What happened

Shares of GW Pharmaceuticals (NASDAQ:GWPH), a biopharmaceutical company focused on cannabinoids, are sinking in response to a relatively good third-quarter earnings report. Despite beating consensus estimates on the top and bottom lines after the bell on Tuesday, the pharma stock has fallen 16.3% as of 12:18 p.m. EST on Wednesday.

So what

Adult epilepsy patients have been using marijuana in one form or another to treat themselves since forever, but they have had to pay for it themselves. GW Pharmaceuticals' lead drug, a cannabidiol (CBD) tincture called Epidiolex, became the first FDA-approved drug derived from marijuana last June, and sales shot up like a rocket following its launch last November.

Frustrated trader looking at his monitor.

Image source: Getty Images.

Epidiolex's approval is limited to a small number of patients with two severe forms of early-onset epilepsy. Doctors can prescribe Epidiolex for unapproved conditions, but these patients generally can't receive reimbursement from private insurers and government payers. Around 15,000 people have received Epidiolex since its commercial launch, which means its limited audience is approaching a saturation point.

Epidiolex sales reached $86 million in the third quarter, which was 25.9% more than the company recorded during the second quarter. While 25.9% sequential sales growth is nothing to sneeze at, it pales in comparison to second-quarter results. During the three months ended in June, Epidiolex sales exploded 104% higher than the previous quarter.

The relative slowdown was a pretty big deal, because yesterday, GW Pharmaceuticals was a $4.2 billion company. If Epidiolex sales plateau over the next several quarters, nobody will be able to justify such a high valuation.

Now what

This December, GW Pharmaceuticals will present phase 3 Epidiolex data from a trial with tuberous sclerosis complex (TSC) patients. This is a rare disease that affects 1 child in 6,000, which makes it more common than Epidiolex's currently approved indications.

Patients born with TSC develop lots of nonmalignant tumors all over, including tumors that hinder brain development. If the ongoing study with TSC patients succeeds, GW Pharmaceuticals could double its addressable patient population before the end of 2020.