This week – for the first time in history – the U.S. Food and Drug Administration (FDA) approved a drug derived from the marijuana plant. The drug is Epidiolex, and it was developed by UK-based GW Pharmaceuticals (GWPH).
The approval didn’t come as a big surprise considering an FDA panel gave the drug a unanimous “thumbs up” back in April. Of course, nothing is a sure thing when it comes to the FDA, especially when a drug like marijuana is involved. However, in many peoples’ opinions – including mine – it was only a matter of time.
When the news broke on Monday, GWPH initially rallied to an intraday high of $157, but it ended up pulling back and closing the day in the red at $144.76. The days after the approval have been plagued by waves of speculation regarding the company’s next move, and so much circling uncertainty has pushed the stock down to its lowest level in six weeks.
Overcoming the Marijuana Obstacle
Naturally, I would have liked to see the FDA approval result in a double-digit gap up, but that wasn’t the case with GWPH and I think it all boils down to where Epidiolex’s ingredients come from.
You see, marijuana is currently listed as a Schedule I drug by the Drug Enforcement Agency (DEA), which means it has no medical purpose and a high potential for abuse. Other drugs in this category include heroine and LSD. At the same time, cocaine is a Schedule II drug. Clearly the DEA needs to readjust their labels here, and they are expected to make a decision regarding the scheduling in the next 90 days.
The distribution of Epidiolex will be hindered as long as marijuana maintains its Schedule I classification, but the good news is that I do expect the DEA to wake up and smell the coffee soon. With Epidiolex’s approval, it is clear that marijuana does have medical benefits. Once the classification is changed, it will remove any concerns investors have and change the future of marijuana-based approvals from the FDA.
According to Bank of America, peak sales of Epidiolex could reach as much as $2.4 billion. And considering the company currently boasts a market cap of $3.9 billion, the stock appears to be greatly undervalued.
It’s also worth noting that GWPH is currently undergoing phase III trials to test Epidiolex in treating Dravet syndrome. The results should be out in the second half of the year, and if they’re positive they will act as yet another catalyst to push the shares higher in the months and year ahead.
The recent FDA approval of Epidiolex is monumental, and it lays the groundwork for many more pipeline decisions over the long term. Therefore, the future is very bright for GWPH.
