The clock is ticking for what's probably the most important quarterly update GW Pharmaceuticals (NASDAQ:GWPH) has ever delivered. The cannabis-focused biotech announces its latest results on Feb. 26, and those results will include the first information available thus far about how well the launch of cannabidiol drug Epidiolex is going.
GW Pharmaceuticals stock has soared more than 50% so far in 2019. But is the biotech still a buy as its critical update approaches?
Reading the tea leaves
GW Pharmaceuticals' near-term fortunes ride entirely on commercial success for Epidiolex. The problem is that we won't have hard numbers on how well Epidiolex is doing until Tuesday. But if you like to read the tea leaves a bit, there are some hints about what to expect.
In January, GW Pharmaceuticals CEO Justin Gover spoke at the J.P. Morgan Healthcare Conference. Gover provided several reasons investors should be optimistic about Epidiolex's performance.
Perhaps the most important thing Gover shared was that four of the five largest U.S. payers have already agreed to reimburse for Epidiolex. In addition, the country's largest pharmacy benefits manager has included the drug as a preferred brand on its national formulary with no prior authorization required for nearly three-quarters of its members. As for Medicaid, over 90% of fee-for-service Medicaid plans and 80% of Managed Medicaid plans have also initiated coverage for Epidiolex.
This acceptance by payers is big, since few patients would be able to afford Epidiolex on their own, with its list price of $32,500. But will healthcare providers prescribe the drug? The signs point to yes.
There's no question that significant unmet need exists for patients with Dravet syndrome and Lennox-Gastaut syndrome (LGS), both rare forms of epilepsy. LGS has no approved drugs other than Epidiolex. The last new treatment for Dravet syndrome was launched eight years ago.
With major payers on board and this unmet need, the primary challenge for GW is to educate physicians about the benefits of Epidiolex. Gover said in January that the biotech's sales team had interacted with around 70% of the targeted 5,000 physicians.
What would be considered a successful first quarter for Epidiolex? The consensus among Wall Street analysts is that GW will report sales of $5.35 million. If you back out around $2.3 million in sales for the biotech's other cannabis drug, Sativex, that would mean Epidiolex is expected to generate sales of around $3 million. Anything significantly more than that will point to a very good start for the drug.
But what about valuation?
The chief problem with buying GW Pharmaceuticals stock, though, is that investors are already assuming a fantastic launch for Epidiolex. GW's market cap stands at close to $4.9 billion. That's more than 381 times trailing-12-month sales, so you can be assured there's a lot of optimism about Epidiolex's potential.
But let's do a little number crunching. The average price-to-sales (P/S) ratio for biotech stocks is around 6, according to data compiled by New York University professor and valuation expert Aswoth Damodaran. Using this average P/S multiple, GW Pharmaceuticals would need Epidiolex to generate annual sales of more than $800 million to justify its current valuation.
Will Epidiolex be that successful? Probably so. I'm not as bullish about the drug's prospects as Bank of America analyst Tazeen Ahmad, who projects peak sales of $2.4 billion. However, my view is along the lines of EvaluatePharma's estimate of Epidiolex sales close to $1 billion by 2022.
If we use a $1 billion sales figure and Damodaran's average P/S multiple for biotechs, GW Pharmaceuticals' market cap could grow to nearly $6 billion within a few years. The good news is that reflects an upside of around 20%. The bad news is that on an annualized basis, the implied return isn't anything to get excited about.
Check out the latest GW Pharmaceuticals earnings call transcript.
To buy or not to buy
I have liked GW Pharmaceuticals for a while. My take is that Epidiolex will indeed be a rousing commercial success. However, I don't think there's enough room for GW to run now to make it a compelling stock to buy.
That doesn't mean GW won't continue to enjoy some momentum. Better-than-expected sales for Epidiolex when the company reports its quarterly results would almost certainly provide a nice boost to GW's share price.
But I'd prefer to see the data from the ongoing phase 3 clinical study evaluating Epidiolex in treating tuberous sclerosis complex before reconsidering whether to buy GW Pharmaceuticals. The biotech expects to announce the late-stage results in the first half of 2019. For now, at least, I view GW Pharmaceuticals as a stock to closely watch -- but not buy.