GW Pharmaceuticals PLC (NASDAQ:GWPH) has a lot going right at the moment. Its cannabis-derived epilepsy tincture is one of the most highly anticipated potential drug launches this year. Epidiolex scored high marks in pivotal trials underpinning an application under review at the moment, and many analysts are predicting a blockbuster drug launch later this year.
With so much going right at the moment, you might be surprised to learn that GW Pharmaceuticals is one of the most heavily bet-against stocks on the Nasdaq exchange. 5.4% of shares oustanding are sold short at the moment. If you're even thinking about buying any, you'd better understand why.
Here's what could go wrong for GW Pharmaceuticals
This stock has doubled over the past couple of years as its lead candidate, Epidiolex, for the treatment of severe childhood epilepsy takes steps toward approval. Short-sellers are betting the drug will flop in the commercial setting if a murky legal status for its active ingredient doesn't derail its chance of earning approval in the first place.
Although marijuana still is a Schedule I narcotic, the Food and Drug Administration (FDA) generally limits its concerns to safety and efficacy. Epidiolex hit both marks during clinical trials underpinning its application, which makes an approval seem likely.
The FDA accepted Epidiolex's application for review but insisted on calling together an independent panel of experts to discuss the drug's risks and benefits on April 19 before handing down a decision expected in June. Advisory-committee meetings are usually a bad sign. More often than not, it seems the FDA holds them because it doesn't want to give the appearance of making unilateral decisions that upset patients in need of new treatments.
Given the drug's solid performance during clinical studies, though, this meeting appears to be an attempt to show the wider public the FDA isn't going to let drugmakers market marijuana-derived products to children without a rigorous examination in a public setting.
While there's a slight chance the FDA will turn Epidiolex down, a possible lack of pricing power is the main reason short-sellers are convinced this stock will tank. The drug's peak sales forecasts are based on pricing that falls in line with standard epilepsy treatments that can exceed $20,000 annually for some patients.
Epidiolex is a liquid formulation of pure plant-derived cannabidiol (CBD), which is the same molecule found in heaps of over-the-counter products you can find on Amazon.com and an increasing number of smaller retail outfits. Moreover, a non-cannabis-based new drug candidate ZX008, from Zogenix, Inc., put up early clinical-trial results that suggest it might be able to outperform CBD.
The company's market cap at recent prices is a mind-boggling $3.4 billion, even though its only commercial-stage drug Sativex put up just $8 million in sales last year. If investors catch word of reimbursement issues for Epidiolex, the stock will plummet.
Here's what could go wrong for short-sellers
An FDA greenlight in June could make Epidiolex available for perhaps 20,000 children affected by severe forms of epilepsy. If the drug's addressable patient population stays this small, the company needs to secure six-figure reimbursement levels to justify its lofty valuation. That doesn't seem likely.
Instead, enthusiastic investors are hoping Epidiolex will successfully expand to a much larger population of patients dissatisfied with available treatments. Epilepsy affects around 3.4 million Americans and is associated with more deaths each year than breast cancer. Existing anti-epileptic drugs don't reduce seizure frequency for more than a third of patients, and many become resistant. Not only are existing anti-epileptic drugs often ineffective, they also come with side effects that make pure CBD seem like root beer.
An interesting show to watch from a safe distance
We still don't know how much GW Pharmaceuticals will try to charge for its CBD tincture, but annual costs in the low five figures are expected. I won't be surprised if patient-advocacy groups influence U.S. end payers to foot such a hefty bill for severely affected pediatric patients. Trying to charge such a high price among the wider adult population, though, would probably incur fierce pushback from insurers and government payers.
At the right price, Epidiolex might become a popular alternative to loosely regulated over-the-counter CBD, but I don't think the drug will ever generate enough revenue to support the company's sky-high valuation. There are plenty of good reasons not to join the short-sellers betting against its success, but they're probably right.
Editor's note: A previous version of this article misstated the percentage of shares sold short.