Sean Williams

The Motley Fool

It's been a largely positive, but still topsy-turvy, year for both legal marijuana and medical marijuana in 2014.

Following landmark victories in 2012 that legalized recreational, adult-use marijuana in Washington state and Colorado, voters in the states of Alaska and Oregon, as well as Washington, D.C., approved recreational marijuana use in midterm elections earlier this month. These states will be looking to cash in on hefty excise and/or state and local taxes geared at closing budget deficits and reducing the immediate need to raise taxes throughout the state.

On the flip side, it was no victory for medical marijuana supporters despite a large degree of success over the previous 15 years. Florida had been vying to become the 24th state to legalize marijuana for medical purposes. However, since the amendment would have required the state to change its constitution, it needed 60% approval in order to pass. Ultimately, Floridians voted 58% in favor and 42% against the measure.

The results aren't too surprising given that Florida has the highest percentage of retired persons in the country, and the Silent Generation (those aged 69-86) has been overwhelmingly against medical marijuana's approval in most polls. Nonetheless, the defeat in Florida does take some of the wind out of the sails of medical marijuana supporters.

This state has make-or-break potential for the marijuana movement

Although state elections are now in the books for another two years, it's not too early to start thinking about which states could be the next to introduce legal marijuana and medical marijuana legislation in the next election. Though we could theoretically see as many as a dozen states bringing some degree of marijuana vote in front of their citizens in 2016, no state has greater make-or-break potential for the marijuana movement than California.

The most populous state in the country, according to The Los Angeles Times, came incredibly close to putting legal marijuana on the ballot in this past election, however it lacked an adequate amount of funding that would have been required to make a run at legalization. The Drug Policy Alliance, the same group that helped get marijuana legalized for adults in Washington and Colorado, and medical marijuana legalized in Massachusetts, has been continuously drumming up support, but all efforts to draft the Control, Regulate, and Tax Marijuana Act have been put off until the 2016 elections.

As you may have figured, the implications for California and the rest of the nation are enormous. As the most populous state, California is poised to become the biggest consumer of marijuana, as well as the biggest generator of tax revenue. Based on data from NerdWallet, California has nearly 25 million people aged 25 and up, of which 6.74% admitting to smoking marijuana within the past month. Out of the 50 U.S. states, only eight had a higher percentage of admitted marijuana users, and in four of those (Colorado, Washington, Oregon, and Alaska), recreational use is now legal.

In other words, California could be poised to reap more than $500 million in annual tax benefits based on a forecast that calls for a flat 25% tax on marijuana. That's no small chunk of change, and it can go to support the state's ailing education system, or even help pay for the maintenance of its state-run health exchange.

Even more so, the legal marijuana movement in a state the size of California provides the perfect example of whether or not a state can regulate production of the product effectively and keep it from winding up in the black market. If you recall, the U.S. federal government still views marijuana as a schedule 1 drug (meaning it's illicit), and it's given no indication it plans on changing its views anytime soon. It is worth noting that the federal government's hands-off approach may already be a change in stance, but any breakdown of regulation on the state level could force a more hands-on approach by the Drug Enforcement Agency.

Medical marijuana is counting on California

Although medical marijuana is already approved in California, the medical marijuana movement is likely to find its momentum stymied over the next two years because of its defeat in Florida. You could arguably go so far as to say that a recreational legalization in California is needed to reinvigorate its prospects of expansion on a medical use level.

Two companies that just might see substantial benefits if California approves recreational use marijuana are GW Pharmaceuticals (GWPH) and Insys Therapeutics (INSY) , which are both in the process of developing cannabinoid-based drugs derived from the cannabis plant to treat myriad diseases. Insys' primary pipeline product is dronabinol, a synthetic THC-based drug designed to treat chemotherapy-induced nausea and vomiting. GW Pharma, on the other hand, has a deeper pipeline that's being tested in everything from type 2 diabetes to various neurologic disorders and pain applications.

Why might these companies benefit? I believe public perception will continue to play a key role with these two stocks, which would make sense given that biopharmaceutical stocks in general are valued based on their future potential rather than their fundamentals. If California legalizes recreational marijuana, it could represent a cascade moment that pushes other U.S. states to legalize. As I mentioned above, it also provides a large-scale state example of what legalization might look like from a regulation and tax revenue collection standpoint. In sum, legalization in California could boost the positive perception of marijuana even further, and it could persuade physicians to be more willing to prescribe marijuana-based medicines (as well as cause consumers to be more proactive about requesting cannabinoid-based therapies).

Of course, investors in both companies should realize that regardless of the public's perception of marijuana, or how California's residents eventually vote, their clinical data will be the ultimate driver of their success. Insys' dronabinol is currently under review by the Food and Drug Administration, while GW Pharmaceuticals is awaiting the results of its phase 3 cancer pain study involving Sativex, as well as its pediatric epilepsy trials involving epidiolex. A disappointment in any of these areas could wreak havoc on these predominantly clinical-stage companies regardless of how the marijuana legalization movement is faring.

Mark your calendars

Whether you're an investor in these companies or just an interested consumer in the issue itself, it pays to mark your calendar, as it would appear that 2016 is setting up to be an even more pivotal year for legal and medical marijuana. In the meantime, keep your eyes peeled for the latest polls on public perception, additional studies on marijuana's long-term benefits versus risks, and the upcoming clinical data and FDA decisions for GW Pharmaceuticals and Insys.

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