What do Cara Therapeutics (NASDAQ: CARA) and Scotts Miracle-Gro Company (NYSE: SMG) have in common? Very little.
However, you might see both show up on lists of marijuana stocks. That's because Cara has a cannabinoid receptor agonist drug in preclinical development, while Scotts' Hawthorne Gardening subsidiary is the top supplier of hydroponics to the U.S. marijuana industry.
Both Cara Therapeutics and Scotts Miracle-Gro are off to a good start in 2019 with their share prices soaring more than 30% year to date. But which stock is the better pick for long-term investors?
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The case for Cara Therapeutics
Cara Therapeutics' lead pipeline candidate, Korsuva, has generated a lot of enthusiasm among investors. The biotech is currently evaluating the intravenous (IV) formulation of the drug in phase 3 clinical studies as a treatment for moderate-to-severe pruritis (i.e., itching) in patients with chronic kidney disease (CKD) on hemodialysis. Cara expects to announce results in the second half of 2019 that, if positive, will form the basis for the company's regulatory filings for Korsuva in the U.S. and in other countries.
The potential for Korsuva in the CKD-associated pruritis (CKD-aP) indication is significant. Jefferies analyst Matthew Andrews thinks the drug could reach peak annual sales of more than $570 million in the U.S. alone.
Cara shouldn't have any problems with a commercial launch of Korsuva if it wins approval. In May 2018, the biotech announced a deal with Vifor Fresenius Medical Care Renal Pharma, a joint venture between Swiss drugmaker Vifor Pharma Group and Fresenius Medical Care, for commercialization rights to Korsuva in the CKD-aP indication outside of the U.S., Japan, and South Korea. Fresenius, the world's largest dialysis provider, also plans to promote the drug in all of its U.S. dialysis clinics.
But Cara's opportunities only start with Korsuva in treating CKD-aP. The company is also evaluating an oral version of the drug in a phase 2 clinical study for treating CKD patients who aren't on dialysis. In addition, Cara has initiated a phase 1 study of oral Korsuva in treating chronic liver disease-associated pruritis (CLD-aP).
As an added bonus, Cara reported positive results last year from a phase 2/3 study of CR-845, the non-branded name for Korsuva, in treating post-operative pain. The drug demonstrated efficacy in reducing pain as well as post-operative nausea and vomiting. Cara's primary focus, though, is on the pruritis indications for the drug. The company has indicated that it would like to find a partner for advancing CR-845.
The case for Scotts Miracle-Gro
There are two primary reasons to consider buying Scotts Miracle-Gro. Let's start with the company's longtime core business in selling consumer lawn and garden products.
Scotts experienced a rough year in 2018 in large part because of a late start to spring, the time when customers begin to pay more attention to their lawns and gardens. That was an anomaly, though. Scotts could actually benefit from extended warmer seasons in the future.
New product launches could also provide a boost. Scotts CEO Jim Hagedorn said in the company's Q1 conference call last month that the Miracle-Gro Performance Organics line of products "is the most important organic product our industry has ever seen." The company is also launching its first nonselective weed control product that's certified for use in organic gardens.
Then there's the cannabis side of the business. Scotts has made a big bet on growth in the cannabis industry. Its Hawthorne Gardening subsidiary has gobbled up several hydroponics and lighting systems companies over the past few years.
Hawthorne's sales should increase nicely as California irons out the wrinkles in its recreational marijuana market. That market opened for business last year, but burdensome regulations and high taxes held back growth. But as the issues are resolved, Hawthorne's business will grow.
The company also should benefit from the expansion of legal marijuana markets in the U.S. Nine other states in addition to California have legalized recreational pot, while 33 states have legalized medical marijuana. Those numbers are likely to grow in the near future, providing a bigger market opportunity for Scotts Miracle-Gro.
If you're really averse to risk, Scotts Miracle-Gro is the better pick. The company is profitable. Its growth prospects are solid. And Scotts even pays a dividend that yields over 2.7%.
But if you're willing to roll the dice a little, I think you might prefer Cara Therapeutics. If Korsuva succeeds in its phase 3 studies, shares of the biotech will almost certainly skyrocket. The problem, of course, is that there's no guarantee that the drug will be successful in late-stage clinical testing and win regulatory approval. Cara has more upside than Scotts Miracle-Gro -- but it has more downside, too.
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