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Is GW Pharmaceuticals an Opportunity Before Earnings?

By Anne Burdakin - Oct 23, 2019 at 6:00AM

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Cannabis-based medicine is already bringing relief to many with more potential ahead.

GW Pharmaceuticals ( GWPH ), a U.K.-based company, is a biotech that has pioneered the medical cannabis field and is capitalizing on its first-mover advantage.

Founded in 1998, biotech veterans Dr. Geoffrey Guy and Dr. Brian Whittle worked closely with U.K. regulatory agencies in establishing necessary licenses and procedures to facilitate cannabinoid medical research. The first GW Pharmaceuticals clinical trials began in 1999.

By contrast, U.S. biotech companies still face multiple federal regulation hurdles in even primary medical cannabinoid research and clinical trials. Though many states have legalized cannabis, research and development remains limited until there is federal legalization. 

"The doctor is the gatekeeper of the patient's health," Dr. John Taenzler, partner at market researcher Cannalytic Insights, told Axios. But "pharma's got their hands tied."

CBD oil being displayed in front of marijuana plants

Image Source: Getty Images

Since the first clinical trials in 1999, GW Pharmaceuticals has focused on distinct cannabinoid-based therapies for illnesses including epilepsy, glioma, and schizophrenia. The product pipeline is filled with products in various stages of development and regulatory approval.

In 2018, the U.S. Food and Drug Administration approved Epidiolex, a treatment for rare and medication-resistant childhood epilepsy conditions. It was the first FDA approved drug containing a purified drug substance known as cannabidiol (CBD) derived from marijuana. The medication does not contain THC, the ingredient that causes a "high." The product was launched in 2018 and is available by prescription in the U.S.

After a few months of being on the medication and finding the "sweet spot" of the correct dosing, Nicole says Evan's seizures drastically dropped, and he began talking again.

"He is like a different kid," she says. "He isn't doped up all the time, he is talking and happy. It's been amazing to see his personality blossom again."

The long and winding road

Since Epidiolex was made available by prescription in November 2018, GW's stock price has ranged between $90 per share to $196 per share. Its current share price is $121.

All analysts who cover it rate it a buy and the median consensus stock price target is $230. Second-quarter 2019 revenue totaled $72.0 million versus just $3.3 million for the second quarter of 2018.

Epidiolex sales have doubled each quarter since its introduction. Third-quarter 2019 earnings are due Nov. 5 and Wall Street expects them to be very good.

That's a big difference between the current price, the 52-week high price, and target price. Did something happen?

Yes, and it presents an investing opportunity.

What has investors excited

The entire cannabis sector has been pummeled since the summer. Supply issues, regulation, underfunded company failures -- have all contributed to a loss of investor confidence. The biggest issue is the vaping crisis, affecting both tobacco and cannabis companies.

GW Pharmaceuticals is not connected with any of those issues but has been painted with the broad brush of negativity affecting all things cannabis.

Then the company was hit by a research report issued by internist and healthcase hedge fund advisor Elliot Favus, CEO of Favus Institutional Research on Sept. 20 that said Epidiolex-related deaths had spiked according to the FDA's database. The data showed an increase in Epidiolex-related deaths during July and August. In July, there were 16 Epidiolex U.S. deaths versus 15 Epidiolex-related deaths between January and June. Favus suggested Epidiolex may be pulled from the market.

The problem with Favus suggesting deaths spiked due to Epidiolex is that patients being treated with the drug typically have a multitude of health issues that often result in death. It's not possible to directly link Epidiolex with the deaths without significant controlled studies that demonstrate causation.

Additionally, month-to-month data comparisons are not significant. The database exists to track trends that may require further study, but health trends take place over years and typically fluctuate a great deal. Favus has refused to discuss his analysis since issuing the research report.

The scary headlines drove the stock price down to $108 in early October, despite Epidiolex approval in Europe the same week.

GW Pharmaceuticals' stock price was battered by general cannabis-related headwinds and a lone research report that generated frightening headlines. But, for investors who recognize a stock that has been beaten down through no fault of its own, this spells opportunity, especially in advance of expected positive earnings results on Nov. 5.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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