3 Reasons Why Marijuana Stock GW Pharmaceuticals Could Fall

GW Pharma has been one of biotech's big winners thanks to a slate of promising marijuana-based drugs, but investors are right to wonder if the stock's winning ways will continue.

Aug 21, 2014 at 4:53PM

Investors often find that turning a blind eye to risks lurking in their investments is far from a profit-friendly strategy. Identifying long-term stocks to hold in portfolios means understanding both a company's puts and takes.

That balanced investment approach applies to even the hottest companies, including GW Pharmaceuticals (NASDAQ:GWPH), one of biotechnology's best performers this past year thanks to excitement surrounding its marijuana-based medicines.

Although no one can predict with certainty whether shares in GW Pharma will rise or fall, let's consider three challenges facing the company that may weigh on the stock.

G

Source: GW Pharmaceuticals.

1. Buy the rumor, sell the news
Biotechnology investors tend to be most bullish ahead of pharmaceutical trial results or commercial launches. That's because there's a significant need for new therapies, particularly for life-threatening diseases, and because drug spending is climbing thanks to longer-living populations and eye-popping price tags for next-generation medicines.

Investors in emerging biotechnology companies like GW Pharma may want to take that kind of enthusiasm with a grain of salt.

According to a McKinsey study, pre-launch excitement often misses the mark. For example, analysts' peak sales projections are wrong 60% of the time for 260 drugs launched between 2002 and 2011, and overly optimistic outlooks overstated the potential market by as much as 160%.

That's not to say that GW Pharma won't be the exception, but it does cast some doubt on whether the valuation being given to the company's shares is justified.

After all, GW Pharma's current market cap of $1 billion is about 20 times its annualized trailing-quarter sales. For comparison, when Amgen paid 17 times sales to buy highly coveted Onyx Pharmaceuticals and get its hands on Onyx's promising cancer pipeline. Similarly, deals to acquire ViroPharma and Forest Laboratories have valued those companies at less than 10 and seven times sales, respectively.

Even if we assume that new approvals will move the sales needle for cannibinoid-based drugs like GW Pharma's Sativex, which is currently approved to treat multiple sclerosis spasticity in Europe, sales would need to at least double to bring the company's valuation more in check.

G

Source: GW Pharmaceuticals.

2. Crossing the moat in cancer pain
Much of the interest in GW Pharma stems from its potential to win FDA approval of Sativex as a treatment for breakthrough pain in cancer patients.

Sativex has shown solid efficacy during cancer patient trials, and an FDA decision could come within the year. Although spending on breakthrough pain totals in the billions annually, investors may want to temper predictions.

That's because doctors have significant experience prescribing opiates for the condition, and other companies such as Mallinckrodt are already innovating longer-lasting, abuse-resistant, formulations.

In addition to challenges in winning over doctors, investors should also recognize that Sativex's potential approval in this indication is for second-line use. That means that Sativex will only be approved for use in patients whose pain is inadequately controlled by first-line opiates like Teva Pharmaceutical's Actiq, Mallinckrodt's Xartemis, or Insys Therapeutics' Subsys.

3. Tempering enthusiasm over use in epilepsy
Investors are also staking a lot of GW Pharma's success on Epidiolex, a promising drug for the treatment of epilepsy.

There's no question that epilepsy is an indication in need of new treatment options. And a positive showing in a 27-patient phase 2 trial landed GW Pharma fast-track status for Epidiolex, which is being studied specifically for Dravet Syndrome. However, even if the drug eventually wins an FDA nod, the total market here might be small: just 5,400 patients are diagnosed with the condition in the United States.

Fool-worthy final thoughts
GW Pharma has been studying the potential of medical marijuana for more than a decade, but it's not alone in its attempts to develop treatments based on the drug. Insys Therapeutics has a host of promising marijuana-based medicines in development, including a new formulation of Marinol, a drug that formerly had sales north of $100 million annually.

Whether investors will continue to price perfection in GW Pharma is anyone's guess, as is whether the company's drugs will win approval and become market share leaders. Given where share prices are now, it would seem investors will need GW Pharma to enjoy a best-case outcome to justify its valuation.

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 just 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.

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 recommends shares of Teva Pharmaceuticals. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers