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Better Buy: GW Pharmaceuticals vs. Cara Therapeutics

By Mark Prvulovic - Feb 4, 2020 at 9:00AM

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Despite their differences, there's a lot of good things going on for both of these health companies.

If you're looking for promising biotech stocks, there's plenty of options to choose from. Cara Therapeutics (CARA 3.09%) is a small-cap company that stayed strong for most of 2019 but has since given back a lot of its value. While it's fallen slightly out of favor, many experts still have high expectations for the stock.

On the other hand, GW Pharmaceuticals (GWPH) is a larger drug developer that has been growing rapidly over the past year. Driven primarily by the explosive sales growth its cannabidiol (CBD) based drug, Epidiolex, GW Pharma has been a favorite among biotech and cannabis investors alike. However, the stock has lost a fair chunk of its value over the past six months despite its impressive revenue growth.

Which of these two stocks is a better buy today, you might ask? 

Medical researcher doing scientific research in a lab.

Image source: Getty Images.

Looking at Cara Therapeutics

Cara Therapeutics' main claim to fame is its lead drug candidate, Korsuva. Aimed at treating a form of bodily itching called pruritus, Korsuva specifically targets patients with kidney-related conditions -- such as chronic kidney failure -- which frequently result in patients developing kidney-related pruritus. With no specific treatments for this condition, doctors end up prescribing general pain medications such as opioids, corticosteroids, and antihistamines.

The problem is that chronic use of these pain drugs can lead to troubling side effects. Even putting aside the possibility of addiction, patients can experience complications such as nausea, weight gain, constipation, and high blood pressure. More severe conditions can also develop from overuse of these drugs, such as osteoporosis, diabetes, and eye disorders such as glaucoma.

On the other hand, Korsuva is relatively symptom-free. Unlike general pain drugs, which target the central nervous system, Korsuva works by targeting the peripheral nervous system, which doesn't interfere with the neurotransmitters in the brain. For the nearly two million Americans who have been diagnosed with kidney-related pruritus, Korsuva would be a substantial improvement from the current standard of care.

The one snag with Korsuva is that it suffered a recent clinical setback. Trial results have been strong for the most part, but in December, Cara revealed the drug failed to meet its secondary endpoints for a phase 2 trial. The trial was meant to test how much of an improvement in itching symptoms patients witnessed according to the Worst Itching Intensity Numeric Rating Scale (WI-NRS). The primary endpoint of the study, which Korsuva did meet, was to see at least a one-point average improvement in patient's WI-NRS scores, while the secondary endpoint was to see at least a three-point average improvement.

Cara Therapeutics went into the study confident it would meet this secondary endpoint, and analysts and investors alike were surprised to see Korsuva underperform. While one trial doesn't take away from Korsuva's otherwise strong clinical record, it is something investors should note.

What's the appeal behind GW Pharma?

Just as Cara Therapeutics' success has been focused on its lead candidate, GW Pharma has caught the attention of both biotech and cannabis investors for its own signature drug, Epidiolex.

Having the distinction of being the first CBD-based drug to receive approval from the U.S. Food and Drug Administration in 2018, Epidiolex treats two rare types of epilepsy in children, Lennox-Gastaut syndrome and Dravet syndrome.

While Korsuva is still in clinical testing, Epidiolex is already available on the market and has seen a dramatic increase in sales. In the company's pre-released fourth-quarter results, the drug brought in $104 million in revenue for the quarter, with approximately $296 million in sales for the entire year.

Considering that some analysts think that Epidiolex could grow to a $2 billion per year drug at its peak, the consensus seems to be that the drug has plenty of room to continue growing.

The picture looks even better for GW Pharma in light of recent news from across the Atlantic ocean, where the European Commission approved the drug for both Gastaut syndrome and Dravet syndrome.

GW Pharma is also working on expanding Epidiolex's approval to treat other conditions, such as Tuberous Sclerosis as well as Rett Syndrome, a rare developmental disorder that causes a loss of motor skills and speech. Should these phase 3 trials prove conclusive, the drug could very well receive expanded approval from the FDA to treat these conditions as well.

Analyzing the financials

Cara Therapeutics is first and foremost a small-cap, late-stage biotech stock, and as such, must be looked at in a different light as a large-cap giant such as GW Pharma.

First of all, revenues for Cara came in at $5.8 million for its third quarter ending on Sept. 30, all of which came from license and milestone related payments. However, operating expenses far eclipsed the company's revenue, bringing the firm to a total net loss of $32.8 million for the quarter.

An accounting statement alongside a pencil and a calculator.

Image source: Getty Images.

However, the company's total short-term assets are $203.5 million, which is enough to last the company for at least six quarters at its current rate of capital expenditure. Cara Therapeutics is expected to submit a New Drug Application (NDA) for Korsuva sometime in the second half of 2020, so if all goes well, Cara could have enough money to last long enough for its drug to hit the market without needing too much extra funding.

In contrast, GW Pharma has been on an impressive revenue growth streak. Net sales have grown exponentially from just $6.7 million in the fourth quarter of 2018 to $108 million as of the fourth quarter of 2019.

Although the company is still operating at a net loss, it's been getting better over the past year as Epidiolex revenues have grown. Net losses have shrunk, from $79.9 million in 2018's third quarter to just $13.8 million in the third quarter of 2019. When the full fourth-quarter results are released, it wouldn't be surprising if the company reveals it's now operating at a profit.

Which stock is the better buy?

While both companies have a lot going for them, I'm a bit more comfortable recommending GW Pharma than I am with Cara Therapeutics.

In the end, Cara is still a clinical-stage biotech stock, and a major setback with Korsuva -- even if unlikely at this point -- would spell disaster for the stock. Epidiolex, on the other hand, has already proven itself as an effective treatment with approval from multiple healthcare regulators.

Couple this with the fact that Korsuva failed to meet its secondary endpoints in December, it's enough to make me at least a bit worried that another setback might come up in the future. GW Pharma's Epidiolex, on the other hand, hasn't given me any reason to be worried.

To the company's credit, Cara does have more growth potential. With a market cap of just $750 million in comparison to GW Pharma's $3.57 billion market cap, Cara has much more explosive potential, especially considering Korsuva's revenue projections.

In the end, however, I'm still going to give the edge to GW Pharma. Although the odds are still in Cara's favor that Korsuva will end up doing fine, the aforementioned clinical setback is enough to make me concerned and decide that GW Pharma is the better buy today.

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