It hardly seems possible, but life just got a lot more complicated in Washington, D.C. The U.S. Department of Justice still insists marijuana has zero medical benefits, yet the Food and Drug Administration just approved the first drug derived from a marijuana plant.
Epidiolex didn't leave any questions about its ability to safely treat severe epilepsy, and that has encouraged investors to make its developer, GW Pharmaceuticals (NASDAQ:GWPH), a $4.1 billion company at recent prices. If Epidiolex sales enter the $1 billion per year neighborhood, shareholders could see some gains in the years ahead. Here's a look at some unique challenges that could get in the way of such lofty expectations.
Approved, but not legal yet
Public opinion concerning medical marijuana has come so far in such a short time that a murky legal status will probably be the least of GW Pharmaceuticals' problems while trying to launch Epidiolex. That said, there is still a major tangle to work out.
The Drug Enforcement Agency still lists marijuana under Schedule 1 of the Controlled Substances Act, which means it isn't legal to sell for any reason. In the past, the DEA has allowed the sale of synthetic cannabinoids by listing them by name under Schedules 2 or 3, which allow for tightly controlled medicinal use. Epidiolex isn't synthetic, though, it's purified from real marijuana plants.
GW Pharmaceuticals can't launch Epidiolex unless the DEA gives it a favorable scheduling, which it should do within 90 days of the FDA's approval. It's hard to imagine the DEA withholding access to a drug that impressed an entire panel of distinguished physicians in an open forum, but we are dealing with a federal law enforcement agency that's being asked to contradict itself under a spotlight. The collection of life-science professionals impressed by clinical trial data no longer have much say in the matter.
It might not have much pricing power
This won't matter if the DEA doesn't allow its sale, but GW Pharmaceuticals hasn't announced pricing details for Epidiolex yet. The strawberry-flavored tincture is only approved to treat severe forms of epilepsy that are extremely rare, and if GW Pharmaceuticals stock is going to stay aloft, the company needs to show investors it can get insurers to accept an awfully high price for each patient. That might be a lot harder than usual for this drug.
Epidiolex is in a unique situation for a newly approved medicine expected to achieve 10-digit annual sales figures: Just about any adult can already buy its active ingredient, cannabidiol (CBD). This is one of the most abundant cannabinoids in marijuana, but unlike tetrahydrocannabinol (THC), CBD isn't psychoactive. Adults with sore backs, insomnia, and epilepsy have been ordering CBD tinctures from dozens of online vendors for years, and I've even seen it for sale in gas stations.
In its approval statement, the FDA hurled a direct threat at manufacturers of other CBD-containing products that try to piggyback on GW Pharmaceuticals' success. I do expect the agency to take swift action against manufacturers that claim their CBD tinctures offer the same benefits as Epidiolex, but there's not much anyone can do to stop epilepsy patients from finding out they can get the same ingredient somewhere else.
Will there be a profit margin?
According to the Epidiolex prescribing label, patients will take between 5mg and 20mg of CBD per kilogram of body weight each day. Epidiolex is indicated for children two years of age and older, and treatment will get expensive.
It turns out that even cheap stuff isn't cheap. I did a little shopping around, and it looks like it would cost at least $50,000 per year to feed a 220-pound adult two grams of CBD through a tincture every day.
Granted, the average child with one of the severe forms of epilepsy that Epidiolex is approved to treat will be much smaller, but it's clear that this isn't an inexpensive drug to manufacture. I'm not sure what kind of profit margins the CBD vendors I perused enjoy, but there's enough competition out there to suggest they're awfully slim.
Today's CBD tinctures are regulated as supplements, which is to say they are hardly regulated at all. Manufacturing something that can be legally marketed as medicine is a lot more expensive. I'm worried that GW Pharmaceuticals won't be able to squeeze out a very wide profit margin on each vial it sells unless it can give Epidiolex a six-digit per year price tag. If it does this, though, the drug will be out of reach for hundreds of thousands of less-severe epilepsy patients who would like a new treatment option.
A long way to fall
I don't think the DEA or insurers will block access to Epidiolex for its current addressable patient population. Unfortunately, it's probably too small to drive sales to a level that justifies the stock's $4.1 billion market cap. Once investors realize this, things could get ugly.