Shares of GW Pharmaceuticals (NASDAQ: GWPH ) have risen nearly 700% since it was listed on the NASDAQ last May, making it one of the top-performing companies over the last 12 months. Should you buy GW Pharmaceuticals, or will this biopharmaceutical marijuana play go up in smoke?
GW Pharmaceuticals is in the cannabinoid prescription product business, with its flagship product Sativex treating muscle spasticity in MS patients. It is currently approved for sale in 25 countries.
The company has license agreements with Otsuka Pharmaceutical, which has commercialization rights to Sativex in the U.S., and Novartis (NYSE: NVS ) , which has commercialization rights to Sativex in Australia, New Zealand, and parts of Asia and the Middle East.
GW Pharmaceuticals is working to get FDA approval for Sativex in the U.S. for muscle spasticity in MS patients and is also working to get FDA approval for the drug to treat pain in cancer patients. The company is also working on developing Epidiolex for the treatment of childhood epilepsy.
GW Pharmaceuticals seems to be pinning its hopes for success on receiving FDA approval for its products in order to tap the lucrative U.S. market. It is currently planning for Phase 3 trials to commence in 2014 for Sativex in the U.S. for spasticity in MS patients. Phase 3 trials for Sativex to treat pain in cancer patients are currently under way, with results expected in the second half of 2014.
These trials are being funded by Otsuka with the intent of submitting an application for New Drug Approval with the FDA upon successful Phase 3 results. GW Pharmaceutics estimates there are 320,000 MS patients in the U.S. affected by spasticity and that there are 420,000 advanced cancer patients in the U.S. suffering from inadequate pain relief from optimized chronic opioid therapy. The FDA has also granted GW Pharmaceutics Orphan Drug Designation for Epidiolex to treat Dravet and Lennox-Gastaut syndromes.
Sounds promising, but...
GW Pharmaceuticals' success hinges on being able to successfully commercialize Sativex and its other products, which relies on receiving regulatory approvals from the FDA and other governments worldwide (which are far from guaranteed.) Even with government approvals, Sativex faces an uphill battle regarding physician willingness to prescribe and patient willingness to use.
GW Pharmaceuticals admits that it has to rely on government health care systems and insurance companies to reimburse patients, as otherwise most patients won't be able to afford their products. More disturbing than these risks is the fact that Sativex's sales have actually declined over the past three years, despite the drug receiving approval in new countries.
Things don't look any better for the most recent quarter, either. GW Pharmaceutics reported second quarter revenue of $12.6 million last week, and the company suffered a quarterly operating loss of $11.8 million. With a market cap of close to $1 billion, this lack of revenue should be a concern to investors.
GW Pharmaceuticals completed a follow-on offering back in January, which raised roughly $94 million, resulting in cash and cash equivalents of $159 million as of March 31. The company is funded for the time being, but mounting research costs coupled with low revenue mean that the company may be forced to further dilute shareholders with another follow-on offering at some point down the road.
Foolish bottom line
The success or failure of GW Pharmaceuticals seems to hinge on both receiving FDA approval for its products and being able to successfully commercialize them. With sales of Sativex struggling and with FDA approval far from certain, it seems the current market cap of just over $1 billion is unjustified at this time.
Potential investors should pay careful attention to the results of the phase 3 clinical trials for Sativex in the U.S. Any negative results or any indication from the FDA that these products won't receive approval would further erode positive feeling about the stock.
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