Few, if any, industries can claim the breakneck growth pace that legal marijuana is currently producing. Last year, cannabis research firm ArcView pegged North American legal weed sales growth at 34% and opined that growth between 2017 and 2021 in North America could average 26% per year. That type of consistent high growth is tough to come by, which is why investors have been almost relentlessly piling into marijuana stocks. Over the past year, the market caps for a number of top pot stocks have jumped by more than 100%.
Leading the charge higher has been a rapid change in the way the American public views cannabis. In 1979, per a CBS News poll, just 29% of Americans were in favor of legalizing marijuana across the country. By April 2017, this had jumped to an all-time record of 61%. Also, a separate poll from Quinnipiac University in April of this year showed that 94% of Americans support the idea of federally legalizing medical cannabis compared to just 5% who oppose it.
A bright spot within the cannabis movement
With such broad-based support behind the legalization movement, especially when it comes to the medical side of the equation, investors are being led to believe that lawmakers in Congress will adjust the scheduling for pot sooner rather than later. But lawmakers have essentially dug in their heels and refused, thus far, to change their stance on weed despite clinical studies that have demonstrated possible benefits from cannabis or cannabinoids derived from the cannabis plant.
One of the more front-and-center, feel-good marijuana stocks is GW Pharmaceuticals (GWPH), the largest marijuana stock by market cap. GW Pharmaceuticals' leading drug candidate is Epidiolex, an oral cannabidiol (CBD) solution designed to treat patients with two rare types of childhood-onset epilepsy, Dravet syndrome and Lennox-Gastaut syndrome. CBD is the non-psychoactive component of cannabis.
In two late-stage trials for each indication, Epidiolex easily met its primary endpoint of a reduction in seizure frequency compared to the placebo, leading most investors and Wall Street to believe that GW's path to success would be a relative cakewalk. Assuming a strong launch and possible label expansion opportunities in the future, $1 billion in annual sales at its peak was not out of the question.
Well, folks, that cakewalk just became quicksand.
Enter Zogenix, stage right
Last week, small-cap biotech Zogenix (ZGNX) shocked Wall Street and investors by unveiling phase 3 data on its investigational drug for Dravet syndrome, low-dose fenfluramine hydrochloride, which is referred to as fenfluramine for short. The study not only met its primary endpoint of a statistically significant reduction in seizure frequency relative to the placebo, but it would appear to have run circles around Epidiolex in a similar grouping of patients -- albeit the two drugs haven't gone head-to-head in a study.
Back in March 2016, GW Pharmaceuticals reported that Epidiolex had reduced seizure frequency by 39% in Dravet syndrome patients as compared to 13% for the placebo from baseline. The baseline was determined by following patients for four weeks prior to trial start, and the study lasted 14 weeks.
By comparison, Zogenix's fenfluramine delivered a superior 72.4% reduction in convulsive seizure frequency compared to 17.4% for placebo patients over the 14-week treatment period. One minor difference was that Zogenix took six weeks to establish its baseline instead of four. On the surface, and while doing a bit of an apples-to-oranges comparison, Zogenix's lead drug looks like a serious threat to GW's top experimental compound.
As noted by Janney analyst Ken Trbovich via Investor's Business Daily, "We believe investors previously ignored the threat from Zogenix because its program was only supported by a small (12 patients), open-label study conducted in Europe."
It's worth noting that Zogenix is also studying fenfluramine as a treatment for Lennox-Gastaut syndrome.
More issues for Epidiolex than meets the eye
That's not necessarily the only blow for GW Pharmaceuticals. In the company's third-quarter earnings release was an announcement that it had delayed its new drug application (NDA) filing in the U.S. for Epidiolex until October from mid-2017. A first-in-class drug would have an opportunity to gobble up market share with no approved indications, but Epidiolex's possible approval by the Food and Drug Administration (FDA) has now been pushed back a few months.
Also, there are no guarantees that Epidiolex can even beat fenfluramine, which is expected to have an NDA filed by Zogenix in the second half of 2018, to pharmacy shelves. Because Epidiolex is derived from cannabinoids, and there's no precedence for cannabinoid-based drugs on the market, it's likely the FDA will take its time with approving a marketing label, and that the U.S. Drug Enforcement Agency (DEA) will need to schedule Epidiolex before it makes it onto pharmacy shelves, assuming approval.
How do we know this? Because we just witnessed the same thing happen to Insys Therapeutics (INSY) and its oral dronabinol solution -- essentially a synthetic version of tetrahydrocannabinol (THC) -- known as Syndros. Syndros was approved by the FDA in June 2016, but it didn't receive its scheduling from the DEA until earlier this year, and it wasn't given approval for its marketing label by the FDA until May 2017. The company finally launched Syndros as a treatment for chemotherapy-induced nausea and vomiting and anorexia associated with AIDS in August, 14 months post-approval. Epidiolex could suffer the same fate, losing most of its first-to-market advantage.
GW Pharmaceuticals' $2.6 billion valuation is predominantly derived from the expectation of success for Epidiolex. If it suddenly isn't the savior that shareholders and Wall Street expected, investors may need to reconsider what this stock is really worth. Sound the warning, folks, because GW Pharmaceuticals might be in deep trouble.