Small biotech stocks can provide investors with opportunities to make big gains — assuming the companies win regulatory approval for their drug candidates and transform from money sinks into cash generators. They can also fail spectacularly, punishing investors severely.
GW Pharmaceuticals has spent 20 years developing a platform for developing and manufacturing drugs derived from chemicals extracted from the marijuana plant. It made history last year by launching the first FDA-approved medicine that contains a purified drug substance derived from cannabis: epilepsy drug Epidiolex. The company expects to develop a number of cannabinoid medicines to treat conditions ranging from autism to cancer.
Cara Therapeutics, on the other hand, has only one drug in its clinical pipeline: Korsuva, an opioid for treating severe itching and pain, but without the same potential for addiction and abuse that characterize other opioids.
Which of these stocks is the best pick for investors willing to add a little risk to their portfolio? We'll look at the two companies through the lenses of their currently shipping drugs, the strength of their development pipelines, and their financial conditions.
Portfolio of approved drugs
Cara Therapeutics is not selling anything yet, but GW Pharmaceuticals has two approved drugs: Sativex and Epidiolex.
Sativex is an oral spray made from an extract of marijuana plants and has a 1:1 ratio of THC, the psychoactive component of cannabis, and cannabidiol (CBD), and is a treatment for spasticity due to multiple sclerosis (MS). The drug has been approved in 25 countries outside the U.S., but it only generated about $10 million in annual sales last year, which pales in comparison to GW's $301 million in operating expenses. The company tried to get the drug approved for cancer pain, but that effort failed in 2015. Now, GW is seeking approval in the U.S. for the MS spasticity indication.
Epidiolex is the company's major triumph to date. The drug is pharmaceutical-grade cannabidiol, a pure form of the hemp-derived CBD oil that is catching on for its supposed health benefits and is available over-the-counter even in states that haven't legalized medical marijuana.
GW won FDA approval for Epidiolex as a treatment for seizures caused by two rare and difficult-to-treat forms of childhood-onset epilepsy: Lennox-Gastaut syndrome and Dravet syndrome. The company estimates there are between 45,000 and 75,000 patients with these diseases in the U.S., and with a price tag of $32,500 per year on the drug, these two indications represent an opportunity of more than $2 billion per year. GW is building on that opportunity by pursuing new indications such as tuberous sclerosis complex and Rett syndrome, as well as preparing to submit Epidiolex for approval in Europe.
Last September, the U.S. Drug Enforcement Administration classified Epidiolex in Schedule V, the category with the lowest restrictions, and GW launched the drug on Nov. 1. While the company has not released any sales data yet, it says the drug is on the Express Scripts formulary, and is covered by four of the five largest insurance payers in the U.S.
Commercial success for Epidiolex is not a guaranteed slam dunk, though. A big unknown is the extent to which it will lose potential customers to medical marijuana and over-the-counter CBD formulations, even though the FDA hasn't given its blessing to those treatment options. Even for patients under the care of physicians, who would almost certainly stick to prescribing approved therapies, GW faces serious competition from Zogenix, which is in late-stage testing of its own, non-cannabinoid drug for Lennox-Gastaut syndrome and Dravet syndrome.
Drug development pipeline
Cara Therapeutics has a synthetic cannabinoid drug in its pre-clinical pipeline, but virtually all its efforts are focused on Korsuva.
Korsuva is differentiated from opioids such as morphine and fentanyl in that it acts on a different type of opioid receptor, and does not cross the blood-brain barrier. Korsuva acts on the kappa-opioid receptors found on sensory nerves in the periphery of the body, so Korsuva stops pain and itching at the source, but doesn't induce the side effects of traditional opioid drugs that operate on the central nervous system, including the pleasant sensations that lead to abuse and addiction.
Cara has tested Korsuva for chronic pain due to arthritis, acute pain after surgery, and pruritis, which is severe itching that affects patients who suffer from chronic kidney and liver diseases. After a clinical trial for Korsuva in chronic pain failed in 2017, the company shifted to focusing on the pruritis indication, where trials have produced strongly positive results, and where the market opportunity is wide open; there are no approved drugs for the condition.
Cara is furthest along in testing an intravenous formulation for Korsuva in patients with pruritis associated with chronic kidney disease, and who are undergoing dialysis — a group that includes more than 1.2 million people worldwide. A phase 3 trial is underway, and data from U.S. patients should be released during the second quarter. Cara is also testing an oral formulation for pre-dialysis patients and patients with pruritis due to liver disease.
Last year, the company partnered with Fresenius Medical Care to commercialize Korsuva. Fresenius runs thousands of dialysis clinics worldwide, and will pay royalties to Cara to sell the drug outside the U.S. while helping promote the drug in the domestic market, where the two companies have a profit-sharing agreement. Fresenius was willing to pay $50 million in cash up front, and purchase $20 million in equity in Cara to seal the deal, which indicates both companies have confidence that Korsuva will cross the FDA's finish line.
Unlike Cara Therapeutics, GW Pharmaceuticals has several drugs in its pipeline it is actively developing, and believes that its proprietary platform for extracting and processing compounds from marijuana could successfully produce treatments with various therapeutic uses.
The molecule furthest advanced in trials is cannabidivarin, or CBDV. This non-psychoactive cannabinoid is in phase 2 testing for epilepsy and autism spectrum disorders, and is being investigated for Rett Syndrome. GW has other pipeline candidates for an aggressive kind of brain cancer called glioblastoma and for schizophrenia, both of which have shown positive results in phase 2 trials, and for neonatal encephalopathy, or malfunction in the brain of newborns.
Both companies have balance sheets strong enough to keep them afloat during the next couple of years.
Cara Therapeutics spent $25.5 million in operating expenses in the most recent quarter, and has $206 million in cash and marketable securities. The company believes that will be enough to cover its operating expenses and capital needs into 2021, even without milestone payments from Fresenius.
After a recent secondary offering, GW Pharmaceuticals has $679 million in cash, had operating expenses between $90 million and $100 million last quarter, and is beginning to get revenue from Epidiolex.
Cara Therapeutics is the safer bet, for now
GW Pharmaceuticals would appear the stronger of these two companies, with two shipping drugs — one of which is a potential blockbuster — and a platform that has generated several pipeline candidates for significant indications. Cara Therapeutics is pretty much a one-trick pony so far.
However, the strongest company doesn't always translate into the stock with the most promise for investors, at least in the near term. Cara Therapeutics' market capitalization is about $600 million, while GW Pharmaceuticals' is about $4.5 billion. That means that GW's clearly stronger position is valued at about 7.5 times that of Cara's. That's a big difference.
There is still plenty of uncertainty about how quickly sales of Epidiolex will ramp up, given the potential competition and lack of a marketing partner. The market has priced success into the stock, but there could be disappointments along the way. And it's hard to put a price tag on the pipeline. While a platform for extracting medicines from marijuana may sound promising to investors buying into the cannabis story, proving the safety and efficacy of drugs aimed at treating conditions of the central nervous system can be a challenge. Also, there's little to stop other companies from taking similar approaches should marijuana turn out to be the medicinal bonanza that some think it is.
On the other hand, much of the risk to investors has been taken out of Korsuva, due to strong results from trials in pruritis, the lack of competition in that space, and the help of a capable partner. It wouldn't take much in the way of sales to push Cara's stock price much higher than it is today.
That's why I think Cara Therapeutics is the safer bet over the next two years or so. After that, if GW Pharmaceuticals shows it has a platform than can produce multiple winners, then its share price could leave Cara Therapeutics in the dust.