CBD Supply And Demand, GW Pharmaceuticals' Problem?

| About: GW Pharmaceuticals (GWPH)
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Summary

CBD supply growth could drastically outpace demand growth.

Advantages FDA approval and insurance coverage could outweigh supply concerns.

Possible limited-time opportunity for GWPH and Epidiolex.

In my first article about GW Pharmaceuticals (NASDAQ:GWPH) I gave a brief history of the company and highlighted some interesting comparisons between it and other publicly-traded cannabis companies at the time. The main differences being that they were not a pump and dump like so many of the other pot stocks touted at the time, that they were doing actual FDA-approved research, had an actual functioning company/management, and had real partners in the pharmaceutical world. Over three years ago these differences separated GWPH, leaps and bounds, from the competition. They are still the leader of the industry but the competition is catching up.

Since GWPH debuted on the Nasdaq, the medicinal cannabis market has matured at a break-neck speed. These advancements have been especially significant in regards to cannabidiol (CBD). Although the publicity is great in the short-run its effects on supply could be detrimental to GW's bottom-line in the long-run. Their savoir, ironically for a marijuana company, is the United States government and its implicit stamp of approval; but will they be able to cash-in before others make a name for themselves?

Many of the same ideas expressed in my first article are still valid, but there are currently a few more competitors in the world of "real" pot stocks (i.e. not pump and dumps), yet there are still none really in GWPH's class. That being said not all competition comes in the form of publicly-traded companies. Even if/when Epidiolex or Sativex gets approved for sale in the United States, there are lots of patients that will continue to prefer their local dispensary/purveyor, arguing that a whole-plant extract is more effective and fueled by their mistrust for Big Pharma. The effect on GW from this portion of the market will probably be minimal, the real threat comes from cheaply grown hemp.

Hemp is grown in many countries throughout the world, and five US states have small research programs currently running. Most of the foreign grown crop is not for CBD extraction. That's not to say the hemp grown doesn't contain CBD, it probably does, it just wasn't grown for that purpose, it's usually grown for fiber or seed oil. When the farmers or processors in each country realize the value of the CBD, they are currently missing out on, they are sure to start extracting it.

Not too long ago CBD was wholesaling at around $0.10 per milligram. Now it can retail at a similar price. Recently, a source was quoted $0.03/mg for 99.5% pure CBD isolate imported from India. A New York Times article highlights a company (backed by Jim Rogers), with growing operations planned in Colombia, that expects to grow cannabis flower at a meager $0.05 per gram. Say they grow a strain that has 10% CBD. That would be 100 milligrams of CBD for $0.05, or $0.0005/mg. Say for argument's sake it cost an extra $0.10 per gram to extract the CBD and put it into a usable form (I suspect with economies of scale this figure is actually significantly lower). So that would come out to 100mg for $0.15 or $0.0015/mg. To put that in perspective Canopy Growth Company's (OTC:TWMJF) Tweed is - currently - able to command about $0.15/mg of CBD in its medicated oils.

There are other companies already putting out CBD products at a lower retail price. CV Sciences (OTCQB:CVSI) and Medical Marijuana Inc (OTCPK:MJNA) both have CBD products. Plenty of Kentucky hemp is supposedly still piled up from last year's crop. One processor claiming to have three year's worth of feed material for extraction, from one year's harvest, hopes to wholesale oil-based CBD at $0.04/mg. Colorado, Kentucky, Tennessee, Oregon all have hemp growing now. Colombia soon will too. The popularity and history of cannabis growing, combined with the large amounts of arable land, cheap pharmaceutical manufacturing, and cheap labor in India should scare anyone invested in hemp farming. The price-points we are seeing now don't seem sustainable. Fortunately for GW Pharmaceuticals they will presumably have the benefit FDA approval and insurance coverage.

After years of only having synthetic cannabinoids approved by the FDA it looks like GW has a good chance of becoming the first cannabis-derived medicine approved in the US, since prohibition. A government stamp of approval would certainly give GW some marketing clout, but their success might hinge more on insurance companies than the FDA. If insurance companies choose not to cover their drugs, the cost could remain prohibitively expensive to many patients. Sativex can cost over $500 for a month's supply in Europe.

Epidiolex would likely be similarly priced, if not more expensive due to high US regulatory costs. So FDA approval doesn't necessarily mean GW will be able to make money selling Epidiolex. Sativex has very limited sales as evidenced by their most recent quarterly report. Just because it has government approval doesn't mean it's profitable, many investors forget that. Despite the long-term risk, there is still a short-term opportunity for investors and for GW itself.

Assuming that Epidiolex, GW Pharmaceuticals' CBD-based drug, gains FDA approval there will be a huge bump in the stock. From there it will take buyout rumors to move the stock higher, and this is the best-case scenario for everyone involved. If they don't sell the company GW is going to have to dilute itself even more to pay for Epidiolex marketing, with no guarantee of profits. If insurance companies decide not to cover Epidiolex for off-label use (or at all) then there might not be enough demand from the relatively small patient base that it will be approved for. For people not covered by insurance or without insurance completely, that $0.0015/mg CBD is probably going to be enticing. After FDA approval, GW either needs to sell themselves or very aggressively build and protect their brand while expanding approved uses of its drugs.

GW Pharmaceuticals has a massive opportunity with its CBD-based drug, Epidiolex. They must act quickly, though, before the supply of CBD on the market explodes. Surely any successes in regards to FDA approval will spur increased demand but will it be enough to outstrip supply? Economics 101 - supply and demand - will play out before our very eyes in the next few years as The Invisible Hand guides the market.

Disclosure: I am/we are long GWPH, CVSI.

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

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