GWPH Business Plan: Alan Brochstein’s Thoughts

GWPH

Alan Brochstein has followed quite closely recent developments in the medical and financial worlds insofar as they have affected GW Pharmaceuticals (NASDAQ: GWPH), the developer of two promising cannabis-based medications.

Brochstein, an early rider on the cannabis-investment bandwagon, advises several hedge funds and investment managers. Recently he shared his perspective in an interview with MJINews. To put it concisely, he believes the GWPH business plan has two parts: first woo the Food and Drug Administration, then attract the attentions of a large biopharm buyer looking to widen its product portfolio.

 

Data and Implications

On Monday, April 13, 2015, the American Academy of Neurology released Epidiolex data in connection with the treatment of resistant pediatric rare epilepsies, in advance of a fuller presentation on Wednesday, April 22.

The market reaction to that data raises the question: how much of a stock price increase was that good news worth? And, in the weeks since, could the stock of the company that developed Epidiolex, GW Pharmaceuticals (NASDAQ: GWPH), have become ripe for correction?

Through early April, this stock’s price was in the neighborhood of $91. With the AAN release it rose sharply to above $108. It hit $114 even at the close of business April 17, then fell back a bit.

After the end of trading Wednesday, April 22, the more complete data did make its appearance, and again it favorably impressed the markets. The data on 137 patients, a number increased over those of previous disclosures, indicated that there was a median 54 percent reduction in seizures after 12 weeks of treatment and a maintenance of that clinical effect over at least 24 weeks. Further, Epidiolex was “well tolerated,” i.e. no devastating side-effects would derail hopes for this drug as a marketable breakthrough.

GWPH’s price closed at $113.04 on Wednesday, but it rose to $120.77 over the course of Thursday’s trading.

 

The Real Nub of the Story

GWPH, founded in 1998, went public in 2001. It is headquartered in Britain though its hopes reside in the United States. As Brochstein said, “The real nub of this story is their ability to sell [their products] in the United States.”

Yes, Brochstein said, GWPH is fully dependent on its cannabis-related products. Beyond Epidiolex, this includes Sativex, a mouth spray used in the treatment of multiple sclerosis. But “the pipeline is not restricted to just the two” now known.

Also, the uses of Epidiolex may go well beyond epilepsy.

Eyes are on the U.S. because the U.S. is the world’s key drug market. In part this is because the U.S. is a wealthy country, a lot of people and institutions have money to spend. In part, though, it is because the U.S.  doesn’t have a single-payer system, it has a lot of private parties, doctors, institutions, insurers, to whom an entrant can market. Finally, the U.S. is the big dog because as Brochstein said, “in much of the rest of the world the FDA’s approval of a drug is very meaningful.”

And the FDA is critical to the business plan. GWPH doesn’t want to be just another entry in the tournament for selling “free market cannabis” on a state-by-state basis, Brochstein said. It wants to get FDA approval and sell the product in the U.S. with the federal government’s seal, and then in the rest of the world with its added cachet.

A question often asked of the growth of a state-by-state legal marijuana market in the U.S., and of the investment prospects it generates, is this: “Couldn’t it all turn into a trap quickly if a Republican drug warrior president comes into office in January 2017?” Indeed, on one view such investments could become a trap months earlier than that, if public opinion turns in favor of such a candidate in, say, September 2016, and the markets start discounting asset values in accord with that turn.

Asked about such a scenario, Brochstein denied that it ought to concern actual or potential investors in GWPH. That scenario would devastate what he calls the free-market cannabis world, but not the prospect of making use of FDA-approved cannabis. And in fact it would assist the sale of the hypothetical FDA-approved cannabis by “stifling the competitors.”

 

Biopharm Consolidation

No corner of the biopharm market exists in isolation—the market is in an era of biopharm consolidation. The recent history of one Israel-based company makes this point vivid. Teva bought NuPathe in 2014 after a bidding war with Endo. Why? Because NuPathe had developed a lucrative specialty as the maker of Zecuity, the only FDA-approved prescription patch for treating migraine headaches. Teva, a generalist company, wanted to strengthen its portfolio in regards to the central nervous system.

Earlier this year, Teva acquired Auspex Pharmaceuticals for $3.5 billion. Auspex was that valuable because of SD-809, a drug it had developed for the treatment of Huntington’s disease, a neurodegenerative disorder. Again, the specialist firm was a lucrative prize for the generalists.

Now, as the process of consolidation continues, Teva recently attempted, and failed, to takeover U.S.-based Mylan, which itself recently sought, and failed, to acquire the Ireland-based drug company Perrigo.

Why did Teva want Mylan? It was not a case of a generalist pursuing a specialist. It was simply two generics-heavy generalists whose product portfolios could have complemented one another.

Still, amidst all that, it is unsurprising that in Brochstein’s view, GWPH could come in for a piece of the action generated by all this consolidation.

Brochstein discussed as a reasonable speculation (though he wanted it to be clear he is not predicting) that when GWPH is eventually acquired by a large company to whose portfolio it will make a valuable addition, it could fetch $4 billion.

If true, that would correspond to a stock price of $200, which in turn would indicate that there may remain a lot of room on the upside.

Christopher C. Faille, a Jamesian pragmatist, was one of the first reporters taking the hedge fund industry as a full-time beat, at the turn of the millennium, with HedgeWorld. His latest book, Gambling with Borrowed Chips, treats of common misunderstandings of the crisis of 2007-08.

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