GW Pharmaceuticals Q1 Results Will Provide Important Markers For The Coming Year
- Company operations should have been only mildly affected by COVID-19 pandemic.
- There have recently been further positive developments for the company.
- Expansion in Europe and overseas may have been somewhat delayed by the pandemic.
- Certain key issues at the earnings call and management comments should be studied before further stock accumulation for the long term.
GW Pharma (NASDAQ:NASDAQ:GWPH) is set to release its Q1 2020 earnings on May 11th.
The company has had further positive developments so far this year. The stock price had been held back more by technical factors and outside developments rather than by core prospects for the company.
The provision of medication for epilepsy patients should not be directly affected by COVID-19. However the company's overseas expansion may have been slowed down. It is possible that testing and development work in both the USA and Europe may have been delayed by the restrictions.
More important than the actual numbers may be the comments of Management at the earnings call. Investors should study these comments and make long-term decisions accordingly. The day after the earnings announcement the CEO Justin Gover will be presenting at the Bank of America Healthcare Conference. That is additionally something for investors to follow closely.
The pipeline and sound financials suggest GW Pharma remains an excellent long-term play. Investors probably do not need to rush into the stock before earnings though.
* As of April, "epidiolex" has been descheduled as a controlled substance under the aegis of the DEA (Drug Enforcement Agency). This means it can have a 1-year prescription and such prescriptions are easily transferable between pharmacies. This resolves a somewhat ridiculous and contradictory situation considering epidiolex was under the least harmful Schedule 5 classification under the CSA (Controlled Substances Act).
The DEA release of all Federal controls was immediate. The change on a State-by-State level can be brought in rapidly by GW Pharma and allow for cross-State lines prescriptions.
This should slightly assist the company's continuing roll-out of their treatment for Dravets Syndrome (DS) and Lennox-Gastaut Syndrome (LGS) for which epidiolex is currently approved by the FDA (Federal Drug Administration).
* As of February GW Pharma officially regained commercialization rights for the "sativex" medication in the U.K. This drug is used for the treatment of spasticity caused by multiple sclerosis. The change-over of marketing of the product from the U.K arm of Bayer AG (OTC:OTCPK:BAYRY) will proceed during the course of the year and be completed by December.
GW Pharma had previously regained such rights for the USA, where the drug is known as "nabiximols". The company has recently become quite bullish about the prospects for sativex.
* In March the FDA (Federal Drug Administration) gave epidiolex an sNDA (Priority Revision for New Drug Application) for TSC (tuberous sclerosis complex). The PDUFA (Prescription Drug User Fee Act) has a target date of 31st July this year. Chances of success must be considered very high as any problems with harmful side-effects of the drug have been successfully dealt with in the treatment for DS and LGS.
TSC afflicts up to 50,000 people in the USA and about 1 million worldwide. This is a greater number than the total sufferers of DS and LGS as I have previously detailed.
* A new international clinical trial on the use of epidiolex for DS was published in April. This continued the very positive news on its effect in reducing convulsive seizures. In particular it showed that for many patients a lower dose of 10 mg/kg/d was as effective as a higher dose of 20 mg/kg/d. This is important as it shows the treatment can be effective for those few individuals who are more prone to suffer from the ill-effects of the drug, as lesser dosages can successfully be given to them.
* In March the company submitted a Type II Variation Application to the EMA (European Medicines Agency). This was for "epidyolex" (the trade name for epidiolex in Europe) for TSC. It follows a successful positive Phase 3 study for safety and efficacy. TS is said to effect 10 out of every 100,000 people in the EU.
* Revenue numbers should of course be studied closely. The historical chart is illustrated below:
One might expect a continuation of the flattening of the curve as the increase in sales matures somewhat in the USA and before European sales kick in. The company almost broke even in 2019 as a whole.
* Cash in Hand is always crucial for drug development companies. Figures as at Q4 2019 showed the company had US$536 million in cash and cash equivalents. The Q4 8K can be viewed here. That suggested the company would have enough cash in hand for operations through 2020 taking into account high capex and sales expenses. Then it would be a matter of whether the company could produce enough free cash flow this year to negate the need for more financing end-2020 or in 2021. The current debt position seems manageable as illustrated below:
* Sativex sales and whether they are starting to become at all meaningful for company revenues. At a healthcare conference last year Justin Gover had made some unusually bullish predictions for Sativex revenues for several conditions. Any update on this at the analyst call could be meaningful.
Analyst Call Comments
Investors should look for any comments on various issues:
* Whether marketing developments in Europe have been delayed to a substantial extent. The initial target was for roll-out in Germany, the U.K, France, Spain and Italy to be completed this year. All five countries have been hit hard by COVID-19. A further "second wave" of ten EU countries is planned to follow these five. The roll-out of epidyolex in the major European economies could have been slowed by two factors, Firstly, marketing staff not being able to call on medical practitioners. Secondly, by the EMA staff being pre-occupied with matters to do with the pandemic.
* Possible progress in other overseas markets such as South Korea should also be noted. Asia could be an under-appreciated future source of revenue. For instance, in South Korea the company started the roll-out of epidiolex and sativex late last year after its approval in November. However the product does cost 1.6 million won (US$1400) for a 100 ml bottle that would last approximately 20 days. It is not covered by national healthcare insurance. In some cases it is believed epdiolex has been allowed in Singapore, a country with especially draconian laws about anything to do with cannabis. Other countries, notably Thailand, are opening up the market for medical marijuana in general.
* There appears to be limited direct impact of COVID-19 on epilepsy. However epilepsy may cause other conditions which themselves reduce immunity in a person. The CDC (U.S. Center for Disease Control & Prevention) has stated that epilepsy may increase the risk of serious COVID-19 infection. The U.K. authorities have said that epileptics are an "at risk" group for the pandemic.
* Comments on the whole range of the pipeline, as detailed by the company in March:
Such timing updates can give investors a better idea of the timing of likely new revenue streams.
* Comments in particular on future usages for sativex and any sort of time-line. The initial usage has been for spasticity for multiple sclerosis patients, many of whom self-medicate with cannabis anyway. The company has been looking at treatment for a host of similar spasticity conditions. These include from spinal cord injury, post stroke conditions, ALS (amyotrophic lateral sclerosis or motor neurone disease), traumatic brain injury, cerebral palsy, and PTSD (post traumatic stress disorder).
* Progress in particular on Phase 3 trials for Rett Syndrome on which the company has been quite optimistic.
* The extent of any delays in clinical trials and regulatory approvals due to COVID-19. The FDA is seen to be prioritizing COVID-19 treatments and vaccines. Enrollment of people in studies may have been made more difficult. Medical personnel have been shifted to other duties in many cases. It is known that a drug application review for one of GW Pharma's possible competitors Zogenix (NASDAQ:ZGNX) has been delayed by several months, for instance. No doubt GW Pharma has suffered some collateral damage from the pandemic but the effects should not have long-term implications.
In my January article I recommended the company as a long-term stock Buy. The stock chart below illustrates what has happened in the past 3 months as recovery in the price follows the initial COVID-19 fall.
The analyst opinion has been very bullish on the stock for quite some time. Currently there is a consensus price target of US$193. That represents an 85% rise from current levels.
As I laid out in detail in an article last November, the stock price has suffered somewhat from being included in Cannabis ETF's. Most companies in these ETF's have seen their stock price eviscerated in the last year or so. As one example, the Horizons Marijuana Life Science ETF (OTC:HMLSF) fell 35% last year. 11.22% of this ETF is comprised of GW Pharma stock. The only larger proportions are Canopy Growth Corp (NYSE:CGC) and Cronos Group Inc (NASDAQ:CRON), both of which are essentially recreational cannabis plays. This is a place where the stock should not really be.
GW Pharma also suffers from a rather narrow stock-holding base. 85% of it is institutional and one private company, the Capital Group, has substantial holdings. That company has strong sway over the stock price. There is no way of knowing how the COVID-19 crisis could affect the soundness of their own business, and thus their actions with regard to GW Pharma stock.
Various other private investment companies and hedge funds hold stakes. I detailed this here. Short interest can be quite high. For instance, in April short interest varied between 12.24% and 23.66%. On 1st May it abruptly dropped to 7.84%. Such short-term trading is a negative element which customers who want to list on U.S. markets have to accept. It may have a short-term effect on the value of an investor's holding in the company. It should not have a negative effect on the stock price long-term.
The direct effect of the COVID-19 pandemic on GW Pharma is limited. The pandemic will have some negative effect on progress for sales & marketing and on testing. The fall in the stock price at the time of the pandemic seems unwarranted. Previous cuts in the stock price due to market manipulation are also unwarranted in relation to the core value of the business. Such manipulation may not go away for some time of course. For this reason there is probably not an immediate incentive to buy stock based on the likelihood of a short-term surge in the stock price.
The company is far and away the main biotech involved in cannabinoid research and development. As my article in February detailed, the competition is a long way behind and has fallen further behind since then. If one accepts the mounting evidence of the beneficial interaction between endocannabinoids in humans and the phytocannabinoids in cannabis plants, then the company is the best investment in a very promising sector.
GW Pharma remains a good long-term bet. By the nature of the business it is likely to have ups and downs. In my opinion the stock should be accumulated on dips and some profit taken on peaks but a core position should be retained long-term. This has been a profitable strategy over a period of several years.
The Q1 figures will of course provide important information to investors. More important may be the analyst call with details on progress in Europe and developments in the product pipeline. These will be key for how investors should see the coming year.
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Analyst’s Disclosure: I am/we are long GWPH. 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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