Is It Time to Buy Shares in This Marijuana Stock?

GW Pharmaceuticals Plc has an intriguing slate of marijuana-based medicine under development, but that may not mean that shares will continue to climb.

Sep 4, 2014 at 3:43PM

Marijuana drugmaker GW Pharmaceuticals Plc (NASDAQ:GWPH) shares have returned an unbelievable 500% in the past year; trouncing the S&P 500 ETFs 23% return and handily outpacing the 37% return for the iShares Nasdaq Biotechnology ETF.

Given GW Pharma's meteoric rise, investors are right to wonder if there's more room left to run higher, or if the shares are ready to retreat, so let's take a closer look.


Source: GW Pharmaceuticals Plc.

Elusive earnings and rising expenses
Emerging biotechnology companies like GW Pharma spend the majority of their cash developing new products or conducting trials to expand labels on existing medication. As a result, emerging biotechnology companies rarely have earnings that shareholders can rely upon to justify their share price; and GW Pharma is no exception.

GW Pharma's only commercialized drug is its multiple sclerosis spasticity treatment Sativex, which is sold in 14 European countries. However, sales of that drug have been lackluster, totaling just $1.7 million last quarter.

That means that until GW Pharma wins more approvals, investors will have to rely on partnership revenue from Otsuka, a major Japanese drugmaker that's working with GW Pharma on Sativex' for use as a cancer pain treatment.

Although Otsuka pays Sativex's clinical trial bills, GW Pharma still expects to burn through $41 million in cash during the year ending September. That burn rate may give investors pause, but equity offerings added $233 million to the company's balance sheet earlier this year. That gives the company plenty of money to continue its epilepsy, ulcerative colitis, and diabetes trials.


Source: GW Pharmaceuticals.

Debating valuation
Valuing emerging biotechnology companies is tricky.

Since GW Pharma has little in the way of sales and is still losing money every quarter, traditional price to sales and price to earnings measures are of little use.

Instead, investors have to rely on research and a bit of guesswork to determine the potential future revenue that may come from GW Pharma's product pipeline. That means considering whether the drug will make its way past regulators, how much the drug will cost, whether doctors will prescribe it, and whether any revenue will be shared with partners.

Since 60% of drugs in phase 2 and another 30% to 40% of drugs in final phase 3 clinical trials typically fail, I typically like to focus on the potential of drugs that are currently in phase 3. At GW Pharma, that limits me to Sativex for cancer pain. However, I'm not willing to ignore the company's phase 2 programs for treating childhood epilepsy given that there are few treatment options; so let's consider potential sales from Epidiolex, too.

We'll know better whether Sativex for cancer pain has a good shot at making its way to market when data from the company's phase 3 study is released later this year. If those results are solid and the FDA approves the drug, it will compete for market share against currently approved opiates including Mallinckrodt's Xartemis and Insys Therapeutics Subsys.

To get a better feel for what that market opportunity may look like to GW Pharma, Mallinckrodt reported sales of oxycodone containing tablets, including Xartemis, of $54 million and Insys reported sales of subsys totaled $55 million in the second quarter.

That's a good starting point for Sativex, but investors should remember that Sativex approval would be for second line use in patients that have failed on opiates. That suggests that sales could prove smaller than they are for these two other drugs. Even if sales do exceed competitors, investors should also remember that it's Otsuka that stands to benefit most from Sativex approval, not GW Pharma. That's because Otsuka will only pay GW Pharma a royalty on sales that is in the mid 20% range.

Shifting gears...

A lot of investor interest is focused on Epidiolex -- for a very good reason. Childhood epilepsy has a significant unmet need.

But while trial results may or may not prove that Epidiolex can address that need, investors should recognize that the patient population for childhood epilepsy indications like Dravet Syndrome is small. GW Pharma estimates that there are just 5,400 patients in the U.S. and another 6,700 patients in Europe.


Source: Author's calculation.

Also, while there are no specifically approved treatments for Dravet in the U.S., Biocodex' stiripentol is approved in Europe. Stiripentol is used alongside anticonvulsants and as of last year carries a price tag of about $370 for 60 250mg tablets. So depending on dosing, that could work out to thousands of dollars in sales per patient per year. That prompted me to do a little back-of-napkin math. Assuming that every U.S. patient took stiripentol three times a day, its peak U.S. sales would still be less than $40 million per year.

Since GW Pharma's current market cap is roughly $1.2 billion and acquirers paid 10 times sales for Viropharma and seven times sales for Forrest Labs, GW Pharma investors would likely want to see between $120 million and $170 million in annual sales to justify GW Pharma's current valuation. Based on these assumptions for Sativex and Epidiolex, that may happen -- but it's far from a certainty.

Fool-worthy final thoughts
Investing in biotechnology stocks like GW Pharma is a risky proposition. There's no guarantee that clinical stage drugs will ever make it to market and if they do win over regulators, they may still fail to win market share.

GW Pharma has an advantage in having already won over EU regulators with Sativex for MS Spasticity and the company should have late stage data that could support a filing in the U.S. for cancer pain soon; however, valuing the company based on those potential approvals may suggest that investors are best suited looking elsewhere until either more data is released or share prices retreat.

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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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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