This Marijuana Stock's Expenses Are Soaring

Source: GW Pharmaceuticals.

GW Pharmaceuticals Inc. has the richest pipeline of marijuana-derived medicines in development, and that has investors flocking to pick up shares in hopes of benefiting from the rising adoption of such drugs. But a flurry of research trials is also costing the company big bucks, so investors should pay close attention to how quickly it burns through its cash stockpile.

Advancing medical marijuanaGW Pharmaceuticals already markets Sativex, a therapy for multiple sclerosis spasticity that is derived from the marijuana cannabinoid THC.

The drug, which is approved in Europe but not in the U.S., aims to reduce the painful muscle tightness and spasms often experienced by MS patients. Although Sativex has been on the market since 2010, it has failed to make a very big mark in the indication, with sales now totaling roughly $1.7 million per quarter.

Regardless, GW Pharma is committing substantial resources to advancing a host of studies evaluating marijuana cannabinoids across a variety of diseases.

The most advanced of these programs is the study of Sativex as a therapy for treating cancer pain. The company is conducting three phase 3 trials on Sativex for use in patients whose pain is inadequately controlled by opiates, and results from the first of those trials were released earlier this year. Unfortunately, the data showed Sativex was no better at controlling pain than a placebo. However, based on earlier-stage success and the fact that results from two additional trials are forthcoming, GW Pharmaceuticals remains hopeful for its first U.S. drug approval.

The company is also conducting late-stage trials of Epidiolex, which is derived from the nonpsychoactive cannabinoid CBD. GW Pharmaceuticals is conducting two phase 3 trials evaluating Epidiolex in Dravet syndrome, a rare form of epilepsy, and has just kicked off the first of two phase 3 trials that will study the drug in Lennox-Gastaut syndrome patients.

In April, researchers presented data from a non-placebo-controlled study of Epidiolex in 137 patients with rare forms of epilepsy, including Dravet syndrome and Lennox-Gastaut syndrome, whose disease failed to improve on existing therapies. In these patients, there was a median 54% reduction in seizures after 12 weeks of treatment.

GW Pharmaceuticals is also testing marijuana cannabinoids' effectiveness in treatingdiabetes, schizophrenia, brain cancer, and ulcerative colitis.

Mounting lossesGW Pharmaceuticals will need these programs to pan out given that Sativex for MS spasticity has yet to generate significant revenue and the company's costs are soaring.

According to the Tufts Center for the Study of Drug Development, it costs $1.4 billion on average to successfully develop and commercialize a new drug. To add to this eye-opening figure, 90% of all drugs that enter human clinical trials fail to make it to market.

In the just-reported fiscal second quarter, costs associated with GW Pharmaceuticals' research pipeline jumped 29.2% year over year, to $22.8 million. That surge resulted in GW Pharmaceuticals reporting a net loss of $11.1 million in the quarter, up 31% from the year before. In addition to increasing research and development expenses, GW Pharmaceuticals' sales, general, and administrative costs also increased by 111% year over year, to $5.6 million.

Looking aheadThe phase 3 failure of Sativex in cancer pain was a blow and suggests investors should temper their enthusiasm in this indication, at least until we get results from the remaining two trials later this year.

Epilepsy seems to be the most compelling potential indication right now, but it will still be some time before the company delivers placebo-controlled results from the phase 3 Dravet syndrome trials that kicked off earlier this year.

Results from the first of these trials are expected by year's end, with the second reading out in early 2016. The recently-launched Lennox-Gastaut syndrome phase 3 trials should offer up data next year, too.

GW Pharmaceuticals also expects to release results from its phase 2 schizophrenia trial this year.

Managing riskInvestors will need to dig through a truckload of results in the coming year. The success or failure of these trials would likely have a big impact on GW Pharmaceuticals' shares, particularly given the company's mounting expenses.

A secondary stock offering in May suggests GW Pharmaceuticals has enough money to pursue its research efforts. The company was sitting on $220.7 million exiting March, and it raised another $167.8 million in that offering.

While there is a lot of potential news on the company's marijuana medicines coming, the company's cash burn and a current valuation north of $2 billion make this stock a bit too risky for me to own and best suited only for the most risk-tolerant of investors.

The article This Marijuana Stock's Expenses Are Soaring originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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