints. In particular, the composite responder analysis for the 250 mg dose, and the responder rate based on a greater than 30% reduction in worst pain severity at week 8 for the 250 mg dose, met the secondary endpoint. This leads Zynerba to the conclusion that ZYN002 should advance into later-stage studies, but it appears to be running on fumes for the time being.

Zynerba has been an important teaching tool for investors considering that some were essentially buying blind without seeing any supporting clinical evidence prior to the release of the Stop and Star 1 data. Just because a company is associated with the marijuana industry doesn't mean its cannabinoid-based drugs are a lock to work in clinical trials. Zynerba is a pot stock worth avoiding until we see data that suggests otherwise.

Image source: Getty Images.

Axim Biotechnologies

Another marijuana stock that's been in a veritable freefall of late is clinical-stage drug developer Axim Biotechnologies (NASDAQOTH: AXIM). Since the beginning of the month, and through this past Friday, Aug. 18, shares of Axim have tumbled 16%. However, it was worse on Aug. 15, when shares hit an intraday low of $4.45, working out to an intra-month decline of 44% at that point.

Unlike Zynerba, which had two very clear catalysts that helped investors pinpoint why it fell, Axim Biotechnologies' newsfeed has been crickets this month. The one exception has come from major stakeholder Medical Marijuana, which owns 43% of Axim's outstanding shares, announcing a clinical study agreement with the University of British Columbia to begin a trial involving Axim's CanChew Plus cannabidiol chewing gum as a possible treatment for drug-induced psychosis. 

So, why the relentless plunge? The primary issue, and stop me if you've heard this one before, is that Axim's therapies are almost entirely unproven. While its website lists more than a dozen clinical trials, virtually nothing in its pipeline has progressed into clinical-stage studies. What's more, Axim's most recent filing with the Securities and Exchange Commission shows that it had less than $600,000 in available cash. That's nowhere near enough capital to run 15 clinical studies, and it brings to question where the company will gather enough capital, without a lot of stock dilution, to run its clinical studies.

Put plainly, it could be years before Axim has any shot of recurring revenue, yet the company's valuation has pushed higher by well over 1,000% over the trailing year. That doesn't make a lot of sense, and investors are beginning to realize it. Among marijuana stocks, Axim just might be the most dangerous of the bunch.

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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.