GW Pharmaceuticals (NASDAQ:GWPH) used to be a high-flying marijuana stock. The cannabinoid-focused biotech captured investors' attention with overwhelmingly positive clinical studies of cannabidiol (CBD) product Epidiolex in treating two rare forms of epilepsy.
But much of the sizzle for GW Pharmaceuticals has now fizzled out. The biotech's shares are down a bit so far in 2017. However, at least one Wall Street investment firm thinks that GW Pharmaceuticals stock has plenty of room to run. Cowen and Company recently issued a price target for the stock of $165, more than 50% higher than the current share price. Can GW Pharmaceuticals really soar by that much?
Reasons for optimism
GW Pharmaceuticals announced on Monday that it had completed its rolling submission of a New Drug Application (NDA) to the U.S. Food and Drug Administration (FDA) for Epidiolex in treating Lennox-Gastaut syndrome (LGS) and Dravet syndrome. The company has already received rare pediatric disease designations from the FDA for Epidiolex in both indications, which gives GW Pharma hope that the agency will grant priority review for the drug. If that happens, Epidiolex could possibly win approval in the second quarter of 2018.
There's ample reason for cautious optimism about the chances of approval for Epidiolex. The cannabinoid drug met primary endpoints in three late-stage clinical studies. Based on the clinical results, the efficacy of Epidiolex shouldn't present an issue for the FDA in granting approval.
But what about safety? GW Pharmaceuticals reported that its drug was "generally well tolerated," but it has also acknowledged some drug-drug interactions. The company's CEO, Justin Gover, doesn't think these interactions will present a serious problem for FDA approval. Gover has stressed in the past that Epidiolex doesn't rely on any other anti-epilepsy drugs to be effective. GW Pharma anticipates, though, that potential interactions with other drugs will be included on the label for Epidiolex, assuming it gains FDA approval.
If Epidiolex can generate annual sales somewhere in the ballpark of $800 million to $1 billion, I think a 50% or more jump in GW Pharmaceuticals stock price would be easily justified. Some analysts have projected much higher peak sales estimates for the drug.
Reasons for worry, too
My hunch is that most investors who follow GW Pharmaceuticals aren't overly concerned about Epidiolex failing to win approval. However, there could be some anxiety about how much payers will be willing to loosen their purse strings for the drug.
Probably the biggest worry of all, though, comes from the threat of competition. Zogenix (NASDAQ:ZGNX) recently announced positive results from a late-stage study of its experimental drug ZX008 in treating Dravet syndrome. Based on the success of this study, Zogenix plans to test ZX008 in treating LGS, as well.
ZX008 isn't a cannabinoid like Epidiolex. That means GW Pharmaceuticals won't be able to use its patents to try to keep Zogenix from mounting a challenge. Also, ZX008 won't have to go through drug scheduling with the U.S. Drug Enforcement Administration like Epidiolex will.
Assuming both Zogenix and Epidiolex win approvals for their respective drugs, it could present an opportunity for payers to play the two companies against each other to secure lower pricing. This scenario could result in GW Pharmaceuticals getting less for Epidiolex than it would prefer, which in turn would dampen investors' enthusiasm about the stock.
Around 85% of drugs that are submitted to the FDA ultimately win approval. My take is that Epidiolex's chances of approval are at least that high. But winning approval alone won't necessarily drive GW Pharmaceuticals stock 50% or more higher.
I suspect investors will still want to gauge the reaction of payers to Epidiolex. Julian Gangolli, president of GW's North American operations, said in June that he expects payers to treat Epidiolex similarly to how they currently handle epilepsy drugs Banzel and Onfi. I think that's a fair assessment. This would mean Epidiolex is covered by payers, but some might require prior authorization of the drug. I don't see this as too great of an impediment to commercial success for Epidiolex.
Zogenix presents a threat, but perhaps less than you might think. The company still must complete a second late-stage study of ZX008. If that study goes well, Zogenix would probably be on track to submit for approval sometime in the second half of 2018 -- and only for the Dravet syndrome indication initially. Even analysts bullish about GW Pharmaceuticals expect Epidiolex to capture only one-third of the market, so there's room for multiple drugs to perform well.
My best guess is that GW Pharmaceuticals stock could jump perhaps 30% to 40% by the middle of next year if the biotech wins approval for Epidiolex. I'm not quite as optimistic about the stock as Cowen, but my hunch is that GW Pharma will again be a high-flying marijuana stock in the not-too-distant future.