Despite its research into marijuana, GW Pharmaceuticals (NASDAQ:GWPH) isn't going to run into legal troubles.
Unlike many of the medical-marijuana companies producing and selling marijuana in states where it's legal, GW Pharmaceuticals isn't stuck in limbo where state laws permit the sale of marijuana but federal laws still say it's illegal.
Instead, GW Pharmaceuticals is staying well within the federal laws with plans to seek approval by the Food and Drug Administration to sell its marijuana-derived prescription drugs.
Which explains why GW Pharmaceuticals is a $685 million company while most of the medical marijuana companies are penny stocks.
A different kind of risk
GW Pharmaceuticals doesn't have to deal with legal uncertainty, but like any biotech company, GW Pharmaceuticals has to get its prescription drugs approved by the FDA. If it can't, GW Pharmaceuticals is in no better position than the penny stocks.
GW Pharmaceuticals' lead product, Sativex, is approved in Europe to treat spasticity due to multiple sclerosis where it's sold by partners Almirall and Bayer HealthCare. It's never going to reach the sales level of Biogen Idec's (NASDAQ:BIIB) Avonex or Teva Pharmaceuticals' (NYSE:TEVA) Copaxone -- both multi-billion dollar multiple sclerosis products -- because it's only used to treat spasticity, the tightening of muscles or involuntary contractions, while Biogen's and Teva's drugs are given continuously to treat patients that may only have occasional attacks. Shipments of Acorda Therapeutics' (NASDAQ:ACOR) spasticity treatment Zanaflex reached $60 million in 2011 before the drug hit generic competition .
That's nothing to get too excited about, especially since Sativex will probably only be used in patients where generic Zanaflex isn't working. In the U.S., GW Pharmaceuticals isn't even prioritizing approval for multiple sclerosis spasticity.
Its lead indication is in cancer pain. A phase 3 trial with its U.S. partner Otsuka Pharmaceutical testing Sativex in cancer pain will read out toward the end of this year. It's potentially a larger market -- sales of Teva's pain medication Actiq peaked at more than $600 million -- but the sales potential will depend on how well Sativex reduces pain, its side effects, and the potential for abuse. There are quite a few opioid pain medications that are available as cheap generics, but they can cause constipation as a side effect, which could give Sativex a leg up.
For multiple sclerosis spasticity, GW plans to start a phase 3 trial in the second half of this year to get the drug approved in the U.S.
A pot full of drug candidates
Beyond Sativex, GW Pharmaceuticals is developing Epidiolex, another marijuana-derived chemical called, cannabidiol, or CBD, for two types of childhood epilepsy: Dravet and Lennox-Gastaut. Independent investigators are currently testing Epidiolex on their own, and GW plans to start a clinical trial in the second half of this year, which would put it on track to start pivotal trials in 2015.
GW also has four other marijuana-derived drugs in its pipeline, for a variety of other diseases including diabetes, schizophrenia, and lucerative colitis.
Risk and reward
Investors need to forget that GW Pharmaceuticals is a medical marijuana stock and treat it like any other drug company. There's plenty of upside from here; if Sativex can produce sales of $500 million, it's not hard to see GW Pharmaceuticals being valued at $2.5 billion. However, the stock has been very volatile over the last few months.
And there's risk that the company won't get Sativex approved or that it won't sell well if clinical trials show that it's not better than generic pain medications. I like the risk-reward situation here, at a market cap under $700 million, than I did when the company was over $1.2 billion, but only for an investor that's willing to hold for multiple years.
In this biotech market, it's hard to say whether GW Pharmaceuticals has hit bottom, especially since it's trading considerably higher than it was a year ago. Investors may need to wait until one of the other pipeline drugs is approved before GW Pharmaceuticals reaches its full potential.
Look beyond medical marijuana (and don't let your portfolio go up in smoke)
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Brian Orelli has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.