The Single Biggest Opportunity for Cannabis Stocks

Investors have flooded into marijuana stocks, attracted by the huge potential coming from the opening of markets as a host of jurisdictions seek to legalize cannabis for recreational use. Given that the Canadian market will offer legal recreational marijuana within the next few weeks, shares of the companies best positioned to supply cannabis to meet new demand have soared.

Yet as much as investors are focusing on the potential for recreational marijuana, the much bigger opportunity for cannabis stocks lies in the medical realm. That's because a growing body of clinical evidence supports the idea that various forms of cannabis can have positive health impacts, and the pace of further research is still accelerating. In turn, there's building pressure on public healthcare programs as well as private health insurance coverage providers to include cannabis-based medications and treatments in their coverage guidelines and health insurance policies. If that happens, cannabis stocks could see another huge boost in interest.

Cannabis, health insurance, and Canada

As with many things related to marijuana, Canada has been a pioneer in looking at the way that medical marijuana interacts with healthcare coverage. Even though Canadian law made marijuana accessible for medical purposes way back in 2001, health insurance providers weren't in any hurry to start including medical marijuana as a covered treatment in their policies. The fears that they had amounted to two primary concerns: that medical marijuana would be extremely expensive to cover and that there was little or no clinical evidence that cannabis-related treatments were actually effective in treating medical conditions.

Over the ensuing 17 years, the cannabis industry has had a lot of time to look more closely at the use of its products for medical purposes. On one hand, some of the fears of insurers have been borne out, as the experience of government agencies like Canada's veterans affairs department, which has covered cannabis for medical purposes for a decade now, showed that coverage led to big increases in marijuana use and overall costs.

Yet private insurers have to answer to the employers who are their biggest clients. Many of those employers have made demands of insurance companies to cover medical marijuana in order to keep their own employees happy.

What cannabis coverage looks like

In response, Sun Life Financial (NYSE: SLF), which is one of Canada's biggest insurance companies, started offering medical marijuana coverage in its private health insurance policies earlier this year. However, it's not the sort of blanket coverage that many cannabis advocates would like.

The approach Sun Life took was to limit use of medical marijuana to those serious medical conditions for which its value has been demonstrated to outweigh any risks of its use. In particular, patients suffering from pain related to cancer, multiple sclerosis, rheumatoid arthritis, or HIV are covered for medical marijuana by Sun Life policies. Some other insurance companies in Canada have already followed suit or are considering it in the near future.

Another option that insurance companies have is to limit reimbursements to an annual limit. For instance, one insurer recommends that employers set a limit of 1,500 Canadian dollars to CA$2,500 in order to keep costs down.

Even with these limitations, however, the potential market for medical marijuana is large. If patients have the ability to have their health coverage pay for cannabis products, then the potential profit for the companies that provide those products will skyrocket.

Coming to America?

For now, even though many states allow the sale of medical marijuana, the failure of the federal government to recognize states' efforts to legalize cannabis has been an insurmountable obstacle for patients seeking coverage. Federal programs like Medicare don't offer coverage for medical marijuana, with the Drug Enforcement Administration still classifying it as a Schedule I substance. The fact that the U.S. Food and Drug Administration hasn't formally approved medical marijuana as a treatment for specific conditions also makes it practically impossible for private health insurance providers to offer coverage.

What could eventually turn the tide is medical research that demonstrates the efficacy of cannabis in treating medical conditions. The FDA approval of GW Pharmaceuticals' (NASDAQ: GWPH) Epidiolex in June for treating epilepsy patients was a big step, as the treatment is an oral formulation of the cannabidiol compound found in marijuana. The approval will allow U.S. medical professionals to prescribe Epidiolex even in states that haven't legalized medical marijuana. Similarly, the FDA approval of Insys Therapeutics' (NASDAQ: INSY) synthetic tetrahydrocannabinol-derived treatment Syndros for chemotherapy and AIDS patients served as another example of how cannabis could eventually gain more widespread acceptance in the medical community -- thereby opening up funding from public and private healthcare coverage sources.

Who will win?

Several cannabis stocks have already put themselves in position to thrive from growing medical marijuana markets. The initial public offering of Tilray (NASDAQ: TLRY) this summer was based largely on Tilray's status as a giant in the medical cannabis market, and the company has looked to collaborate with clinical trial researchers to foster greater acceptance of cannabis. Canopy Growth (NYSE: CGC) has a substantial presence in the Canadian medical marijuana market and would also be well positioned to shift supply internationally if changing conditions warranted the move.

As much as marijuana investors are focusing squarely on the recreational market right now, medical cannabis is still the biggest opportunity that marijuana stocks have. If the floodgates of health insurance money open, then revenue for cannabis providers could soar -- especially if marijuana products improve their mainstream reputation by demonstrating real impacts in improving patients' lives.

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