1 Huge Risk Facing This Marijuana Stock

Before you go, we thought you'd like these...
Before you go close icon

Source: GW Pharmaceuticals

The prospects for medical marijuana are incredibly intriguing. According to a Medical Marijuana Markets report in 2011, the market for medical marijuana may surge from $1.7 billion in that same year to as much as $9 billion in 2016.

That's an impressive jump, but investors should remember that industry growth won't benefit every one of the medical marijuana companies equally. As with most investments, there are bound to be winners and losers. The tough part will be figuring out which company is which.

Understanding the challenges facing companies like GW Pharmaceuticals a U.K.-based developer of medicine derived from the chemical cannibinoids found in marijuana plants, is as good a place to start as any. Share prices in GW Pharma have rocketed up 360% in the past year, trouncing the S&P 500's 17% gain, but GW Pharma is far from risk-free. In fact, the company is staring down one-big risk right now and that's U.K. regulators unwillingness to pay for its only commercial drug, Sativex.

Source: GW Pharma

Advancing medical marijuana in Europe
Sativex isn't approved for sale in the U.S. (yet), but it is approved in the European Union as a treatment for multiple sclerosis spasticity. Multiple Sclerosis spasticity is a common among MS patients and is characterized by muscle stiffness or uncontrollable muscle spasms that can be painful and if left untreated may ultimately damage joints.

GW Pharma's Sativex, a synthetic formulation of the marijuana cannibinoid THC, won approval in the EU to treat the condition in 2012, yet sales have been hard to come by, totaling $1.7 million last quarter. That's a pretty poor showing for a common disease indication affecting millions, particularly considering that revenue for drugs that treat MS relapses is measured in the billions of dollars, not millions.

In a bid to spark Sativex sales, GW Pharma has been steadily rolling it out in new markets across Europe, but that roll-out has been bumpy.

In June 2012, Germany agreed that Sativex provides a benefit to MS spasticity patients, but price negotiations with Germany's drug reimbursement authority proved long and contentious. In March 2013, GW Pharma and German regulators sat down with an arbitrator in a bid to come to an agreement, but the price the arbitrator determined was fair ended up being below what GW Pharma gets in other EU nations.

That prompted GW Pharma's CEO Justin Gover to issue a press release saying, "Despite Sativex being a clear example of such a medicine, as recognized in other markets, the German system appears to be neglecting the interests of patients and jeopardizing pharmaceutical companies' ability to provide German patients with access to new treatments. Sativex is one of several examples of new medicines that have not been appropriately valued by the German reimbursement system."

Eventually, German regulators bumped up the amount they were willing to pay for Sativex, but the struggle is emblematic of the high hurdles facing GW Pharma's attempts to get Sativex into new markets.

Unfortunately for investors, the latest decision from the United Kingdom's price watchdog suggests that those hurdles may be getting even higher

The National Institute for Health and Care Excellence, or NICE, updated guidelines for caring for multiple sclerosis patients this week and in that guidance, NICE not only recommends that all MS patients receive both an MRI and a consultation with a neurologist prior to being diagnosed with the disease, but also recommended against the use of GW Pharma's Sativex. It's recommendation against Sativex was based on the agency's conclusion that the drug's benefits don't justify its price.

In making that determination, NICE used a calculation known as Quality-Adjusted Life Year, or QALY, a measure that compares the benefit of a particular medicine against its cost. According to NICE's calculation, Sativex costs about 50,000 pounds per QALY, which is significantly above its 30,000 pound threshold for recommendation.

As a result, NICE is advocating that patients seek out supervised exercise programs that can improve mobility and fight fatigue, rather than use Sativex.

End of the story?
It's unlikely that we've heard the last about Sativex in the U.K. NICE is notoriously cost-conscious and often lobbies drugmakers hard for steep price discounts. In the past, NICE has been particularly vocal in challenging prices for new, oral MS drugs from Novartis , Sanofi , and Biogen , so it's not that surprising to see it balking at Sativex, too.

No one knows how steep a price cut GW Pharma will have to agree to to win over NICE, but it's clear that medical marijuana drug pricing will remain highly scrutinized, particularly in Europe. If that scrutiny makes its way across the pond to healthcare payers in the U.S., GW Pharma may find there's little appetite here for Sativex.

This coming blockbuster will make every biotech jealous
The best biotech investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not just how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool's new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.


The article 1 Huge Risk Facing This Marijuana Stock originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. . The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

People are Reading