Shares of GW Pharmaceuticals (GWPH) have been sliding since the company reported quarterly results that were arguably positive. Even though GW Pharmaceuticals reported second-quarter product sales that grew 70% year over year, its stock price has tumbled about 20% since announcing results in early August.

The disconnect between year-over-year sales growth and the stock price has inspired some intrepid investors to buy up shares at what could turn out to be a great bargain. Here's what needs to happen for this risky bet to pay off.

Person in a suit wrestling with a downward-sloping chart.

Image source: Getty Images.

Epidiolex sales need to reach expectations

GW Pharmaceuticals is enjoying a relatively successful launch of Epidiolex, a cannabidiol (CBD) tincture approved in 2018 to treat patients with severe childhood-onset epilepsy. Pivotal studies leading to the drug's approval showed impressive reductions in the frequency of convulsive seizures experienced by patients with Dravet syndrome and Lennox-Gastaut syndrome. These results led investors to expect sales of the drug to exceed $1 billion annually at the time of its launch. 

Sales are way up compared to the previous year period, but not compared to the first three months of 2020. In the U.S., second-quarter sales of Epidiolex that reached an annualized $444 million were just 4.7% higher than during the first quarter.

Drugmaker stocks generally trade at mid-single-digit multiples of total sales. Despite falling significantly in recent weeks, GW Pharmaceuticals still boasts a $3.3 billion market cap that probably won't rise much further unless sales of Epidiolex perk up in the second half of 2020.

Why Epidiolex sales should be soaring

At the moment, Epidiolex is the only brand of CBD approved and actively regulated by the Food and Drug Administration. It's also the first drug in a long time to make a big difference for children with debilitating forms of epilepsy that don't respond to standard antiepileptic drugs (AEDs).

During trials leading to its approval, adding Epidiolex to standard AEDs helped reduce convulsive seizure frequency by 75% or better for 24% of Dravet syndrome patients, compared to 12% of those that received a placebo.

More recently, the Drug Enforcement Administration completely removed Epidiolex from the purview of the Controlled Substances Act, making it as accessible as standard AEDs.

Looking ahead

Epidiolex earned approval from the FDA in August to treat patients with tuberous sclerosis complex, a rare disease that affects around 50,000 people in the U.S. Unfortunately for GW Pharmaceuticals, the added indication will probably only offset pressure from a new treatment option for Dravet syndrome patients.

In June, the FDA approved Fintepla from Zogenix (ZGNX) for the treatment of seizures associated with Dravet syndrome. Fintepla is a newly branded version of the ill-fated appetite suppressant fenfluramine.

Unlike CBD, fenfluramine is far too dangerous for common use because of its association with lethal heart complications when used in combination with phentermine as an appetite suppressant called fen-phen. In 1997, the FDA requested the removal of fen-phen from the U.S. market.  

Three columns rise from left to right with a person  standing on the tallest and looking out with a telescope.

Image source: Getty Images.

Fintepla's prescribing label contains a black box warning. Before physicians can prescribe Fintepla, they need to earn a risk evaluation and mitigation strategy certification that includes instructions to monitor the patient's heart ultrasonically before, during, and after treatment.

Fintepla looks like a highly effective treatment option for Dravet syndrome patients. During a pivotal trial leading to its approval, around 58% of those treated with a high dose of Fintepla experienced a convulsive seizure reduction of 75% or better, compared to just 3% of the placebo group. 

GW Pharmaceuticals could also end up competing with soticlestat, a cholesterol 24-hydroxylase inhibitor that Ovid Therapeutics (OVID) is developing in partnership with Takeda (TAK -1.95%). Recently released results from a mid-stage clinical trial showed that soticlestat significantly reduced seizure frequency for patients with Dravet syndrome and Lennox-Gastaut syndrome.

A bargain now?

The future for GW Pharmaceuticals relies almost entirely on sales of Epidiolex. At the moment, the only other drug in the company's pipeline is nabiximols, a combination of CBD and THC that produced disappointing results in a phase 3 trial as a potential painkiller for advanced cancer patients. 

The company finished June with $478 million in cash and equivalents after losing $17 million in the first half of 2020. Those losses will probably mount as GW Pharmaceuticals attempts to earn FDA approval for nabiximols with five phase 3 trials set to begin in the second half of the year. 

Nabiximols has been approved in the EU under the brand name Sativex since 2011 to treat muscle spasms caused by multiple sclerosis. Sales of the drug reached just $13.9 million last year. With Epidiolex sales under threat of competition and nothing worthwhile in development, this is a stock to avoid right now.