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Why GW Pharmaceuticals Could Be a Gold Mine for Growth Investors

You've probably heard of the great California gold rush of the mid-19th century. Today, many are flocking to what has been called the "green rush" -- a major wave of money flowing into the marijuana industry. But while many marijuana stocks have taken off, many of them are also extremely volatile and risky.

GW Pharmaceuticals (NASDAQ: GWPH) isn't without risk and volatility. However, the biotech specializing in development of cannabinoid drugs has been a huge winner over the past five years, with its stock soaring more than 1,100%. Here are three reasons why GW Pharmaceuticals could still be a gold mine for growth investors wanting to take part in the "green rush."

Image source: Getty Images.

1. Good chances of approval for Epidiolex

Regulatory approval is never a sure thing. However, GW's chances of winning approval for Epidiolex appear to be pretty good. Epidiolex, which is a liquid formulation of pure cannabis plant-derived cannabidiol (CBD), has been studied by GW Pharmaceuticals since 2007. The company plans to submit the drug for U.S. regulatory approval soon.

GW reported positive results from three late-stage clinical studies of Epidiolex. Two of those studies evaluated the drug in treating Lennox-Gastaut syndrome (LGS), a rare form of epilepsy. The other study evaluated Epidiolex in treating Dravet syndrome, another rare and severe type of epilepsy. 

In all three studies, patients taking Epidiolex experienced significant reduction in seizures compared to those on placebo. The drug's safety profile also looked pretty good. Although there were some adverse events in the clinical trials, most of them were reported as mild or moderate.

Drug-drug interactions are a fact of life for epilepsy patients. The good news for Epidiolex is that there's evidence of a lack of these kinds of interactions with several of the most commonly used anti-epileptic drugs, including valproate, stiripentol, levetiracetam, and topiramate. The only drug-drug interaction that GW has seen so far for Epidiolex is with clobazam. This doesn't seem likely to derail approval for the drug, however. 

2. Huge market opportunity

If GW Pharmaceuticals does gain regulatory approval for Epidiolex, the market opportunity for the drug is tremendous. There are an estimated 14,000 to 18,500 patients in the U.S. with LGS. Another 23,000 to 31,000 LGS patients are in Europe. Drug resistance is common among LGS patients, which highlights the need for new treatments.

Dravet syndrome is even more rare than LGS, with estimates that somewhere between one in 20,000 to one in 40,000 people are affected by the condition. There is no current FDA-approved treatment for Dravet syndrome. 

Image source: Getty Images.

Epidiolex has received orphan designation for both LGS and Dravet syndrome. That means GW would have seven years of commercial exclusivity in the U.S. (plus another six months for an expected pediatric extension) and 10 years of commercial exclusivity in Europe. 

The key question for GW will be how to price Epidiolex. Analysts have floated potential price tags from $30,000 to $60,000 per year. In my view, the company will probably go with the lower end of that range for a couple of reasons. First, a lower price tag would help win reimbursement deals with payers. Second, it would reduce the likelihood that patients choose to buy over-the-counter cannabidiol products (which can easily cost over $20,000 annually out of pocket.) 

3. Reasonable valuation in light of the potential

GW Pharmaceuticals' market cap currently stands at $2.8 billion. Is this valuation reasonable based on the prospects for Epidiolex? I think so.

Some analysts think the cannabinoid drug could reach peak annual sales of $3 billion. I'm not that optimistic, but I'm not nearly as pessimistic as others who project Epidiolex will only bring in $300 million per year. If GW makes in the neighborhood of $1 billion in sales, the stock has room to move significantly higher over the next few years.

And that's just for the first two indications of LGS and Dravet syndrome. GW Pharmaceuticals is also evaluating Epidiolex in a late-stage study for treating tuberous sclerosis complex, which affects around 25,000 Americans. Another late-stage study is in progress for the drug in treating infantile spasms, of which there are roughly 2,000 to 4,000 new cases each year. 

Then there's the rest of GW Pharmaceuticals' pipeline. The company has a couple of clinical studies underway for its cannabidivarin (CBDV) candidate in treating epilepsy and autism spectrum disorders. GW also is evaluating another cannabinoid drug in treating glioma, schizophrenia, and neonatal hypoxic-ischemic encephalopathy.  

The average one-year price target among Wall Street analysts for GW Pharmaceuticals stock reflects a 36% upside potential over the current share price. With a solid chance of approval for Epidiolex, huge market potential, and more candidates in the pipeline, I think Wall Street is right. This marijuana stock could be a gold mine for growth investors. 

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Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.