Zogenix, Inc. (ZGNX)

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ZGNXhttp://www.nasdaq.com/symbol/zgnxHealth Care2010Major Pharmaceuticals

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Is Pot Stock GW Pharmaceuticals Undervalued?

GW Pharmaceuticals (NASDAQ: GWPH) is on the cusp of shaking up the U.S. epilepsy treatment market. The medical marijuana company won FDA approval for Epidiolex's use in rare childhood-onset epilepsy over the summer and it should become commercially available to patients as soon as a decision is made on scheduling it by the Drug Enforcement Agency. The potential for medical marijuana to disrupt how doctors help patients who don't respond to existing treatment options is significant, but GW Pharmaceuticals shares are already trading at new highs. Is this company priced to perfection or is it cheap?

Rethinking marijuana use

A lot of attention focuses on the recreational use of marijuana, however, anecdotal evidence has existed for a long time that it offers medicinal benefits. In the 1800's, patients could buy marijuana extracts in pharmacies to treat stomach ailments and in 2013, the Stanley Brother's Charlotte's Web won widespread media coverage for its ability to help a child suffering from treatment resistant seizures.

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A medicine bottle and dropper on top of a marijuana leaf.

Image source: Getty Images.

Despite reports of its health benefits, few scientifically controlled studies have been conducted to determine for certain that marijuana is effective and safe. One reason for the lack of such studies is that marijuana's still a Schedule 1 controlled substance in the U.S., and as a result, its availability for studies has been limited to one grower: Mississippi's Marijuana Research Project, a federally funded program. To secure marijuana from the project, researchers have to win an OK from the DEA and a panel that includes representatives from the National Institute on Drug Abuse (NIDA). For many researchers, these obstacles have made pursuing pot research and development unattractive.

Rather than struggle to overcome the hurdles in America, GW Pharmaceuticals has been studying medical marijuana in the United Kingdom since the 1990s. It markets the tetrahydrocannabinol (THC) drug, Sativex, in Europe for use in multiple sclerosis, but it wasn't until Epidiolex's recent FDA approval that it had any products it could pitch to doctors in America.

A purified formulation of cannabidiol (CBD), a non-euphoric chemical cannabinoid common in cannabis, Epidiolex's approval followed years of clinical evaluation in patients with Dravet syndrome and Lennox-Gastaut syndrome, two types of epilepsy that emerge in childhood and that historically don't respond well to antiepileptic medications. In those trials, Epidiolex successfully reduced the number of monthly seizures suffered by patients by 40% to 50%.

The approval of Epidiolex is particularly significant because validating marijuana's health benefits could go a long way toward improving perceptions of the drug, potentially resulting in more states approving it, and possibly a less stringent view of it by Congress.

Pot's profit potential

There are only a few thousand people with Dravet syndrome in the U.S. and there are about 30,000 patients with Lennox-Gastaut syndrome, so its unlikely that GW Pharmaceuticals is going to generate billions of dollars in annual sales solely from those two approved indications. Typically, antiepileptics cost a few thousand dollars per patient per year and unless Epidiolex is priced significantly higher, back of the napkin math suggests that its sales are likely to be in the high eight-figures to low nine-figures.

However, Epidiolex's market opportunity may be much bigger than that if doctors begin prescribing it off-label to patients with other types of epilepsy. In the U.S. alone, there are 470,000 children suffering from epilepsy, about one-third of whom have their seizures inadequately controlled by existing medications.

Even if it doesn't get off-label use, a late-stage study is under way in tuberous sclerosis complex, a patient population of about 25,000. If it works in that indication too, its addressable market could nearly double from where it is today.

Ultimately, pushing more broadly into the epilepsy market won't happen overnight, but use could be helped if the DEA issues a favorable scheduling decision. If the DEA decides on Schedule IV, then Epidiolex can be easily prescribed and refilled. If it places it in Schedule II, then obstacles to access could hinder its use.

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A doctor writing a prescription while holding a marijuana bud.

Image source: Getty Images.

What's it worth

It's common for biopharma companies with fast-growing products to trade at high multiples to sales, but its equally common for drugs with blockbuster projections during clinical-stage trials to fall short of forecasts. If we assume that Epidiolex wins widespread use in Dravet syndrome and LGS, and it goes on to win an OK in TSC too, then a 5 to 10 multiple to potential sales would probably make a valuation of the company in the $2 billion to $3 billion range. If Epidiolex gets used frequently off-label, then it wouldn't shock me if sales climb into the mid- to high-nine figures, making a valuation of $3 billion to $5 billion conceivable. Currently, GW Pharmaceuticals market cap is roughly $4.9 billion, so I think a lot of its potential in these three indications may be baked into current share prices.

The valuation doesn't necessarily appropriately reflect additional marijuana cannabinoid studies further back in GW Pharmaceuticals R&D pipeline, though. GW Pharmaceuticals is evaluating marijuana cannabinoids in glioblastoma and schizophrenia, and it's conducting an intriguing study in autism, too. Success for those programs could make the company much more valuable, however, investors might want to keep some optimism about those trials in check. Previously, GW Pharmaceuticals has had to shelve prospects in its pipeline because clinical trials have failed. Notably, it had to abandon its high-profile study of THC for use in cancer pain in 2015 after it failed to outperform a placebo in late stage trials.

It's also unclear how the market will view Epidiolex relative to high-CBD strains available at dispensaries in highly populated states, such as California. Increasingly, marijuana growers are beginning to conduct their own research into marijuana strains that eventually could result in Epidiolex competitors. Furthermore, Zogenix (NASDAQ: ZGNX) recently reported compelling results in late-stage Dravet syndrome studies for its ZX008 that appear to match up favorably to Epidiolex.

Overall, GW Pharmaceuticals has an opportunity to generate meaningful revenue, particularly if DEA scheduling is favorable, but for now, it's valuation appears to reflect a lot of its upside. 

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Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Zogenix Has $3.4B Opportunity With Pediatric Epilepsy Asset, BofA Says In Bullish Initiation

Zogenix, Inc. (NASDAQ: ZGNX)'s lead asset ZX008 presents a multibillion-dollar opportunity, according to Bank of America Merrill Lynch.

The Analyst

Analyst Tazeen Ahmad initiated coverage of Zogenix with a Buy rating and $63 price target, suggesting 29-percent upside.

The Thesis

BofA's worldwide, risk-adjusted peak sales estimate for Zogenix' lead asset ZX008 is $1.5 billion in 2029, comprising a $604 million opportunity in Dravet syndrome, $503-million in Lennox-Gastaut syndrome and $386 million in other pediatric epilepsy conditions, Ahmad said in a Friday note. (See the analyst's track record here.) 

An estimate not adjusted for risk gives a peak worldwide sales estimate of $3.4 billion across all indications, which Ahmad said is higher than the peak sales achieved by other anti-epileptic drugs and anticonvulsants. 

The candidate showed the best efficacy so far in the two Phase 3 studies for Dravet, with NDA and MAA filings expected by the end of 2018, the analyst said. ZX008 is in a Phase 3 trial for Lennox-Gastaut, with the readout expected in late 2019 or early 2020.

"With positive efficacy and safety, we believe ZX008 can penetrate the pediatric epilepsy market in DS, LGS and off-label use," Ahmad said. 

BofA anticipates a positive Phase 3 readout from the LGS study, a faster-than-expected ramp rate and lower-than-expected competition from other products such as GW Pharmaceuticals PLC- ADR (NASDAQ: GWPH)'s Epidiolex posing upside risk to its thesis.

Downside risks include a failure to reach commercialization for LGS, a lower-than-expected off-label offtake or any cardiovascular risk that triggers long-term safety concerns, Ahmad said. 

The Price Action

Zogenix shares have gained about 22 percent year-to-date.

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Latest Ratings for ZGNX

Date Firm Action From To
Sep 2018 Bank of America Initiates Coverage On Buy
Sep 2018 Northland Securities Initiates Coverage On Outperform
Sep 2018 B. Riley FBR Initiates Coverage On Buy

View More Analyst Ratings for ZGNX
View the Latest Analyst Ratings

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© 2018 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

Investors in This Top Marijuana Stock Can't Overlook These 2 Serious Challenges

Big things are happening in the cannabis industry -- especially with our neighbor to the north. In 34 days, on Oct. 17, recreational marijuana can be legally sold in licensed dispensaries in Canada. And with its legalization, the industry will be angling for somewhere in the neighborhood of $5 billion in annual sales.

But there's more going on with the weed industry than just Canada lifting the curtain on adult-use marijuana in Canada. There are big things happening in the United States, too. Among the numerous marijuana firsts this year was the approval of the very first cannabis-derived drug by the U.S. Food and Drug Administration (FDA) on June 25.

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A doctor with a stethoscope around his neck holding a cannabis leaf between his hands.

Image source: Getty Images.

The very first cannabis-derived drug gets the green light

U.K.-based GW Pharmaceuticals (NASDAQ: GWPH) made history when the FDA gave the green light to its cannabidiol (CBD)-based oral solution known as Epidiolex for two rare forms of childhood-onset epilepsy: Dravet syndrome and Lennox-Gastaut syndrome. CBD is the non-psychoactive component of the cannabis plant best known for its perceived medical benefits. Though synthetic forms of tetrahydrocannabinol (THC), known as dronabinol, had been approved by the FDA before -- THC is the psychoactive cannabinoid that gets a person "high" -- no genuine cannabinoids derived from the cannabis plant had ever been used in clinical trials that led to an approval by the FDA.

During clinical testing, Epidiolex ran circles around the placebo. In one pivotal-stage study involving Dravet syndrome patients, GW Pharmaceuticals' lead drug demonstrated a 39% reduction in seizure frequency relative to baseline, which proved to be three times better than the 13% reduction in seizure frequency that was recorded by the placebo.

A separate late-stage study in patients with Lennox-Gastaut syndrome that was published in The New England Journal of Medicine in May 2018 found, following a 14-week treatment period, a 41.9% decline in drop-seizure frequency for patients in the high-dose arm from baseline, and a 37.2% decline in the low-dose group. Comparatively, this was more than double the 17.2% decline from baseline registered by the placebo arm. In other words, it's not hard to see why this drug was approved. 

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A biotech lab researcher closely examining a cannabinoid-rich liquid solution in a flask.

Image source: GW Pharmaceuticals.

For GW Pharmaceuticals -- and arguably the cannabis community -- it's a big win. Epidiolex gives the company its first U.S.-approved product, and very likely a way to push into the black. Its only other drug is Sativex, which is approved to treat spasticity associated with multiple sclerosis in more than a dozen countries outside the U.S., but is otherwise a blip on the sales radar.

GW Pharmaceuticals is about to face some major hurdles

Unfortunately, GW Pharmaceuticals' lead drug is set to face two very serious challenges in the near term that shareholders of this stock simply can't overlook.

Despite being the only approved therapy for Dravet syndrome, and one of the first Lennox-Gastaut therapies we've seen given the green light in some time, it's no guarantee that patients will gain access to Epidiolex. The treatment will have a wholesale cost of $32,500 per year. I'll go ahead and repeat that again in case you were skimming or perhaps passed out from sticker shock. That's $32,500 per year for the very first cannabinoid-based drug.

Although The Wall Street Journal notes that out-of-pocket Medicaid costs could total just $5 or $10 a month, or perhaps $200 a month for someone on a private insurance plan, a $32,500 cost is going to certainly turn some patients and insurers off. Frankly, it could be difficult for GW Pharmaceuticals to secure the coverage needed to get its product into patients' hands. 

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Prescription drug tablets covering a hundred dollar bill, with Ben Franklin's eyes still visible.

Image source: Getty Images.

The other problem here is that GW Pharmaceuticals is unlikely to be the only show in town when it comes to Dravet syndrome. Last year, Zogenix (NASDAQ: ZGNX) announced exceptionally impressive phase 3 data for its low-dose fenfluramine hydrochloride (ZX008) in Dravet syndrome. According to the study, patients taking Zogenix's lead drug saw a 72.4% reduction in seizure frequency from baseline after 14 weeks of treatment. That ran circles around the 17.4% reduction in seizure frequency for the placebo group.

To be clear, this isn't an apples-to-apples comparison of seizure-frequency reduction. Just because Zogenix's lead drug demonstrated a 72.4% reduction from baseline and Epidiolex delivered a 39% reduction doesn't mean Zogenix has the superior drug. However, physicians could certainly be biased by this data and may favor Zogenix's drug as a result. Of course, we'd also need to see how Zogenix prices its drug (assuming approval) before making a call of how competitive it could be against Epidiolex. 

In short, GW Pharmaceuticals is far from a slam-dunk investment despite making history. Investors are going to need to pay close attention to insurer coverage data for Epidiolex, as well as ZX008's advancement, if they're going to stick around in this marijuana stock.

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

Six Biotechnology Names on My Watch List

The indices have been slowly drifting lower after a gap up open. Early breadth was around 3 to 1 positive but its now down to around 4-3 positive. The bulls are not producing much positive momentum but the bears are doing an even worse job of producing negative momentum.

Here's Why Zogenix Slipped 14.9% in August

What happened

Shares of Zogenix (NASDAQ: ZGNX) fell nearly 15% last month, according to data provided by S&P Global Market Intelligence. The pharma company announced it was issuing up to 6.9 million shares of common stock at $52 apiece. While Mr. Market wasn't thrilled with the dilution, the share offering was actually a pretty wise move. That's because it took advantage of a recent surge in the stock price to raise up to $359 million in gross proceeds.

So what

The extra cash will come in handy, as Zogenix is preparing to submit applications for regulatory approval of ZX008 in both the United States and Europe by the end of the year. The drug candidate delivered positive results in a second phase 3 trial in July -- the cause of the stock's recent jump -- demonstrating its potential to treat Dravet syndrome. The drug is also being prepared to begin a phase 3 trial for Lennox-Gastaut syndrome. Both diseases are forms of epilepsy.

An ascending graph drawn on a chalkboard that shows a sudden descent.

Image source: Getty Images.

The most recent results were glowing, which has been the case all along for ZX008. That has helped the drug candidate to earn orphan drug status, breakthrough status, and fast-track status from the U.S. Food and Drug Administration. It also bodes well for the drug's eventual marketing approval for treating Dravet syndrome, which is rare but has inadequate options for patients.

Now what

Zogenix has seen its market valuation climb more than 300% in the last year to around $1.6 billion in early September. That's not too surprising, as it looks increasingly likely that the company will get regulatory nods for ZX008. However, seeing that the drug is the only one in development at the company, investors don't have much clarity over the long-term direction of the pharma. Perhaps it will make an acquisition to stock its pipeline or seek to be acquired itself, but right now, investors might want to consider that there may not be much upside to the stock.

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

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