At first glance, GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH) is one of those investments that should be moving higher, but it GWPH stock isn’t.
Analysts recognize the pharmaceutical company for its alternative therapies, specifically involving cannabidiol (CBD).
Just recently, regulatory officials granted their CBD-based, anti-seizure drug Epidiolex the green light. Still, GWPH stock tumbled hard, dropping more than 4% on Monday.
What exactly happened? While the government approval for Epidiolex, which aims at treating seizure disorders called Lennox-Gastaut syndrome and Dravet syndrome, is a net positive, GW Pharmaceuticals can’t market the therapy until the Drug Enforcement Administration has its say.
Ordinarily, just an approval from the Food and Drug Administration is suffice. However, cannabis-related products are an entirely different ballgame.
While marijuana advocates gained tremendous momentum following the 2016 election, they must still contend with an overriding cloud: Schedule I classification.
According to the DEA’s website, “Schedule I drugs, substances, or chemicals are defined as drugs with no currently accepted medical use and a high potential for abuse.”
To put this into context, marijuana is considered equivalent to heroin, LSD, and ecstasy.
Unfortunately for the legalization movement, this classification also has the potential to stunt any and all traction.
Federal law supersedes state law, and technically, the Trump administration can quash individual states’ green initiatives.
Therefore, it’s easy to see why the markets took a dim view on GWPH stock. Although GW has a groundbreaking therapy in Epidiolex, investors ultimately care about the product’s financial viability.
But if Epidiolex hits a legal or administrative snag, that financial viability turns to zero.
This apprehension towards GWPH stock is similar to why major financial institutions shun cannabis-related ventures.
It’s no comfort that a record number of states legalized marijuana to varying degrees if the feds can crack down capriciously.
GWPH Stock Is a 50/50 Shot
Optimists might point out the growing trend towards not only legalization, but broader social acceptance.
As I reported for InvestorPlace regarding John Boehner joining cannabis firm Acreage Holdings’ advisory board, marijuana has gone mainstream. I wrote:
According to the Pew Research Center, only 12% of Americans supported legalization initiatives in 1969. In that same year, an overwhelming 84% were opposed, while 4% apparently didn’t know. But in 2017, the sentiment shifted dramatically. While it’s not a complete reversal, 61% support legalization, while 37% do not. Interestingly, 2% did not have an opinion.
It’s not unreasonable to believe that the feds, and in particular, President Trump himself, will go easy on weed.
I’ve made another argument before that while Trump loves his “law and order” image, he can’t completely ignore public opinion.
He’s not exactly the most popular leader of the free world. If Trump wants a good shot at reelection, attacking marijuana legalization isn’t the correct path. He’ll kill jobs and revenue streams that cannabis companies can easily generate.
Needless to say, positive marijuana sentiment bodes well for GWPH, along with CBD-pharma rival Zogenix, Inc. (NASDAQ:ZGNX). However, before you discount-dive these companies, you should realize the risks.
Primarily, the Schedule I classification potentially limits the framework regarding Epidiolex. What GW contends is that CBD genuinely provides medicinal value.
But legally, a Schedule I drug means that it has no accepted medical value, and only the potential for abuse. The DEA has the power to reschedule Epidiolex, but it’s a tricky political landmine; hence, the volatility in GWPH stock.
While Trump would hurt his public standing if he cracked down on all state-marijuana laws, he doesn’t have to play nice with CBD-based treatments. Indeed, he probably shouldn’t as it would negatively impact his core voting base.
GWPH Stock Is Ultimately Speculation
As things stand, I believe GWPH is a speculative bet, not a comfortable, longer-term investment. Although winning FDA approval for Epidiolex is a net positive, I’m worried that other companies would benefit more.
Let me explain. The fundamentals for GWPH stock are poor, to say the least. It has deeply negative margins, suffers declining revenues, and bleeds cash like no one’s business.
That’s not dissimilar to other high-risk, high-reward pharmaceutical companies.
Still, I want to stress that GW banks heavily on Epidiolex gaining total administrative approval. If something goes sour, either legally or in the retail market, GWPH could crumble.
Just look what happened in early 2016. And if that occurs, better capitalized pharmaceuticals can take advantage.
I also want to emphasize that GW is principally a pharmaceutical company doing cannabis, not the other way around.
While I’m bullish overall on the marijuana sector, you shouldn’t conflate the industry’s momentum with stock. They’re related but GW must succeed on its own merits (ie. producing effective therapies).
In looking at the share price, it’s evident that the markets believe in the company. I don’t blame them because what GW accomplished is very impressive.
However, stock has several sector-related and political risk factors that are difficult to ignore.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.