This was expected to be the year that everything went right for the cannabis industry. To our north, Canada had become the first industrialized country in the world to legalize recreational marijuana and commenced sales in October 2018. Derivative products were also presumed to hit dispensary shelves by no later than October 2019. Meanwhile, numerous states in the U.S. have been pushing toward legalization in what should be the most lucrative cannabis market in the world.
But these visions of grandeur quickly went up in smoke once the first quarter came to a close. Direct marijuana players in North America were clobbered by a confluence of factors, including supply issues in Canada and high tax rates in select states. But perhaps the biggest surprise is that ancillary players were hammered, too.
Cannabinoid-focused drug developer GW Pharmaceuticals (GWPH), for example, has lost 43% of its value on a trailing-seven-month basis (through Dec. 22) since hitting its yearly high on May 22. Is this dip in one of the more popular pot stocks deserved, or could this be an incredible buying opportunity? Let's take a look.
The buy thesis
To start with the obvious, GW Pharmaceuticals is the only biotech company that's been able to get a cannabis-derived drug approved by the Food and Drug Administration. The company's lead drug is Epidiolex, an oral therapy based on cannabidiol (CBD) that was approved in June 2018 to treat two rare forms of childhood-onset epilepsy known as Lennox-Gastaut syndrome and Dravet syndrome. Prior to this approval, Dravet syndrome had no FDA-approved treatments, so this was a big step forward for patients. In various clinical studies, Epidiolex wound up reducing seizure frequency in patients by between 30% and 40% from baseline.
Another reason to consider the stock as a buy is the company's successful launch of Epidiolex. Considering that synthetic versions of cannabinoids have face-planted in recent history, GW Pharma's successful launch of Epidiolex should be seriously commended. In the third quarter, the company recorded net sales of $86.1 million, and has collected $188 million in net sales through the first nine months of 2019. It might be well on its way to over $500 million annually with its two existing indications.
Just as important, GW Pharmaceuticals has managed to get 93% coverage from commercial, Medicare, and Medicaid insurance plans. While more or less on par with seizure treatments in terms of cost, Epidiolex isn't cheap. Therefore, securing insurer coverage across more than 9 out of 10 insurance plan platforms is a big deal.
Lastly, a potentially bountiful pipeline is waiting in the wings. There's a decent chance that we'll eventually see Epidiolex's label expanded to include tuberous sclerosis complex (TSC) following positive late-stage trial data. Just weeks ago, GW Pharma announced that Epidiolex provided a greater reduction in TSC-associated seizures than the placebo (49% for the 25 mg Epidiolex dose and 48% for the 50 mg dose, versus 27% for the placebo), with more patients also experiencing a 50% or greater seizure reduction compared with the placebo. Beyond Epidiolex, other cannabinoid-based compounds are in development for autism spectrum disorders and glioblastoma, to name a few indications.
The avoid thesis
Based on the above factors, GW Pharmaceuticals probably sounds like a surefire buy. But there are two sides to this story.
To begin with, Wall Street is all about the bottom line. And while sales of Epidiolex have been better than expected, this is a company that's still, for now, losing money. Removing a number of one-time benefits and costs from the equation, GW Pharmaceuticals produced a loss from operations of $17.7 million in the third quarter, and $98.3 million through the first nine months of 2019. The good news is that the company has plenty of cash on hand to weather these losses and fund its research. However, with anything even remotely related to cannabis getting shellacked in recent months, these losses aren't going to be well received by Wall Street.
Another point to consider is that Epidiolex is probably not going to be the only game in town. Zogenix's (ZGNX) Fintepla has on numerous occasions impressed with late-stage data in patients with Dravet syndrome. In 2018, for instance, Zogenix reported that Fintepla wound up leading to a 55% reduction in seizure frequency for Dravet patients relative to baseline. Keep in mind that while Zogenix's Fintepla and GW Pharma's Epidiolex have not gone head-to-head, this 55% reduction from baseline, at least on paper, should sound intriguing to patients and physicians. GW Pharmaceuticals did catch a break with Zogenix receiving a refuse-to-file letter from the FDA, but Zogenix has since resubmitted its new drug application.
Third and last, not all of GW Pharma's cannabinoid-based ventures have proved successful. Sativex, an oromucosal spray designed to treat spasticity associated with multiple sclerosis, is an approved therapy in more than a dozen European countries. Despite this approval, Sativex sales have been virtually nonexistent for years. It's a stiff reminder that not every cannabinoid-based drug will be a success, nor will every clinical trial.
Now that we've been able to take a look at both sides of the aisle, we can get back to the primary question: With GW Pharmaceuticals down 43% over the past seven months, is now the time to buy?
Being the highly opinionated investor I am, it's incredibly rare that I'll take a middle-of-the road view. However, this is one of those instances. In other words, I don't believe GW Pharmaceuticals is a buy right now, but I also don't believe it's a stock that investors should bet against. It's what you might call a watch list/wait-and-see stock.
On one hand, I'm intrigued by how quickly Epidiolex's sales have ramped up, and am encouraged that GW Pharma should be able to expand the label of its lead drug in the future. Profitability is very much within sight for the company, and it could even happen on a recurring basis by as soon as next year, assuming the strong uptake of Epidiolex continues.
On the other hand, the company hasn't shown that it has complementary cannabinoid-based therapies beyond Epidiolex to carry the load. Furthermore, with Zogenix's Fintepla waiting in the wings for possible approval, it leaves the door wide open for Epidiolex's market share to be significantly cut.
For the time being, I believe watching and waiting is the most prudent move with GW Pharmaceuticals.