Interpreting the Recent Downward Price Movement on $GWPH



Summary: GW Pharmaceuticals (NASDAQ: $GWPH) develops and commercializes marjiuana-derived pharmaceutical products. Their primary asset is Epidiolex, approved in late 2018 for rare severe epileptic encephalopathies Lennox-Gastaut syndrome (LGS) and Dravet syndrome (DS), and recently approved for seizures related to Tuberous Sclerosis Complex (TSC). Epidiolex has had a strong launch so far, reaching nearly $300M in net sales in 2019, its first full year on the market. The product is widely forecast to reach blockbuster status. However, $GWPH fell ~17% late last week when 2Q20 earnings were reported. Investors seemed to be responding to a plateau in Epidiolex sales: Epidiolex net sales totaled $116M and $117M in 1Q and 2Q respectively, which $GWPH attributed to a decline in the rate of new patient starts due to COVID. The selloff is justified if this represents a true change in the trajectory of Epidiolex sales. However, if $GWPH can get the Epidiolex rollout back on track while advancing their pipeline, this could represent a buying opportunity for investors willing to hold through the next few quarters.


Key Takeaways

  • We model a ~$145 12-month price target for $GWPH, representing 25 - 30% upside against the current price point of ~$113.95

  • Despite our overall optimism that $GWPH will be able to return Epidiolex to a growth trajectory, we also model approximately flat growth in patient penetration through EOY 2021 to account for COVID-related impacts on new patient starts (this is reflected in our above price target)

  • If the slow rate of new patient starts persists until 2021, it is possible the market will remain pessimistic that $GWPH can get back on track, which could create an overhang for the stock that could see it remain below our target: other investors may choose to wait until $GWPH proves they can drive continued new patient growth before reinvesting


  • WX Capital Position: BUY at current price (~$113.95)

  • 12-month Price Target: ~$145

  • WX Capital Portfolio Allocation: 4%

  • WX Capital Anticipated Investment Timeline: Long-term (~12 months)

  • Qualitative Risk Level: HIGH execution risk, LOW development risk


Further Details

We believe it is feasible that transient COVID-related impacts on the healthcare system are responsible for the slowing of Epidiolex sales growth: for example, patients may be less likely to come in for consultations and thus less likely to adjust medications (LGS, DS, and TSC patients are typically poorly managed by anti-seizure medications and require balancing a mix of drugs). Additionally, $GWPH noted sales force coverage issues as both they and healthcare providers adjusted to the remote-work paradigm, which likely impacted their ability to drive new prescriptions. While these conditions will likely persist through the rest of the year and possibly 2021, we do believe that physicians, patients, and manufacturers are finding strategies to work around these types of limitations and do not expect a permanent overhang on $GWPH’s ability to commercialize Epidiolex. To reflect these impacts, we conservatively model flat growth in Epidiolex penetration through the end of 2021.


Looking ahead, we believe there is reason for long-term optimism: the recent FDA approval for TSC approximately doubled Epidiolex’s on-label addressable population, and we expect TSC to become a meaningful source of Epidiolex sales by the late 2020’s. We also anticipate positive global growth over the next few years as Epidiolex completes negotiations with European regulatory bodies. $GWPH is also studying Epidiolex in other refractory epilepsies, offering potential future label expansions. In addition, we also modeled for the U.S. launch of nabixomols (marketed as Sativex ex-U.S.) for MS-related Spasticity (80% probability of success), which even at a modest penetration (~15% of the ~30% of MS patients suffering from disabling spasticity) could represent a ~$250M peak sales opportunity (~$200M POS-adjusted). Nabixomols may also benefit from future label expansion as uses in other indications are currently in P1 and P2 studies.


Disclosure:

We own shares of GW Pharmaceuticals. This article expresses our own opinions, not GW Pharmaceuticals’ or any other party’s opinion. We are not receiving compensation for this report. We do not have a business relationship with the company mentioned in this report.