What happened

Shares of GW Pharmaceuticals (NASDAQ:GWPH) were up 10% as of 2:50 p.m. EDT Thursday after rising as much as 13.6% earlier in the day. The biotech continued to enjoy momentum that started yesterday spurred by Morgan Stanley analyst David Lebowitz's report that the U.S. Drug Enforcement Administration (DEA) plans to reclassify GW's cannabidiol (CBD) drug Epidiolex as a Schedule IV controlled substance.

So what

GW Pharmaceuticals won U.S. Food and Drug Administration (FDA) approval in June for Epidiolex as a treatment for Dravet syndrome and Lennox-Gastaut syndrome (LGS), both of which are rare forms of epilepsy. However, that was only the first regulatory hurdle for the drug. Because Epidiolex is a cannabinoid, it also must be classified by the DEA under one of five schedules for controlled substances.

Marijuana leaves on table next to beakers filled with green liquid.

Image source: Getty Images.

Currently, all marijuana-related products are grouped into the Schedule I classification by default. Drugs in this schedule are illegal at the federal level, with the U.S. government declaring them to have "no currently accepted medical use and a high potential for abuse." Obviously, since GW Pharmaceuticals secured FDA approval for Epidiolex after achieving success in several late-stage clinical studies, the drug clearly has an "accepted medical use." It was clear that the drug would be reclassified into another schedule, but which one it would be assigned to was up in the air.

GW Pharmaceuticals CEO Justin Gover predicted even before the FDA approval for Epidiolex that the drug would receive no worse than a Schedule IV classification. Schedule IV drugs are defined by the DEA as having "a low potential for abuse and low risk of dependence." Based on the Morgan Stanley report, that's the category it appears that Epidiolex will indeed receive. This is good news for GW because it means that there won't be stringent limitations placed on distributing the product.

Now what

The DEA still has yet to announce its scheduling decision for Epidiolex. However, there's no reason to doubt the Morgan Stanley report that the agency will classify Epidiolex as a Schedule IV drug.

What's even more important for GW Pharmaceuticals now is how well the commercial launch for Epidiolex goes. Some believe that the drug won't gain a lot of traction while others think Epidiolex could become a blockbuster over the next few years. Which view proves to be more accurate will determine whether or not GW Pharmaceuticals stock keeps its momentum going.

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