Is GW Pharmaceuticals a Buy?

Keith Speights, The Motley Fool

Some didn't think that GW Pharmaceuticals (NASDAQ: GWPH) would be able to successfully market the first FDA-approved drug made from the cannabis plant. They were wrong.

Sales for GW's cannabidiol (CBD) drug Epidiolex have been fantastic. The tremendous launch of Epidiolex has enabled GW Pharmaceuticals stock to deliver a year-to-date gain of more than 50%, making it one of the best marijuana stocks on the market so far this year. But is GW a stock to buy now?  

GW Pharmaceuticals executives at NASDAQ

Image source: GW Pharmaceuticals.

All the reasons to buy GW Pharmaceuticals stock

The top reason to buy GW Pharmaceuticals is that Epidiolex is still only in its early innings. The U.S. launch of the drug has gone about as well as anyone expected. Payers have readily agreed to pay for Epidiolex, with 93% of all commercial, Medicaid, and Medicare lives in the U.S. covered. Over 2,500 physicians have prescribed the CBD drug. And more than 12,000 patients have used Epidiolex, with most of them continuing to use it.

Another sizable market could open up soon. GW thinks that Epidiolex will win European approval in October. Assuming that happens, the company plans to move quickly to kick off commercial launches for the drug in France, Germany, and the United Kingdom in the latter part of 2019. Launches in Italy and Spain will follow next year.

So far, we've only been talking about Epidiolex as a treatment for Dravet syndrome and Lennox Gastaut syndrome (LGS), both of which are rare forms of epilepsy. GW Pharmaceuticals CEO Justin Gover stated in the company's Q2 conference call that it expects to submit for FDA approval of Epidiolex in treating tuberous sclerosis complex (TSC) in the fourth quarter of 2019. Approval would expand the market for the drug to another 50,000 or so patients. GW has also already initiated patient enrollment in a phase 3 clinical study evaluating Epidiolex in Rett syndrome, a disease that causes seizures and other effects such as the loss of coordination and speech. 

GW's pipeline includes several other promising cannabinoid candidates. The company plans to start a phase 3 study in Q4 of Sativex in treating multiple sclerosis spasticity. Sativex is already approved in several other countries but isn't approved yet in the U.S.

Another candidate, cannabidivarin (CBDV), is being evaluated in a phase 2 open-label study (where both patients and researchers know which patients receive a drug) in Rett syndrome. GW anticipates kicking off another phase 2 study late this year of CBDV in treating autism spectrum-related disorders.

The company also expects to start a safety study in Q4 evaluating an intravenous CBD formulation in treating neonatal hypoxic-ischemic encephalopathy (NHIE), a disease where babies develop brain damage resulting from deprivation of oxygen.

All of this potential has Wall Street analysts excited about GW's prospects. The consensus one-year price target for the stock reflects a premium of 50% above the current share price.

All the reasons to stay on the sidelines

While the list of reasons to buy GW Pharmaceuticals stock is a relatively long one, the list of reasons to stay on the sidelines consists of only two items: valuation and risk.

GW Pharmaceuticals' market cap currently stands at around $4.6 billion. Epidiolex will likely top annual sales of $1 billion at its peak, but that peak is still five years or more away. This means that the company's valuation already reflects significant growth expectations for the CBD drug.

Investors and Wall Street analysts are clearly optimistic about GW's pipeline prospects. However, that's where significant risk comes into play. The company has already experienced a pipeline setback with CBDV in treating focal seizures. The odds of succeeding, particularly with pipeline candidates in phase 2 studies, aren't very good. Only around 15% of drugs in phase 2 testing go on to win FDA approval, with roughly half of drugs in phase 3 studies eventually winning FDA approval.

All things considered

I have liked GW Pharmaceuticals for quite a while, even when there were plenty of doubts about the likelihood of success for Epidiolex. I still like the company's prospects. But my view is that the best approach, at least for now, is to watch this stock rather than jump aboard.

What would put me back on the GW Pharmaceuticals train? A solid pipeline win. Should GW secure FDA approval for Epidiolex in treating Rett syndrome or demonstrate overwhelmingly compelling results from one of its clinical studies, I would take a hard look at calling the stock a buy.

I won't be surprised if the company delivers. Betting against GW Pharmaceuticals has proven to be a bad move so far.

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Keith Speights 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.

This article was originally published on Fool.com