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What happened
Shares of GW Pharmaceuticals (GWPH +0.00%), a British pharma company developing cannabis-based therapies, rose by more than 16% within the first hour of trading on Monday after the company announced a second late-stage success for Epidiolex as a treatment for Lennox-Gastaut syndrome (LGS), a rare and severe form of childhood-onset epilepsy. Specifically, Epidiolex-treated patients at the 20 mg/kg/day dose level experienced a median 42% reduction in monthly drop seizures, compared to only a 17% decline in patients taking a placebo in this trial. Most importantly, the observed difference in monthly drop seizure rates between the two groups was highly significant (p-value = 0.0047).
So what
GW's stock has been bursting higher this year on Epidiolex's positive clinical trial results in both LGS and another form of childhood epilepsy known as Dravet syndrome. The key issue to understand is that some analysts think that Epidiolex could achieve peak sales of nearly $3 billion for these first two indications, although this estimate makes a number of rather questionable assumptions about the drug's penetration rate and pricing structure.
Now what
With a total of three positive late-stage trials now in hand, GW is reportedly planning on filing for Epidiolex's approval with the U.S. Food and Drug Administration, or FDA, for both LGS and Dravet syndrome in the first half of 2017. As such, the drug could be on the market by the first quarter of 2018, assuming its series of late-stage trials are enough to convince the FDA to grant an approval without any significant delays.
Now, while this drug does have the potential to become an important revenue driver for the company, there's no guarantee it will transform into the blockbuster the market is apparently forecasting at this point. GW's market cap, after all, has ballooned to $2.7 billion on the back of this latest news, implying that Epidiolex will quickly grab a significant chunk of these niche markets, and command a premium pricing structure in the process. And therein lies one of GW's biggest risk factors at the moment.
The bottom line is that Epidiolex is far more likely to generate around $300 million-ish in peak sales based on fairly standard pricing and marketing practices -- rather than these blockbuster estimates being floated by a handful of bullish analysts. If so, GW is arguably overvalued right now, and therefore could be ready for a steep pullback.
