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Is It Time to Get in on GW Pharmaceuticals While the Price Is Right?

By Jim Halley - May 6, 2020 at 5:28AM

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It isn’t turning a profit yet, but its revenue is about to jump.

GW Pharmaceuticals (GWPH) is a crossbreed: a biotech and a cannabis company. Based in England and founded in 1998, the company's focus is examining various cannabinoid formulations as potential therapeutics.

The stock's share price has dropped 53% from a year ago. That's not unusual among cannabis companies; many of them saw a surge in popularity with investors last April, only to come down to earth last summer when investors realized the business models were unsustainable. However, that doesn't appear to be the case for GW Pharmaceuticals, a medical marijuana company with a big upside.

GW Pharmaceuticals's biggest drug is Epidiolex, a liquid, purified form of cannabidiol (CBD). The drug is used for the treatment of seizures associated with Lennox-Gastaut syndrome or Dravet syndrome, two rare forms of epilepsy, in patients older than 2. Last year, in its first full year on the market, the drug brought in $296.4 million, and that number will likely jump this year. 

Cannabis plant

Image Source: Getty Images.

Last month, Epidiolex was descheduled by the Drug Enforcement Agency, meaning it can be sold in pharmacies in the United States without federal controlled-substance restrictions.

This opens the company's top seller to U.S. markets. The Food and Drug Administration is also looking at a positive phase 3 study with Epidiolex to see whether the drug can be approved to treat seizures in a genetic disorder called tuberous sclerosis complex, which causes tumors. That answer could come as soon as this summer. The drug is also undergoing a phase 3 trial to determine its effectiveness in treating Rett syndrome, a very rare genetic mutation that affects the development of the brain, most commonly in girls.  

The company's other main drug is nabiximols, known as Sativex outside the United States. This cannabis-based mouth spray is used to treat spasticity in multiple sclerosis patients in 25 countries, though it has not been approved for that use yet in the U.S., where it's undergoing a phase 2 trial in the second quarter. Clinical trials are also scheduled later this year to test its effectiveness in treating spasticity in spinal cord injuries and in post-traumatic stress disorder (PTSD).

Another product in the company's pipeline is schizophrenia drug GWP42003, a cannabidiol-based treatment the company expects to put through a phase 2B study to determine efficacy in the latter half of this year.

Huge growth potential -- but plenty of risk, too

Last year, GW Pharmaceuticals had $311.3 million in product sales, an increase of $295.9 million -- or 1,921% -- from the $15.4 million it recorded at the end of 2018. Those numbers are hard to ignore, and while that rate of growth is likely unsustainable, the subscriber base for the company's drugs should continue to noticeably expand.

GW Pharmaceuticals isn't turning a profit yet, but it does have $536.9 million in cash on the balance sheet, and it's headed in the right direction. A loss of $17.7 million for the year was much better than the $305.3 million loss posted in 2018.

Another possible scenario: The company could be bought

GW Pharmaceuticals is a small company, with a little more than 900 employees and a relatively new sales force. In its annual report, management concedes that this is an area of concern as it attempts to ramp up marketing for Epidiolex and nabiximols. That's true of a lot of emerging drug companies, of course -- you don't hire a full sales staff before you find a marketable product. However, it also makes GW Pharmaceuticals a potential acquisition for a larger pharmaceutical company, which would not be a bad thing for shareholders.

Is the risk worth the potential reward?

In the short term, I would say no, as there's no telling yet what the COVID-19 pandemic has recently done to the company's bottom line. The next quarterly report is coming out May 11, so we'll have better insight then. As a long-term holding, though, GW Pharmaceuticals looks tempting. The company has one big seller that's just starting to come into its own and will likely have wider applications, as well as several other drugs in the pipeline. Looking at the current stock price, gobbling up some stock now and holding it could become very profitable.

Jim Halley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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