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1 Picture You Need to See Before Writing Off GW Pharmaceuticals

By Keith Speights - Jan 19, 2020 at 9:31AM

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The cannabis-focused biotech's presentation at the J.P. Morgan Healthcare Conference was eye-opening.

We could probably all now agree that the biggest naysayers of GW Pharmaceuticals (GWPH) and its CBD drug, Epidiolex, have been proved wrong. One GW skeptic said in 2018 that he'd "be shocked if annual Epidiolex sales ever reach $300 million." The drug topped that amount in its first full year on the market.

Even with the U.S. launch of Epidiolex surpassing expectations, some investors could still be concerned that GW Pharmaceuticals' share price already bakes in the growth potential for the drug. GW Pharmaceuticals CEO Justin Gover's presentation last week at the J.P. Morgan Healthcare Conference should give investors something to think about. There was one picture, in particular, in Gover's presentation that you need to see before writing off GW Pharmaceuticals.

An Epidiolex box, bottle, and syringes.

Image source: GW Pharmaceuticals.

A chart some will focus on

Before we get to that important picture, though, let's first look at a chart in Gover's presentation that many investors will focus on. This chart shows just how impressive GW's revenue growth has been over the last five quarters.

GW 2019 net sales revenue growth bar chart

Image source: GW Pharmaceuticals.

There's a lot to like about this chart. However, investors who don't think highly of GW's prospects will probably quickly spot that the quarter-over-quarter growth rate for the biotech's sales is slowing significantly.

GW Pharmaceuticals bulls, though, would rightly point out that the company's sales growth so far has been driven by the U.S. launch of Epidiolex. The drug now has European approval, and GW is launching it on a country-by-country basis. Sales growth could pick up in 2020 thanks to the multiple European rollouts of Epidyolex (the brand is spelled slightly different from the U.S. version).

The picture that really matters

But Justin Gover showed a slide at the J.P. Morgan conference that should expand the thinking for investors considering the growth opportunity for GW Pharmaceuticals. Here's the picture that really matters for the company.

Unmet need in treatment-resistant epilepsy diagram

Image source: GW Pharmaceuticals.

On the left side of the above diagram are the two indications for which Epidiolex is currently approved -- Dravet syndrome and Lennox-Gastaut syndrome (LGS). The drug has been remarkably successful in these two indications so far from a commercial standpoint, winning reimbursement from U.S. payers and, as we've already seen, racking up big sales.

However, there are no more than 70,000 patients in total with either Dravet syndrome or LGS. If Epidiolex could pick up an approval for treating seizures associated with tuberous sclerosis complex (TSC), its addressable patient population would increase by at least 57% and perhaps significantly more than that. The good news for GW is that it could win FDA approval for Epidiolex in the TSC indication later this year and European approval relatively soon afterward.

And that's just the tip of the iceberg. Dravet syndrome, LGS, and TSC are rare forms of epilepsy. Should GW be able to win regulatory approvals for cannabinoid drugs in treating all treatment-resistant forms of epilepsy, the company could expand its potential market nearly tenfold.

There are also opportunities for GW that the above picture doesn't include. For example, the company hopes to win FDA approval for nabiximols (which is marketed outside the U.S. as Sativex) in treating multiple sclerosis spasticity. In addition, GW is evaluating other cannabinoid drugs in clinical studies for treating conditions including autism spectrum disorders and schizophrenia.

But there's a catch

So should investors scoop up shares of GW Pharmaceuticals right now with so much opportunity before it? Not so fast. There's a catch that anyone who follows biotech stocks will be all too familiar with: Potential approvals aren't the same thing as actual approvals.

Yes, GW announced positive results last year from a late-stage clinical study evaluating Epidiolex in treating TSC. The chances of winning regulatory approvals should be pretty good, although it's not a slam dunk. But GW Pharmaceuticals hasn't been all that clear on its path to obtaining access for Epidiolex in treating the broader population of epilepsy patients.

As for the rest of the biotech's pipeline candidates, all except for nabiximols are in early- to mid-stage clinical trials. There's a long way to go before seriously talking about regulatory approval and commercialization of these products.

The bottom line for GW Pharmaceuticals is that plenty of question marks continue to hover over it. However, with the company's market cap below $4 billion, an approved drug that could easily top $1 billion in annual sales, and significant pipeline opportunities, aggressive investors might want to consider taking a nibble with this biotech stock.

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