What happened

Shares of GW Pharmaceuticals (NASDAQ:GWPH) fell 13.3% in June, according to data provided by S&P Global Market Intelligence, despite the biotech gaining Food and Drug Administration approval for its epilepsy drug Epidiolex.

So what

For the most part, the stock market values companies based on expectations. Biotech companies often shoot up after positive binary events, such as FDA approvals or clinical trial results, because there's uncertainty about which way the event will go. To justify taking on the risk of shares going down, smart investors will only buy at a discount to the expected post-approval price.

But there wasn't much uncertainty which way the FDA would rule on Epidiolex. The drug is clearly helping patients by lowering seizure rates. Considering the unmet need and a ringing endorsement by the FDA's advisory committee of outside experts, an approval was all but certain.

As a decision approached, investors piled into GW Pharmaceutical's stock, raising its value near the appropriate post-approval valuation. Add a little sell-the-news mentality, and it's not surprising that GW Pharmaceuticals fell on the approval.

Marijuana growing in a greenhouse

Image source: Getty Images.

Now what

Long-term investors who didn't panic during the post-approval decline were rewarded with shares that rebounded over the last week or so to near pre-approval levels.

Now, it's back to waiting for GW Pharmaceuticals and its investors; before the company can start selling Epidiolex, the marijuana-based drug needs to be scheduled by the U.S. Drug Enforcement Administration, which can take a couple of months.

At a market cap of $4.2 billion, GW Pharmaceuticals certainly has some drug sales already priced in, but there's plenty of upside if the company can ramp up sales to around $1 billion.

Brian Orelli and The Motley Fool have no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.