GW Pharmaceuticals: A Cannabis Stock That's Way Too High To Make Any Sense

| About: GW Pharmaceuticals (GWPH)

Summary

GW Pharmaceuticals sports a bloated $1.8 billion market capitalization that - at a staggering 43 times its enterprise value/theoretical takeover price - looks virtually impossible to justify.

Despite meager sales of its sole commercial product to date, GW has managed to convince the market that it can turn its next cannabis-based medication into a blockbuster drug.

GW hopes to make a fortune on a new epilepsy drug that many families say they would never use, even if the company supplied the pricey medication for free.

That drug, known as Epidiolex, will face plenty of competition from herbal cannabis oils that have already won over thousands of families and continue to explode in popularity.

A number of parents - including some who actually tested Epidiolex in clinical trials - feel convinced that whole-plant cannabis oils definitely work better due to the so-called "entourage effect."

GW Pharmaceuticals (NASDAQ:GWPH) can forget about convincing Allison Benavides - or Heather Jackson or Liz Minda or many other parents sold on the healing powers of marijuana - to give its cannabis-based drug, Epidiolex, a chance. Even if GW secures regulatory approval to market Epidiolex as a treatment for severe forms of epilepsy, those mothers fully intend to stick with the natural cannabis oils that they currently use to control their children's seizures instead.

"I would never switch to Epidiolex," vowed Benavides, a medical social worker and leader of a rapidly growing support group filled with parents who have turned to medical marijuana as the answer to their prayers. "I'm not touching anything that's working. Epilepsy treatment is very individualized, and I don't want to rock the boat in any way."

With her son free of the uncontrollable seizures that once racked his little body, but ended soon after she started treating him with a natural cannabis oil known as Charlotte's Web (CW) more than two years ago, Benavides sees absolutely no reason to try Epidiolex - even if insurers agree to cover the projected $40,000-a-year bill - and considers the $200 a month that she pays for his CW oil money very well spent.

Jackson swears by CW, too. The second parent (after Charlotte's) to successfully treat her child with CW, a cannabis oil very high in cannabidiol (NYSE:CBD) - the same non-psychoactive compound found in Epidiolex - and very low in THC, Jackson spent almost a decade futilely trying to control her son's relentless seizures before CW finally answered her prayers. With her son Zaki responding so well to CW that he "went from hospice to health" in virtually no time and has since remained seizure-free for years, Jackson cannot even fathom rolling the dice on Epidiolex and suspects that many other parents feel the same.

Jackson ought to know. As the executive director of Realm of Caring, a nonprofit foundation that has attracted more than 20,000 members since it first started helping families gain access to CW a few years ago, she hears from parents who treat their children with the popular CBD oil all the time.

"I do not know any in this population who are getting success that will switch (to Epidiolex), even if it is paid for," Jackson said. "I would not switch if you paid me, (either). Not in a million years."

Price War

GW clearly expects a far more welcome reception instead.

Together with conflicted analysts at Piper Jaffray and Cowen (two U.S. firms rewarded with handsome underwriting fees for managing its stock offerings), GW has tried to dismiss herbal cannabis-based therapies as little more than temporary substitutes for the standardized prescription drug that parents really want. By overestimating the typical cost and underestimating the unique appeal of "whole-plant" cannabis oils, both GW and its loyal cheerleaders have arrived at the convenient - if misguided - conclusion that most families will jump at the chance to swap their herbal remedies for a uniform prescription drug that contains only purified CBD and (perhaps more importantly) qualifies for insurance coverage.

In one of the more recent bullish reports that he has published on the company, for example, Piper Jaffray analyst Joshua E. Schimmer pegged the cost of artisinal CBD oils at $600 to $800 a month and suggested that only a "small number of families" will insist on sticking with whole-plant cannabis extracts containing additional compounds (THC, THC-A, etc.) that those parents regard as essential due to their perceived medical benefit. Unwilling to rule out even that population, Schimmer further suggested that some of those families might at least turn to Epidiolex as a more reliable and affordable source of CBD - at a cost to their insurers of $40,000 to $50,000 a year - because of all the money that they would supposedly stand to save.

During hours of telephone interviews, however, only one parent mentioned even hearing about a family saddled with that sort of financial burden (and only because that particular child requires an extremely high dose of CBD to control his/her seizures). With CW available through Realm of Caring for as little as 5 cents a milligram, parents can treat their children with that popular CBD oil for a modest fraction of the amount that Schimmer has tried to portray as routine.

"It varies in price" depending on the dose, Jackson said. "It could range from $100 to several hundred dollars. My son's therapy is $250 every two months … (Before), we tried all kinds of things that were not covered by insurance. If somebody wanted to take my money with the promise of helping my kid, I would say, 'Great! Let's do it.'"

Missing Ingredients

GW and its dutiful supporters have jumped to another conclusion that could prove rather shaky, too. By counting on Epidiolex to become the new CBD therapy of choice, they have basically assumed that most parents will automatically favor a prescription drug and trust that medication to work at least as well as - if not much better than - their herbal CBD remedies.

In order for GW to believe that argument, however, the company must ignore several inconvenient facts: 1) after treating their children with all sorts of pharmaceuticals that never worked - but almost always caused horrific side effects - many of those parents no longer trust prescription medications and/or wish to rely on them at all; 2) a number of parents who have managed to control their children's seizures with the help of natural cannabis oils regard all of the compounds present in those whole-plant extracts (not just CBD) as crucial to their overall success; and 3) at this point, a number of those parents have relied on herbal CBD oils to successfully treat their children - with little, if any, help from traditional anti-epileptic drugs (AEDs) - for years, and that population should only continue to grow by the time that GW finally arrives on the scene.

Take Minda, for example, a registered nurse who decided to withdraw her daughter Jadyn from a clinical trial that had provided her with an opportunity to test Epidiolex free of charge. Despite clear signs of improvement during the daytime, Jadyn continued to endure relentless seizures throughout the wee hours of the morning and remained on powerful anti-epilepsy drugs (AEDs) that cause all sorts of nasty side effects. Convinced that her daughter needed more than just the CBD present in Epidiolex to fully control her seizures, Minda began experimenting with various whole-plant cannabis oils (starting with CW) until she finally discovered a formula that worked like a charm.

With her daughter suddenly free of seizures for the first time in years - and now almost weaned off of the heavy-duty AEDs that often bothered her even more - Minda cannot even imagine placing her trust in another pharmaceutical drug again.

"I would never go back to Epidiolex," she declared. "We actually had better seizure coverage on Charlotte's Web than we did on the Epidiolex. But my daughter needs the whole plant; she needs cannabis. Hemp oil (like Charlotte's Web) is not enough for a lot of people. It's just a watered-down version of what the entire plant can do."

Plenty of others have reached that same conclusion. Based upon scientific research - and, in a growing number of cases, personal experience - many parents have grown convinced that whole-plant cannabis therapies work better than CBD alone because of a phenomenon known as the "entourage effect."

Just ask Brian Wilson, a former New Jersey resident who grew so desperate to control his son's epileptic seizures that he joined a crowd of parents flooding into Colorado in pursuit of CW only to discover that his child needed more help.

"CBD is a very important part of the mix - but only part," Wilson emphasized in a media interview a couple of years ago. "We saw minor seizure control and developmental progress with CBD alone. We didn't see real seizure control until we added measurable levels of THC to the mix."

"Others see great results with THC-A added in. Some see very good results with no CBD (at all). The point is, this is highly individualized medicine. There is no magic bullet" that works for everyone.

Competitive Edge?

Nevertheless, GW seems convinced that Epidiolex will enjoy all sorts of practical advantages that should weigh heavily in its favor.

During a recent telephone interview, GW Vice President of Investor Relations Stephen Schultz insisted that most parents of children with epilepsy and the physicians who treat those kids would overwhelmingly prefer a prescription drug over some kind of herbal supplement because they want the following: a stamp of approval from the U.S. Food and Drug Administration that validates the product as both safe and effective; a list of both active and inactive ingredients; standard consistency that never varies from one bottle of medication to the next; clear and specific dosing recommendations on a government-approved label (as opposed to advice found in "Facebook discussions" or assumptions reached based upon trial and error); convenient access to the product through both national chains and neighborhood pharmacies; and (arguably the most important attraction of all) insurance coverage that limits out-of-pocket expenses by paying the vast majority of the medication bill.

"When you look at the market as a whole, most parents and physicians really desire a pharmaceutical," the GW spokesman said. "Will some patients be responding to those artisinal oils? Maybe. Will some be reticent to change? Maybe. (But) I think that there does exist a significant unmet need for a new seizure medication. We believe that Epidiolex will offer a unique safety and efficacy profile and (the epilepsy market) will respond to that."

GW better hope that Epidiolex produces the desired results. By isolating CBD and turning it into a prescription drug, after all, GW has created a standardized medication that contains only one of the key ingredients that so many patients afflicted with intractable epilepsy seem to need.

If GW agreed to conduct a head-to-head study comparing Epidiolex to natural alternatives, in fact, the company might find itself surprised to discover just how well some of those herbal treatments actually work. Just look at the difference between the results of surveys conducting on parents in both of those groups.

Type of Product

At least a 50% decrease in seizure frequency

At least an 80% drop in seizure frequency

A 100% reduction in seizure frequency

Epidiolex

47% of patients

Not disclosed

9% of patients

Herbal cannabis oils

71% of patients

43% of patients

11% of patients

Click to enlarge

Popular Weed

In an effort to more thoroughly measure the benefits provided by its popular CBD oil, Realm of Caring has arranged for Johns Hopkins University to oversee a brand-new patient registry that will allow experts there to collect data from its huge membership base and turn that material into valuable research. With more than 20,000 members in its database at last count - and that number expected to reach 30,000 by the end of this year - the foundation can provide Johns Hopkins with plenty of evidence for a compelling study that actually documents the often-impressive results that so many parents have seen with their own eyes.

"When this whole phenomenon originally started, nobody believed us," CW Botanicals Chief Executive Officer Joel Stanley recalled in a recent telephone interview. "We were begging for researchers to help us with observations, but we kept getting doors slammed in our face … Now our data is significantly larger, and I think that it's going to be a very, very valuable tool."

While GW may rank as the first pharmaceutical company to pursue the development of cannabis-based prescription drugs, it still lags behind the family-owned business that originally took the epilepsy market by storm. GW had yet to even shift its attention away from some ill-fated studies focused on cancer pain to late-stage trials of Epidiolex, after all, when Dr. Sanjay Gupta highlighted the medical benefits of CW in a powerful CNN documentary that sent demand for the herbal CBD oil soaring right through the roof. So many parents of children with epilepsy wanted to try CW after the documentary aired, Stanley said, that 15,000 people had placed their names on a waiting list for the oil by the end of the following year. Thanks to new legislation that lifted onerous restrictions on hemp (marijuana plants containing 0.3% THC or less), however, Stanley and his brothers suddenly found themselves free to grow enormous crops of their low-THC marijuana and actually sell their cannabis extract as hemp oil to families all over the country.

By late 2014, CW Botanicals had announced the end of that waiting list and established a website that would allow customers in all 50 states to easily place orders for CW and receive the popular oil right through the mail. The company now handles about 10 times as many orders as it could before the law changed, Stanley said, and "conservatively" estimates that its current business will at least triple in size before the end of next year.

While GW would love to win over many of those customers with its new prescription drug, Stanley seems remarkably unconcerned about that sort of threat.

"We're offering very different products," he emphasized. "There are going to be some people who want a botanical and others who want a pharmaceutical; people can respond to either one."

"But when something is really working for a child, the parent is not going to switch. So I'm not really worried, from a business sense."

Early Withdrawals

For its part, GW has yet to prove that its own cannabis-based epilepsy treatment even works more often than not.

When GW recently announced that Epidiolex had met its primary endpoint in the first of several Phase III clinical trials - sparking a huge celebration that more than doubled the price of its stock in a single day - the company stopped short of revealing the official "responder rate," or the percentage of patients who experienced a significant (50% or greater) reduction in seizure frequency while undergoing treatment with its experimental drug. GW also reported a somewhat disturbing 13.1% dropout rate for patients in the treatment arm - compared to just 1.7% in the placebo group - without providing any real color on the serious adverse events that led to all of those early departures.

At this point, its official spokesman indicated a few days ago, GW still lacks access to that sort of data itself and suspects that the physicians in charge of the trial will likely wait to release the full results until a big medical conference takes place near the end of the year.

As one of the parents who withdrew her child from those clinical trials, Minda already knows why she gave up on Epidiolex and turned to herbal cannabis-based remedies instead. With her daughter still enduring seizures from roughly 2 a.m. until well past dawn almost every single day - even after taking very high doses of CBD and remaining on high-powered AEDs that caused terrible side effects - Minda grew so frustrated that she decided to take matters into her own hands.

"My daughter was maxed out on the Epidiolex dose, and that high dose certainly didn't help," Minda said. "The Epidiolex wasn't doing it for her. I wanted to take her out of the study and go to something natural: cannabis … I now have my daughter back, and she's better than she has ever been in the past six years."

After growing curious about those clinical trials herself, Benavides tracked down a few of the parents who had enrolled their children in the Epidiolex studies and convinced them to share their personal stories. In an interesting twist, she revealed, the most satisfied of those parents reported only a 10% reduction in seizures that (despite major cognitive improvements) would have effectively classified the child as a failure. In the worst of the three cases, she added, the child "just did horribly." And in the final case, she concluded, the patient actually suffered no seizures for six months in a row - easily performing well enough to emerge from a 12-week trial as a complete success - before taking a dramatic turn for the worse and, despite ongoing treatment with Epidiolex and "tons of other medications," ultimately returning to his/her original condition.

Upon hearing that feedback, Benavides felt convinced that her own son probably would have failed those studies, too, and even more relieved that CW had already answered her prayers.

"I feel very blessed," she said. "Within four months of trying medications that didn't work, I had a pretty hopeful Plan B that quickly became THE plan: cannabis … As of Feb. 11, 2014 - one year from his diagnosis - he became seizure-free. The cannabis worked the way that I originally thought the pharmaceuticals were going to work. (And) I'm definitely not going to mess with the main component of the treatment that's been working" for years.

Sticker Shock

As a wildly expensive $82 highflier, GW can't afford to lose out on too much business before its strawberry-flavored CBD syrup even arrives on pharmacy shelves. Based upon its steep valuation, GW has already convinced the market that Epidiolex will not only sail right through the approval process but also go on to become a spectacular hit. Generously rewarded for the potential success of Epidiolex in advance, GW currently sports a lofty $1.8 billion market capitalization that - at a staggering 52 times its annual sales and 43 times its enterprise value/theoretical takeout price - virtually requires the company to turn Epidiolex into the world's first cannabis-based blockbuster drug in order to make any sense.

Given the rare conditions that it intends to target - two severe forms of epilepsy that afflict just 22,000 U.S. residents combined - GW needs to literally conquer its designated market and/or sell an awful lot of Epidiolex for off-label uses (without violating federal laws by actively pursuing that extra business) if the company hopes to even approach that level of success. Never mind that GW apparently wants to price Epidiolex at such a hefty premium that the drug could wind up costing two, or even three, times as much as one of the most expensive epilepsy medications on the U.S. market today. If GW tries to bolster its sales by charging a fortune for its new drug, insurers might refuse to even cover the pricey medication for most patients outside of those who actually suffer from the rare conditions listed on the very restrictive label.

Regardless, GW must have convinced its most supportive analysts that the company can and will enjoy the best of both worlds. Determined to justify the $147 target price that he slapped on GW almost two years ago - and continued to maintain even after the company gave up on a cannabis-based treatment for cancer pain that once represented a more significant commercial opportunity - Schimmer has repeatedly adjusted his models, once making radical changes in a matter of days, in an effort to present Epidiolex as a promising epilepsy drug easily capable of achieving blockbuster status.

Just check out a sample of the shifting estimates that Schimmer has used to make his formula work.

Date of report

Projected market share

Estimated price of drug

Likely future sales

Early 2014

12% of all children who suffer from refractory seizures by 2012

Starting at $40,000 a year in 2018 and rising to $72,000 by 2022

Blockbuster status, with $1.114 billion in annual sales, within five years

Nov. 19, 2015

March 17, 2016

20% of all children who suffer from refractory seizures by 2012

Starting at $40,000 a year in 2017 and rising to $50,00 by 2020

Blockbuster status, with $1.212 billion in annual sales, within six years

March 21, 2016 (four days after releasing previous report)

27% of all children who suffer from refractory seizures by 2012

Starting at $30,000 a year in 2017 and rising to $37,500 by 2020

Blockbuster status, with $1.212 billion in annual sales, within six years

Click to enlarge

Depending on the report, Schimmer assumes that Epidiolex will cost two or three times as much as Onfi - an anti-seizure medication that easily ranks as one of the most expensive epilepsy drugs on the U.S. market - and rapidly gain enough traction to achieve blockbuster status within five or six years of its debut. By pegging the price of Onfi at $2,122 for 100 20-milligram pills and treating the maximum adult dose of 40 milligrams a day - twice as much as most young children should take - as typical, he arrives at a total cost for the drug of roughly $15,000 a year.

Based upon the average wholesale price of that drug, however, the Cleveland Clinic determined that the cost for a 30-day supply of Onfi actually ranges from $450 to $900 a month - or as little as $5,400 and no more than $10,800 a year - instead. At double the midpoint of that range, Epidiolex would cost barely half of the lowest estimate that Schimmer has plugged into his models and therefore generate barely half of the revenue that he has projected in a rather valiant effort to make that product look like a future blockbuster drug.

Premature Celebration?

GW could face competition from new epilepsy drugs, too.

Like GW itself, Zogenix (NASDAQ:ZGNX) has developed an experimental treatment for Dravet syndrome and expects to release the results of a Phase III trial that's currently testing that new drug before the end of this year. If the existing data on that drug (known as ZX008) serves as any guide, GW should feel pretty worried. During a five-year followup to a very impressive preliminary trial, 80% of the patients undergoing treatment with ZX008 enjoyed a 75% or greater reduction in seizure activity through each year of the study, including 42% who remained seizure-free for two to four years and 25% who remained seizure-free throughout the entire five-year period.

"It is very exciting," Zogenix proclaimed upon releasing the impressive results that prompted the company to pursue its ongoing Phase III trial. "We believe these data represent the most robust, long-term data set of any investigational treatment for Dravet syndrome, especially since some of these patients have been treated for well over 20 years."

Given the high success rate of its competing drug candidate and the weak performance of its languishing shares, Zogenix might understandably wonder why GW looks like the far more popular company right now. Despite its promising clinical results, Zogenix remains valued at a modest $263 million - worth 85% less than GW for some bizarre reason - even though it actually generates more revenue than its highflying rival and could arguably face a much brighter future.

When compared to Insys Therapeutics (NASDAQ:INSY), an established pharmaceutical company that actually secured approval of its treatment for cancer pain - and now hopes to introduce its own cannabis-based treatment for epilepsy to the market - GW looks awfully expensive, too. A former highflier worth barely half as much as GW at this point, Insys owes most of its remaining $1 billion market capitalization to its cancer drug and (after subtracting the value assigned to its generic cannabis platform) receives very little credit for its experimental CBD-based epilepsy medication at all.

Granted, Insys could run into the same kind of challenges that GW seems poised to face if too many parents decide that herbal cannabis oils better control seizures than the pure CBD version that the company intends to sell at a steep premium. In a curious twist, back when GW developed its first cannabis-based drug - a poorly selling treatment for the painful spasms suffered by multiple sclerosis patients that contains both CBD and THC - the company apparently learned an interesting lesson that should have helped the company at least understand why parents might reject its new epilepsy drug and choose to rely on whole-plant cannabis therapies instead.

Before GW abandoned its futile efforts to secure approval of that early drug for the treatment of cancer pain, its Chairman Geoffrey Guy told CNN that the company had actually discovered that multiple compounds from the cannabis plant seem to provide stronger benefits together than an isolated compound can on its own.

"It could be that multiple individual compounds play a role," CNN paraphrased the company chairman as saying at the time. "Or it could be due to their interaction in the body. It could be a combination of both."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.