GW Pharmaceuticals (NASDAQ: GWPH) is on the cusp of shaking up the U.S. epilepsy treatment market. The medical marijuana company won FDA approval for Epidiolex's use in rare childhood-onset epilepsy over the summer and it should become commercially available to patients as soon as a decision is made on scheduling it by the Drug Enforcement Agency. The potential for medical marijuana to disrupt how doctors help patients who don't respond to existing treatment options is significant, but GW Pharmaceuticals shares are already trading at new highs. Is this company priced to perfection or is it cheap?
Rethinking marijuana use
A lot of attention focuses on the recreational use of marijuana, however, anecdotal evidence has existed for a long time that it offers medicinal benefits. In the 1800's, patients could buy marijuana extracts in pharmacies to treat stomach ailments and in 2013, the Stanley Brother's Charlotte's Web won widespread media coverage for its ability to help a child suffering from treatment resistant seizures.
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Despite reports of its health benefits, few scientifically controlled studies have been conducted to determine for certain that marijuana is effective and safe. One reason for the lack of such studies is that marijuana's still a Schedule 1 controlled substance in the U.S., and as a result, its availability for studies has been limited to one grower: Mississippi's Marijuana Research Project, a federally funded program. To secure marijuana from the project, researchers have to win an OK from the DEA and a panel that includes representatives from the National Institute on Drug Abuse (NIDA). For many researchers, these obstacles have made pursuing pot research and development unattractive.
Rather than struggle to overcome the hurdles in America, GW Pharmaceuticals has been studying medical marijuana in the United Kingdom since the 1990s. It markets the tetrahydrocannabinol (THC) drug, Sativex, in Europe for use in multiple sclerosis, but it wasn't until Epidiolex's recent FDA approval that it had any products it could pitch to doctors in America.
A purified formulation of cannabidiol (CBD), a non-euphoric chemical cannabinoid common in cannabis, Epidiolex's approval followed years of clinical evaluation in patients with Dravet syndrome and Lennox-Gastaut syndrome, two types of epilepsy that emerge in childhood and that historically don't respond well to antiepileptic medications. In those trials, Epidiolex successfully reduced the number of monthly seizures suffered by patients by 40% to 50%.
The approval of Epidiolex is particularly significant because validating marijuana's health benefits could go a long way toward improving perceptions of the drug, potentially resulting in more states approving it, and possibly a less stringent view of it by Congress.
Pot's profit potential
There are only a few thousand people with Dravet syndrome in the U.S. and there are about 30,000 patients with Lennox-Gastaut syndrome, so its unlikely that GW Pharmaceuticals is going to generate billions of dollars in annual sales solely from those two approved indications. Typically, antiepileptics cost a few thousand dollars per patient per year and unless Epidiolex is priced significantly higher, back of the napkin math suggests that its sales are likely to be in the high eight-figures to low nine-figures.
However, Epidiolex's market opportunity may be much bigger than that if doctors begin prescribing it off-label to patients with other types of epilepsy. In the U.S. alone, there are 470,000 children suffering from epilepsy, about one-third of whom have their seizures inadequately controlled by existing medications.
Even if it doesn't get off-label use, a late-stage study is under way in tuberous sclerosis complex, a patient population of about 25,000. If it works in that indication too, its addressable market could nearly double from where it is today.
Ultimately, pushing more broadly into the epilepsy market won't happen overnight, but use could be helped if the DEA issues a favorable scheduling decision. If the DEA decides on Schedule IV, then Epidiolex can be easily prescribed and refilled. If it places it in Schedule II, then obstacles to access could hinder its use.
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What's it worth
It's common for biopharma companies with fast-growing products to trade at high multiples to sales, but its equally common for drugs with blockbuster projections during clinical-stage trials to fall short of forecasts. If we assume that Epidiolex wins widespread use in Dravet syndrome and LGS, and it goes on to win an OK in TSC too, then a 5 to 10 multiple to potential sales would probably make a valuation of the company in the $2 billion to $3 billion range. If Epidiolex gets used frequently off-label, then it wouldn't shock me if sales climb into the mid- to high-nine figures, making a valuation of $3 billion to $5 billion conceivable. Currently, GW Pharmaceuticals market cap is roughly $4.9 billion, so I think a lot of its potential in these three indications may be baked into current share prices.
The valuation doesn't necessarily appropriately reflect additional marijuana cannabinoid studies further back in GW Pharmaceuticals R&D pipeline, though. GW Pharmaceuticals is evaluating marijuana cannabinoids in glioblastoma and schizophrenia, and it's conducting an intriguing study in autism, too. Success for those programs could make the company much more valuable, however, investors might want to keep some optimism about those trials in check. Previously, GW Pharmaceuticals has had to shelve prospects in its pipeline because clinical trials have failed. Notably, it had to abandon its high-profile study of THC for use in cancer pain in 2015 after it failed to outperform a placebo in late stage trials.
It's also unclear how the market will view Epidiolex relative to high-CBD strains available at dispensaries in highly populated states, such as California. Increasingly, marijuana growers are beginning to conduct their own research into marijuana strains that eventually could result in Epidiolex competitors. Furthermore, Zogenix (NASDAQ: ZGNX) recently reported compelling results in late-stage Dravet syndrome studies for its ZX008 that appear to match up favorably to Epidiolex.
Overall, GW Pharmaceuticals has an opportunity to generate meaningful revenue, particularly if DEA scheduling is favorable, but for now, it's valuation appears to reflect a lot of its upside.
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