Why GW Pharmaceuticals Could be the Next Marijuana Bubble Stock to Pop

Marijuana stocks have soared this year as more states decriminalize the drug's recreational and medical uses. Even so, most companies developing marijuana-based products are years away from turning a profit, suggesting that a fair amount of this rapid appreciation is due to hype, not fundamentals. 

GW Pharmaceuticals (NASDAQ: GWPH  )  is a British biopharma developing medicinal products based on marijuana-derivatives called cannabinoids. The company's claim to fame thus far is Sativex, a treatment for spasticity due to multiple sclerosis that is commercially available in 11 countries.

The company's share price has skyrocketed by 958% in the past year. With this in mind, let's consider two good reasons GW might now be extremely overvalued. 

GWPH Chart

GWPH data by YCharts.

Reason No. 1
Although GW has a commercial product in hand in Sativex, we aren't seeing much in the way of top-line growth because the drug isn't yet approved in the U.S. Specifically, GW is expected to post only $50 million in revenue this year. 

GW hopes to improve its top-line growth with commercial launches of Sativex in a host of additional countries within the next year. Even so, the U.S. is an important market, and an approval for Sativex as a treatment for multiple sclerosis won't be granted in the U.S. until the company completes a late-stage trial planned to begin later this year. 

Looking ahead, GW plans to seek FDA approval for Sativex as a treatment for cancer pain, but the initial top-line phase 3 cancer pain data for an NDA filing aren't expected until near the end of 2014. In short, we aren't likely to see an approval for either indication within the next year.  

Turning to other potential revenue drivers, GW is developing Epidiolex as a treatment for rare types of pediatric epilepsy. But the clinical work needed to gain an approval probably won't be complete for a while.

GW shares are trading at over 32 times projected 2014 revenue, and there is little reason to believe this valuation gap can be bridged by increasing product sales in the near future. 

Reason No. 2
The prospects for GW's bottom line aren't much better. Over the next year, GW is expected to see its loss per share grow by nearly 15% due to increasing costs from expanding clinical activities. On the bright side, GW's pipeline is the its biggest strength; the company boasts perhaps the broadest clinical pipeline of any company in the marijuana industry.

Simply put, GW is going through the typical growing pains of any biopharma at this point in its life cycle, with costs far outstripping revenue. At the same time, clinically oriented companies such as GW typically don't go parabolic in the course of a single year, suggesting that its rapid share price appreciation is related more to a rising-tide phenomenon. 

Foolish wrap-up
GW's recent hyperbolic growth makes little sense from either a top- or bottom-line perspective. And while we could point to investors placing a high valuation on the company's clinical pipeline -- akin to an Isis Pharmaceuticals (NASDAQ: ISIS  )  or Nektar Therapeutics (NASDAQ: NKTR  )  -- I think this explanation is a bit of a stretch as well.

Isis and Nektar have multiple potential blockbusters in their respective pipelines with well-defined commercial opportunities. For example, Isis' experimental treatment for high triglycerides and heart disease called ISIS-APOCIIIRx could see sales well into the multi-billion dollar range. Keeping with this idea, Nektar's experimental breast cancer drug NKTR-102 is also expected to potentially generate sales north of a billion dollars if approved. 

GW's pipeline, by contrast, falls much more on the speculative end of the spectrum due to the unproven nature of cannabinoids as treatments for diseases such as type 2 diabetes. GW's clinical candidates may ultimately bear fruit for blockbuster indications, but there aren't any good examples to point toward that would justify the company's rich valuation based primarily on its clinical activities. 

Overall, I think GW has benefited greatly from the massive appreciation of everything marijuana-related this year. And while a number of marijuana stocks have cratered almost overnight lately, GW has bucked this downward trend and moved even higher. As such, investors with a long-term outlook may want to keep GW's present valuation, in relation to its underlying fundamentals, squarely in their mind going forward.

Leaked: This coming blockbuster will make every biotech jealous
The best biotech investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool's new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.


Read/Post Comments (4) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3008758, ~/Articles/ArticleHandler.aspx, 9/1/2015 4:48:52 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

George Budwell

George Budwell has been writing about healthcare and biotechnology companies at the Motley Fool since 2013. His primary interests are novel small molecule drugs, next generation vaccines, and cell therapies.

Today's Market

updated Moments ago Sponsored by:
DOW 16,058.35 -469.68 -2.84%
S&P 500 1,913.85 -58.33 -2.96%
NASD 4,636.11 -140.40 -2.94%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 3:59 PM
GWPH $103.31 Down -3.04 -2.86%
GW Pharmaceuticals… CAPS Rating: **
ISIS $48.75 Down -1.43 -2.85%
Isis Pharmaceutica… CAPS Rating: *****
NKTR $10.75 Down -0.30 -2.71%
Nektar Therapeutic… CAPS Rating: ***