- Signal from Noise
– GW Pharmaceuticals Undeservedly Caught Up in the Volatile Marijuana Stock Fad – Epidiolex shows strong initial growth; could potentially drive stock higher long term – GWPH pipeline attractive; if approved in U.S. Sativex could fuel additional growth Wall St fads come and go. Twenty years ago saw the dotcom boom, which was preceded in the ‘90s by the gambling/casino craze. Bowling stocks—yes, bowling—were all the rage in the late 1950s. So I’m told. The latest fashion is marijuana. Stocks tied to its increasing state by state legalization quickly blow hot and cold on positive or negative news in this burgeoning area. Shares of pot growers, suppliers, and retail outlets are all volatile. Caught up in this fad—though it shouldn’t be—is U.K.-based GW Pharmaceuticals (GWPH), a commercializer of therapeutic products from cannabinoid—the natural compound that includes the active constituents of cannabis. Pot stock, right? Not really. It doesn’t contain THC, or tetrahydrocannabinol, the chemical responsible for marijuana’s psychological effects. GWPH has U.S. and European approved products for medicinal use. Its ADRs trade in the U.S. Though not a pot stock, it nevertheless has a good-sized weighting (4%-7%) in some volatile marijuana themed ETFs, such as Alternative Harvest ETF (MJ). That instability hits GWPH shares, which have dropped to as low as $90 from $196, earlier this year, and now about $135. Recently, the stock has been dented by a negative report from Favus Institutional Research and some price push back from a U.K. regulatory agency. Despite this, GWPH’s bullish long term case is a persuasive one. Jason Benowitz, senior portfolio manager at Roosevelt Investment Group, says the adoption of GWPH’s Epidiolex, launched a year ago as the first FDA-approved cannabidiol medicine, will be the main stock driver in the intermediate term. Epidiolex has surpassed early expectations due to pent-up demand, broad product awareness, favorable payor coverage, and an unmet need for reducing seizures in two rare pediatric disorders, Dravet Syndrome (DS) and Lennox-Gastaut Syndrome (LGS), according to a recent Needham report. Currently, Epidiolex is used by 12,000 patients. Benowitz estimates 42,000 patients taking it by 2023, using a conservative average addition of 1,900 per quarter, significantly less than the 4,400 added in the second quarter. In the U.S. there are about 3.7 million epilepsy patients, of which 470,000 are children, with 30,000 to 50,000 with LGS and 15,000-20,000 with DS. The latter are “highly treatment resistant” with conventional medicine, GWPH says. It was recently approved by the EU and GWPH expects sales to begin in France, Germany and the U.K. in the fourth quarter. Though the U.K. National Institute for Health and Care Excellence initially didn’t approve Epidiolex, saying the trial wasn’t long enough and citing concerns about its cost effectiveness. Roosevelt’s Benowitz views that as “just a negotiating tactic,” which will be, as both parties have noted publicly, be ironed out eventually. GWPH’s pipeline is promising (see chart). It’s also working on expanding Epidiolex indications. Positive results were seen in a Phase 3 trial of Tuberous Sclerosis Complex (TSC), another difficult-to-treat pediatric epilepsy condition that affects 40,000-80,000 individuals in the U.S. and over 1 million globally. If all goes well, it could be sold for TSC next year. Sativex is a GWPH product approved in dozens of countries but not the U.S. The company is seeking approval here. Sativex treats spasticity due to multiple sclerosis. GWPH has other product candidates in various stages of testing of childhood-onset neurological conditions, schizophrenia and glioblastoma. As for the negative Favus report, Needham has written that it “mischaracterized Epidiolex data from the FDA Adverse Event Reporting System. The report noted an increase in death among Epidiolex-treated patients but there is no indication that these deaths are Epidiolex-related. The deaths reported appear to be in-line with the high death rate among DS patients, Needham wrote. Benowitz estimates GWPH’s sales at $1.9 billion in 2023, roughly double the consensus view, because Epidiolex should drive growth. This is based on, among other things, label and geographic expansion; use in more patients and at higher doses. Because it is approved elsewhere, he includes some sales of Sativex in multiple sclerosis in the U.S., which are generally not assumed by the sell side since the Phase 3 trial is only just enrolling. Additional positive news flow may come from upcoming trials in autism and multiple sclerosis, but investors ascribe little value to additional programs. GWPH, a $4 billion market cap firm, isn’t profitable on an annual basis, though it swung to a 21 cents EPS in the second quarter from a 25 cents loss in the year ago period. Benowitz estimates $21 per share EPS in 2023 and uses a range of 10 times EV/Ebitda and 15 times EPS as a multiple for a potential stock price of $200 to $230, or up to 65% upside. Downside is put at $100, or 25%. By the way, the stock is flat from three years ago, while the market is up 40%. The company will report third quarter results Nov. 5, so we’ll get another look at trends in a few days. Where could I be wrong: As a midcap that currently depends on a few products, there’s risk there. Expectations are high. If Epidiolex sales fail to exceed them, then the stock could underperform. Potential advances by competing treatments, like Zogenix, could create risks, but GWPH has a long head start. For the next year or two, GWPH is an Epidiolex growth story, until other drugs in the pipeline kick in. Bottom Line: GWPH’s big stock price drop provides an attractive opportunity ahead of continued strong Epidiolex growth, inside and outside the U.S. There’s also nice optionality in the various treatments in its pipeline, which could begin contributing as soon as next year.