GW Pharmaceuticals (NASDAQ:GWPH) ranked among the best marijuana stocks of 2016, with the biotech's shares gaining 63% last year. Those high-flying days are gone now, though. Over the last three months, GW Pharmaceuticals stock has taken a nose-dive.

But could a rebound be just around the corner for what could be considered a blue chip among marijuana stocks? Maybe so.  

marijuana in a test tube

Image source: Getty Images.

Anatomy of the drop

GW Pharmaceuticals stock performed quite well through early March. Then the bottom fell out. But why?

It's hard to pinpoint a specific turn of events that caused GW stock to begin to fall. The company made just two announcements in early March. One pertained to GW Pharmaceuticals CEO Justin Glover speaking at the Cowen and Company healthcare conference. The other related to the appointment of Scott Giacobello as new CFO and former CFO Adam George's move to the newly created position of managing director-U.K. 

Neither of these announcements were the kinds of things you'd expect to cause the stock to drop. My hunch (and it's only a hunch) is that a development in South Dakota might have been a symbolic tipping point for GW Pharmaceuticals stock.

On March 2, the Health and Human Services committee of the South Dakota House of Representatives voted to move a bill forward that would legalize cannabidiol (CBD) in the state if it had received approval from the U.S. Food and Drug Administration. A few days later, the full House of Representatives in the state approved the bill.

This might not seem like bad news for GW Pharmaceuticals. After all, the biotech plans on filing soon for FDA approval of its CBD product, Epidiolex. The South Dakota law seems tailor-made for exactly what GW Pharmaceuticals would like.

But that underscores the problem. Many U.S. states already allow legal use of CBD -- without the requirement for FDA approval. GW Pharmaceuticals biggest competition could be off-the-shelf CBD. CNBC's Jim Cramer recently listed GW as one of "the most dangerous stocks in the world" because of the threat to the company from legal marijuana. 

Marijuana legalization rally

Image source: Getty Images.

GW Pharmaceuticals' strategy

Obviously, GW Pharmaceuticals would love it if every state followed South Dakota's lead. The company enjoys orphan-drug status for Epidiolex, which gives it seven years of commercial exclusivity in the U.S. This should keep other drugs at bay for quite a while. 

But what about competition from legal marijuana? That's where GW Pharmaceuticals will likely employ another strategy. The company claims 13 different patent families that have been either granted or filed in the treatment of epilepsy and for formulations of Epidiolex. Expect the company to assert its intellectual property rights vigorously if other companies try to market over-the-counter CBD products for epilepsy.

There's also the cost angle. A target price range of $30,000 to $60,000 per year for Epidiolex has been floated by analysts. I suspect that GW Pharmaceuticals will go with a price in the low end of that range to win over payers. Buying a year's supply of off-the-shelf CBD at equivalent doses of Epidiolex for an average-sized 10-year-old child could easily run over $20,000 per year. 

GW Pharmaceuticals could actually offer patients a better deal financially. How? Patients must pay the full amount out of their pockets for off-the-shelf CBD. Assuming insurers cover Epidiolex, they will pick up most of the tab for the drug with patients typically paying a co-pay that's much smaller than their cost for off-the-shelf CBD.

Could payers choose to cover CBD products that aren't approved by the FDA? That would be a doomsday scenario for GW Pharmaceuticals. However, I don't see that happening. It would be a complete reversal from payers' policies that have been around for a long time.     

Rebound on the way?

So could GW Pharmaceuticals stock rebound soon? Probably so.

I think the primary reason behind the big recent sell-off is that investors are concerned about the threat that legal marijuana (CBD) poses for Epidiolex. However, I also think that the biotech is better protected from competition than some think. If I'm right on both of these counts, GW Pharmaceuticals should at some point bounce back in a big way. 

Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.