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GW Pharmaceuticals: Cannabis with a Cause

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CBD research targets childhood epilepsy

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I wrote an article on August 11, 2016 titled, Don't Blame the DEA for Not Reclassifying Marijuana.  In it, I made the case that the DEA shifted the political liability of their decision to the FDA.  It was classic 'cover your ass' in DC parlance and they were 1000% correct by the letter of the law.

In that article, I disclosed that I own GW Pharmaceuticals (NASDAQ: GWPH), a UK-based biopharmaceutical company.  I first got involved in March at an average cost of $38 and I've spent the better part of this year researching the space and getting to know the company (as well as I could over the phone).  The stock was trading in the mid-$80's when that article posted; it's now trading slightly above $100.

It's important to note that none of what I'm about to share is intended as advice.  Anyone who is familiar with my work over the last 25 years understands that I am transparent to a fault, but we each have unique time horizons and risk profiles.  I've been buying dips to sell rips and I'm either a buyer or seller depending on the time and price. 

I am not talking my position; I am talking about my position.  There is a huge difference. 

The stock is volatile too, with a 52 week low of  ~$35 and a high of  ~$134.  And it's not the most liquid issue on the board, so it's often difficult to get in or out of the stock.  You must do your own work on this or any investment; we are each responsible for our own decisions.  Mickey Mantle won't pay your rent.

The company was in town for The Morgan Stanley Healthcare Conference yesterday.  I listened to their presentation and thought the tone, or "body language" as we used to call in on the Street, was positive.  Some investors were expecting trial results, but those weren't released (the company expects them by the end of the month).  Others were hoping for M&A news, although anyone who knows anything about Wall Street knows that wasn't going to happen.

Here is where the story begins to get interesting.  Reuters reported last week that the company hired Morgan Stanley "after other drug-makers approached it to express interest in an acquisition." The company doesn't comment on takeover speculation and noted they've had a relationship with Morgan Stanley for years.  While the plural language in the press release caught my attention, that's not why I own the stock--I don't buy stocks for takeovers--but it wouldn't shock me if a larger player coveted their pipe.

Several prominent Wall Street firms cover the stock, which is important for a significant reason beyond the insight provided.  Institutional buyers require legitimate research to back their investment decisions, particularly when investing other people's money.  Morgan Stanley reiterated their $152 price target yesterday and BAML (PT $172), Cowen (PT $135), Piper (PT $165) cover the stock, too.  These are sell-side targets mind you, which should always be taken with a grain of salt, in a stock market that rallied 300% in the last seven years, no less.  Still, for an institution that wants to play in this space, it might as well be the Good Housekeeping Seal of Approval.

I view markets through four distinct lenses and it's pretty rare for me to find a stock that checks all four boxes.  Let's take a look at this stock through those metrics:

Fundamentals:  I've read just about every piece of research I could get my hands on, including the latest from the shops mentioned above.  They all offer a variation of the same take: if the company continues to execute, there are an array of indications for their lead drug, Epidiolex.

The risk, of course, is that the FDA trials don't continue to demonstrate efficacy; they've successfully navigated several phase three trials and plan to submit to the FDA in the first half of 2017, but past success is no guarantee of future results.  The company provides a comprehensive outline of their research which I've linked here, and a snapshot of the pipeline below. 



Technical Analysis: The stock broke out through $98.50 on massive volume (10M+ shares traded ~$100) and rallied to $110 before pulling back to retest the breakout level several times.  Interestingly, I've watched the volume increase during rallies and decline during the dips, which is typically a sign of accumulation.  I'm not a huge fan of chart-work with biotech stocks (binary risk) but this is a snazzy looking chart, so long as it holds ~$98.



Structural: The DEA, in *not* reclassifying marijuana to a schedule 2 drug, spoke to the emerging evidence of CBD in treating childhood epilepsy.  The company extracts the cannabidiol from the cannabis plant, removing the THC, or the psychoactive constituent of cannabis, in the process. 

If the company continues to execute, it will literally be a structural shift in how the medical community is able to treat a host of horrible diseases.  Furthermore and paradoxically, the DEA ruling, intentionally or not, quelled additional research / competition, which is a net positive for GWPH (per Morgan Stanley).

Psychology: This stock has long been whispered as a takeover target for the very reasons mentioned in the Reuters story.  The stock popped when the 'story' hit last week, before consolidating at former resistance / newfound support (my opinion).  Absent the company announcing that they're not for sale, which is unlikely but possible, that premium should remain in the stock heading into next year.  It is also worth noting that with a $2.3B market capitalization; this is viewed as a 'bolt-on' acquisition by some of the analyst community.

Put a gun to my head and I'll say this stock has room to $150 although as I've said and will say again, I'm trading around my position, which is a fluid process depending on a confluence of factors and the information available at any given time.  As of right here, right now-11:06AM on Thursday, September 15-this is everything I know in the name, and I will continue buy dips to sell rips.

As far as known catalysts are concerned, trial data is expected by the end of the month (the next two weeks) and the company is scheduled to present at the American Epilepsy Society the first week of December.

I never want to be involved with anyone losing money so please and always do your own work, make your own decisions and understand the two-sided risk inherent in any stock, biotech in particular.   I'm just sharing the story as seen through my eyes; eyes which have been right at times, and eyes that have been wrong.

R.P.

Twitter: @todd_harrison


Position in GWPH
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