Why the Market Is Wrong About This Popular Marijuana Stock

GW Pharmaceuticals is a promising company working on important medical marijuana-based drugs for MS, cancer, and diabetes, but it's just too expensive to buy.

May 17, 2014 at 10:00AM

Few areas of disease treatment have captured investors' attention as fully as medical marijuana has this year. While medical marijuana dispensaries have grabbed the spotlight lately, there are also biotechs attempting to create life-enhancing treatments based on compounds found in marijuana. These may lead to new treatments for chronic and life-threatening conditions ranging from autoimmune disease to neurological disease to cancer. GW Pharmaceuticals (NASDAQ:GWPH) is the most prominent example, but after making a tremendous move in the past year, I believe that shares have simply become too pricey.

GWPH Chart

GWPH data by YCharts

Proof in the pudding
There's no question that GW Pharma is at the forefront of developing therapies based on the chemical components of the marijuana plant. The company has been knee-deep in dissecting the medical benefits of marijuana since its founding in 1998.

Marijuana

Source: GW Pharmaceuticals

But GW Pharma has only one -- just one -- product currently on the market. And that one product is far from raking in sales.

Sativex has won approval as a treatment to reduce spasms in multiple sclerosis (MS) patients in 11 countries. While Sativex has yet to be approved in the U.S., MS is a chronic and widespread global disease. In fact, Europe -- where Sativex is already available -- is home to more than half of all MS patients worldwide.

Because of that, Biogen (NASDAQ:BIIB) and Novartis (NYSE:NVS) generate billions of dollars in sales for drugs used to treat MS relapses in Europe. Biogen's sales of MS relapse drugs Avonex, Tysabri, and Tecfidera overseas total more than $500 million a quarter, much of that coming from Europe, and ex-U.S. sales of Novartis MS drug Gilenya were nearly $300 million in the first quarter (again thanks, in large part, to Europe). But investors shouldn't extrapolate Biogen and Novartis' sales success to Sativex.

The market for spasticity drugs like Sativex is far smaller than the relapse market is for those other MS drugs. In addition, Sativex has not yet gained FDA approval, limiting its market reach (although it is on the market in a number of European countries). As a result, GW Pharma reported revenue of just $13 million in the first quarter.

Promising pipeline
That $13 million number represents a 3% decline in constant currency from first quarter 2013, and the company brought in about $50 million over the trailing-12 months. That means that, at GW Pharma's current $1.24 billion market cap, investors are paying roughly 23 times revenue to own its shares. That's a premium that far exceeds even the most pricey M&A deals. For example, when Amgen acquired cancer drugmaker Onyx Pharmaceuticals last year, it paid 17 times sales. And when Shire bought ViroPharma, it paid just 10 times revenue.

That suggests that investors aren't buying shares based on GW Pharma's current results, but for its promising pipeline. And again, to be fair, it's a solid pipeline. The company has already been granted fast-track status for Sativex as a treatment for cancer pain, and it's studying the use of cannabinoid drugs for the treatment of epilepsy and diabetes, too.

But the potential approval for use in cancer patients is as a second-line treatment behind widely used opioids, which reduces its potential market even if it receives FDA approval, and epilepsy and diabetes solutions could prove years away.

Fool-worthy final thoughts
Developing innovative therapies to treat important diseases takes drug developers down many paths, and patients, doctors, and investors should be glad to know companies like GW Pharma are doing solid work to find new treatments for complex diseases.

But that doesn't mean investors should dive in at any price. Patients are already being prescribed medical-marijuana-based drugs globally, including Marinol, a THC-based drug that has been on the market since 1985 for treating nausea caused by chemotherapy. But despite its long-standing use, Marinol (and its generics) appear to generate annual U.S. sales of less than $200 million.

GW Pharma may have some great products that will help many patients, but until it can prove itself further, and get some more revenue coming in the door, investors should approach it without wearing rose-colored glasses

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Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies 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.

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