Better Know a Marijuana Stock: GW Pharmaceuticals

By Sean Williams Markets Fool.com

Marijuana stocks seem like the Holy Grail for investors.

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According to cannabis research firm ArcView, legal pot sales (which includes medical and recreational) grew by a scorching 34% in North America to $6.9 billion last year. Albeit, $46.4 billion in sales were still conducted on the black market, meaning there's a very significant opportunity for legal businesses to attract under-the-table consumers in the years to come. This shouldn't be too difficult with more and more U.S. states and countries considering legalization.

If investment firm Cowen & Co. is right and legal marijuana sales can grow to $50 billion by 2026, then the rally in marijuana stocks could be just beginning.

Image source: Getty Images.

But there are dozens of marijuana stocks for investors to choose from, and with emotions running high, investors may be jumping into these stocks for all the wrong reasons, or worse yet, without understanding the benefits and risks offered by each company.

With this in mind, we'll take the time to highlight and dissect one marijuana stock each week from here on out until we've covered the bigger players (those with market caps above $200 million). We'll begin by looking at the biggest marijuana stock of all, GW Pharmaceuticals (NASDAQ: GWPH).

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What GW Pharmaceuticals does

By market cap, U.K.-based GW Pharmaceuticals towers over all other marijuana stocks with a $3 billion valuation.

GW Pharma, as the name implies, is a drug developer, but with a twist. The twist is that the company is involved in discovering cannabinoids from the cannabis plant and utilizing those cannabinoids, in combination with the natural cannabinoid receptor system found in our bodies, to effect a desired biological change.

Image source: GW Pharmaceuticals.

The company is currently exploring a number of indications, including the treatment of epilepsy, tuberous sclerosis, infantile spasms, autism spectrum disorders, glioma, and schizophrenia, to name a few. The vast majority of the company's pipeline is clinical in nature; however, it does have one approved therapy known as Sativex. Sativex is not approved in the U.S., but it is approved in more than a dozen EU nations as an oromucosal treatment for spasticity associated with multiple sclerosis.

Promise and opportunities

Without question, the big opportunity for GW Pharmaceuticals is with Epidiolex, its experimental cannabidiol-based medication that's shown incredible promise in treating two rare types of childhood-onset epilepsy, Lennox-Gastaut syndrome and Dravet syndrome.

Epidiolex has been through two separate phase 3 trials for each indication, and it's passed all of its trials with flying colors. For Lennox-Gastaut, a statistically significant separation between Epidiolex and placebo was evidenced by seizure reduction of 50%. In Part B of the company's Dravet syndrome study, Epidiolex led to a 39% reduction in convulsive and total seizure frequency during the primary treatment period, which was 26 percentage points higher than the placebo.

Image source: Getty Images.

Long story short, Epidiolex is GW Pharma's white knight with blockbuster sales potential. It also has label expansion opportunities in tuberous sclerosis and infantile spasms, which are being examined in late- and mid-stage clinical studies, respectively.

Also working in GW Pharma's favor is the improving opinion of the American publicand the softening stance toward medical cannabis among states. According to Gallup, 60% of the nation supports the legalization of cannabis, which is an all-time high. A separate study from the independent Quinnipiac University found 93% support for a nationwide legalization of medical cannabis. And, of course, 28 states have legalized the use of medical cannabis for certain ailments. As favorability toward the drug improves, GW's revenue ceiling could grow as well.

Risks and concerns

However, it's not all rainbows and sunshine for marijuana stocks.

Let's not forget that cannabinoid-based medicines aren't guaranteed to succeed in clinical trials. For example, Sativex was being tested in three pivotal phase 3 trials for cancer pain in the United States. With Sativex generating just scraps in sales from MS spasticity in overseas markets, an approval from the Food and Drug Administration (FDA) to treat cancer pain was viewed as a way to really put it and GW Pharmaceuticals on the map. Unfortunately, Sativex failed miserably in its late-stage studies as a treatment for cancer pain, causing the company to accept its defeat and move on from its cancer pain study.

Image source: Getty Images.

Epidiolex is also set to face competition. Zogenix (NASDAQ: ZGNX) will be conducting a pivotal phase 3 trial of its own on Dravet syndrome patients with ZX008, a low-dose fenfluramine liquid solution. Zogenix has already received the orphan-drug designation for ZX008. Additionally, Insys Therapeutics (NASDAQ: INSY), a marijuana stock that will eventually be featured in this series, is developing a cannabidiol-based compound to treat Dravet, Lennox-Gastaut, and infantile spasms. Is there enough room for two CBD-based medicines in severe pediatric epilepsy indications? I'm not so sure.

As a clinical-stage company, GW Pharmaceuticals, like most marijuana stocks, is also losing a lot of money. As of the end of fiscal 2016, its accumulated deficit was nearly at $230 million (i.e., the cumulative amount of money it's lost since inception), and it used $125.2 million in cash last year alone. Though its enormous run-up in share price has afforded it the ability to generate capital via common stock offerings, GW is most definitely burning through its cash on hand and bleeding red on a fundamental basis.

There are also political concerns. The U.S. is the world's most profitable prescription drug market, but entry into that market could be denied or severely hindered if Attorney General Jeff Sessions gets his way. Sessions is a big opponent of marijuana's expansion, and he's often questioned the validity of its medical benefits.

Should you buy GW Pharmaceuticals?

Now for the most important question of all: should you consider buying GW Pharmaceuticals?

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Personally, I'm not sold on the stock at this point in time. At a $3 billion valuation, Wall Street appears to already be factoring in what's likely to be an FDA approval for Epidiolex in Lennox-Gastaut and Dravet, as well as label expansion into infantile spasms and tuberous sclerosis. We don't even have pivotal data yet on these latter two studies, and without label expansion, Epidiolex will likely struggle to top $1 billion in sales.

On the other hand, GW Pharma is on track to be among the most profitable marijuana stocks on the planet thanks solely to its expected approvals in Dravet and Lennox-Gastaut. Even so, the company is valued at somewhere around 36 times Wall Street's expected profit projections for 2020. Yes, Wall Street is always forward-looking, but to have to look three years into the future just to arrive at a P/E that's double that of the S&P 500 isn't a great deal in my opinion.

I also worry about GW's reliance on Epidiolex. Don't get me wrong, there are a number of successful biotech companies that have leaned heavily on a single, often orphan disease, drug. But, with competition rearing its head, GW Pharmaceuticals is going to need to show promise in other areas of its pipeline to convince me that it's the marijuana stock to own for the long haul.

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