Here's how it's supposed to work. A biotech wins FDA approval for a promising new drug. The biotech stock then goes up. But that's not what happened for GW Pharmaceuticals (NASDAQ:GWPH) on Monday.

GW Pharmaceuticals got the first part right. The biotech announced FDA approval for cannabidiol drug Epidiolex in treating Dravet syndrome and Lennox-Gastaut syndrome (LGS), both of which are rare forms of epilepsy. However, GW stock didn't go up. Instead, it dropped more than 4%.

Why didn't the stock jump on the great news? Here are three reasons behind GW Pharmaceuticals' drop. 

Man holding notebook with question mark drawn on page

Image source: Getty Images.

1. Overall market drag

There's an old saying that a rising tide lifts all boats. However, a falling tide also brings all boats down. 

I think this was a big factor for GW Pharmaceuticals stock on Monday. Most stocks fell on reports that the Trump administration planned to impose new trade restrictions on China, and potentially other countries. 

What do these trade restrictions have to do with Epidiolex? Nothing. The FDA approval allows marketing of the drug only in the U.S., but the market doesn't care about such details. Many simply see that stocks are selling off, so they think they should sell off nearly every stock. It doesn't make sense, but it's what sometimes happens.

2. Approval wasn't a surprise

Would GW Pharmaceuticals stock have gone up if the market wasn't having a down day? Probably, but not necessarily by a large amount. 

The approval of Epdiolex was fully expected. In April, an FDA advisory committee voted unanimously to recommend approval for the drug. This vote was based on stellar results from three late-stage clinical studies. The advisory committee couldn't find much not to like about Epidiolex.

While the FDA doesn't have to follow the recommendations of advisory committees, it usually does. An analysis conducted by McKinsey found that the FDA approved a drug in 88% of the cases where an advisory committee had recommended approval. 

The actual approval of Epidiolex on Monday removed the sliver of a doubt that might have been in some investors' minds. However, I think that anticipation of an approval was already largely baked into GW Pharmaceuticals' stock price. 

3. Now comes the hard part

Another likely reason GW Pharmaceuticals stock didn't enjoy a solid bounce on Monday is that the biotech now faces the hard part -- achieving commercial success for Epidiolex. Actually, there's a hurdle before commercialization that GW must clear first: Epidiolex must be scheduled by the U.S. Drug Enforcement Administration (DEA), a process that can take up to 90 days.

GW Pharmaceuticals will probably begin marketing Epidiolex in the U.S. in early fall. There are three keys to achieving commercial success. First, payers must cover Epidiolex. Second, physicians must prescribe the drug. Third, patients must want to take Epidiolex rather than use medical marijuana instead.

I thought GW Pharmaceuticals executives made some good points at the Bank of America Merrill Lynch 2018 Health Care Conference in May. The company's president of North American operations, Julian Gangolli, stated that payers "get the science" and "understand the value" of Epidiolex. That's key to winning them over to cover the drug. I suspect that if payers cover Epidiolex, physicians will definitely prescribe it because of the unmet medical need in treating epilepsy.

As for patients potentially taking medical marijuana instead of Epidiolex, GW Pharmaceuticals CEO Justin Gover pointed out that the costs of using cannibidiol (CBD) oils at the therapeutic dosages provided with Epidiolex are really high. He thought that patient out-of-pocket costs would be manageable -- and much lower than buying CBD products. I suspect this view is right. 

Will GW Pharmaceuticals stock go up?

I think whether or not GW Pharmaceuticals stock does move higher depends entirely on what happens later this year and in 2019. A better-than-expected launch of Epidiolex would likely send shares soaring.

Estimates for peak sales of Epidiolex are all over the map. Pessimists think the figure could be around $300 million. Market research firm EvaluatePharma projects peak sales close to $1 billion. The most optimistic analysts think the drug could make $2 billion or more.

GW Pharmaceuticals' market cap currently stands at close to $4 billion. If the early launch of the drug hints that the optimists could be right, the stock has a lot of room to run even without additional pipeline victories. But anything short of a significant commercial success could cause GW Pharmaceuticals' stock price to sink a lot more than it did on Monday.

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