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Why GW Pharmaceuticals Stock Rocketed 40.5% in February

By Billy Duberstein - Mar 5, 2021 at 9:00AM

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The cannabis-based pharmaceutical company agreed to be acquired.

What happened

Shares of GW Pharmaceuticals (GWPH) rose 40.5% in February, according to data provided by S&P Global Market Intelligence. The bulk of the move came on Feb. 3 when Jazz Pharmaceuticals (JAZZ 1.80%) announced it would be purchasing GW for $7.2 billion, or the equivalent of $220 per share, made up of $200 per share in cash and $20 in Jazz stock.

GW also reported its fourth-quarter and full-year results during the month.

A lab technician pulls a cannabis bud  into  a test tube.

Image source: Getty Images.

So what

GW has the only drug made from cannabis, the emerging blockbuster Epidiolex. It was approved by the Food and Drug Administration in 2018 to treat seizures resulting from early-onset epilepsy. Last year, Epidiolex brought in $510.5 million in sales, up 70% over 2019, making up nearly all of GW's $527.2 million in revenue for the year.

In addition to Epidiolex, the company has a pipeline of other cannabinoid-based treatments, including nabiximols, a drug for spasticity resulting from multiple sclerosis or spinal injuries that is in phase 3 trials. Other treatments in its pipeline are for schizophrenia, autism, and other applications in neuropsychiatry.

Now what

GW Pharm now trades around $214 per share, very close to the acquisition price. Therefore, unless you are a professional merger arbitrageur -- one who bets on announced mergers being consummated -- the ship has likely sailed on GW. But its shareholders will be receiving about 9% of their buyout in the form of Jazz Pharmaceuticals stock.

Jazz specializes in treatments for neurological disorders, especially narcolepsy, with its drug Xyrem. It made up 74% of sales last year, but generics will be coming in 2023. That will likely stifle Jazz's growth, unless some of its other drugs in oncology, specifically lung cancer, catch on. But those bring in relatively small dollar amounts today.

That's likely why Jazz seized the opportunity to buy GW, and to pay a hefty 50% premium to do so. As such, I wouldn't be as enthusiastic about Jazz as I would be about GW Pharma as a stand-alone company. But Jazz is trading for just about 10 times next year's earnings estimates, so if the company finds a way to plug the hole left by Xyrem in a couple of years, there could be upside.

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